Risk Profile Contingent Analysis of Management Control Systems

Unternehmensführung & Controlling
Wolfgang Becker · Patrick Ulrich Hrsg.
Peter Göstl
Risk Profile
Contingent Analysis
of Management
Control Systems
Evidence from the Mechanical
Engineering Industry
Reihe herausgegeben von

Wolfgang Becker, Bamberg, Deutschland
Patrick Ulrich, Aalen, Deutschland
Die inhaltliche Zielsetzung der Reihe ist es, den Gesamtkontext von Unternehmens-
führung und Controlling im Spiegelbild seiner historischen Entwicklung, aber auch
im Lichte der aktuellen Anforderungen an eine zukunftsorientierte betriebswirtschaft-
liche Managementlehre abzubilden. Das Controlling wird in diesem Zusammenhang
als integrativer Bestandteil der Unternehmensführung aufgefasst. In dem damit hier
zugrunde gelegten wertschöpfungsorientierten Verständnis des Controlling stehen
eine originäre Lokomotionsfunktion sowie derivative Informations- und Abstim-
mungsfunktionen im Vordergrund dieser funktional geprägten Controllingauffassung.
Die führungsnahe Lokomotionsfunktion dient dem initialisierenden Anstoßen der
Wertschöpfung sowie der Ausrichtung aller unternehmerischen Aktivitäten auf den
Wertschöpfungszweck. Diese Funktion wird erst möglich, wenn die derivativen Infor-
mations- und Abstimmungsfunktionen erfüllt sind. Die Reihe strebt die Generierung
fundierter, praxisnaher, aber auch theoretisch auf State-of-the-Art-Niveau stehender
wissenschaftlicher Erkenntnisse an, die Unternehmensführung und Controlling auch
im Forschungsbereich eine wachsende Bedeutung zuschreiben. Die Reihe hat einen
hohen theoretischen Anspruch, ist letztlich jedoch immer im praxeologischen Sinne
anwendungsorientiert ausgerichtet und zudem ausdrücklich offen für neue inhaltliche
und publizistische Formate. Sie nutzt die bildhafte Vermittlung als Gestaltungsinstru-
ment und bietet zeitgemäße, wissenschaftlich solide, dabei aber verständliche und
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esene Experten aus Theorie und/oder Praxis der von ihnen bearbeiteten Themenge-
biete und somit ausgezeichnete Kenner von Unternehmensführung und Controlling.
Die Grundlage für die Inverlagnahme bildet ein Exposé, das über den inhaltlichen
Aufbau des Werkes, den geschätzten Manuskriptumfang, den Termin der Abliefe
rung des Manuskriptes an den Verlag sowie die Zielgruppe und mögliche Konkur
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Verlag einem kritischen Review unterzogen. Die Schriftenreihe präsentiert Ergeb-
nisse der betriebswirtschaftlichen Forschung im Themenfeld Unternehmensführung
und Controlling. Die Reihe dient der Weiterentwicklung eines ganzheitlich geprägten
Management-Denkens, in dem das wertschöpfungsorientierte Controlling einen für
die Theorie und Praxis der Führung zentralen Stellenwert einnimmt.
Herausgegeben von
Univ.-Prof. Dr. Dr. habil. Wolfgang Becker Prof. Dr. Patrick Ulrich
Lehrstuhl für Betriebswirtschaftslehre, Professur für Unternehmensführung
insbes. Unternehmensführung & und -kontrolle
Controlling Hochschule Aalen – Technik und
Otto-Friedrich-Universität Bamberg Wirtschaft
Bamberg, Deutschland Aalen, Deutschland
Weitere Bände in der Reihe http://www.springer.com/series/12530

Peter Göstl
Risk Profile Contingent

Analysis of Management
Control Systems
Evidence from the Mechanical
Engineering Industry
With a Preface by
Univ.-Prof. Dr. Walter S.A. Schwaiger, MBA
Peter Göstl
Vienna, Austria
Dissertation der Technischen Universität Wien, 2018

ISBN 978-3-658-28090-1 ISBN 978-3-658-28091-8 (eBook)
https://doi.org/10.1007/978-3-658-28091-8
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Preface
Today’s business environment is characterized by an ever-increasing

level of connectivity and complexity. Hand in hand, these enhancements
dramatically increase the uncertainties and risks that enterprises face. In
order to assure the enterprise’s sustainable existence on the market, the
top management needs to choose and implement adequate planning and
control systems which would enable them to reliably identify and manage
these ever changing uncertainties and risks.
Establishing adequate planning and control systems requires a clear
differentiation between uncertainty and risk as well as between different
types of risk. In the traditional point of view tracing back to Frank Knight,
a risk is associated with a probability that specifies the likelihood of its
occurrence, whereas the uncertainty has no probability assigned to it.
Furthermore, risks can be of a speculative or a pure nature. A speculative
risk includes possible gains and losses at the same time, e.g. foreign
exchange rates which can increase or decrease in the future. In contrast
to that, pure risks only have loss potentials, e.g. like a warehouse fire.
In a more modern view, which traces back to the ideas put forth by Mikes
& Kaplan (2014), a new categorization is proposed which excludes the
distinction between uncertainty and risk, but additionally includes the
controllability aspect. Mikes & Kaplan distinguish the following three types
of risk. The “preventable risks” are similar to the traditional concept of
pure risks. Due to the lack of any gain potentials, the proposed risk man-
agement strategy is to eliminate them completely. The “strategy execu-
tion risks” are of a speculative nature and they can be controlled by the
enterprise. As these risks also entail gain potentials and due to their in-
trinsic connection to any and every manner of entrepreneurial activity,
they are not eliminated, buy rather fine-tuned in order to achieve a favor-
able risk/reward-profile. Finally, the “external risks” can be of speculative
or pure risk nature with the addition that the probabilities of their occur-
rence normally cannot be controlled by the enterprise. Consequently, the
risk management strategy mainly focuses on the mitigation of the nega-
tive consequences that would occur if these risks materialize.
VI Preface
The big challenge that enterprises face nowadays in the ever-increasing

business environment “riskiness” is not only to identify all the risks, but
also to identify the corresponding risk types, to find the adequate risk
management strategy and to correctly integrate the different strategies
into the planning and control systems at the operational, financial, and
strategic management levels.
This challenge is the topic that Peter Göstl is addressing in his doctoral
thesis. In addition to its practical problem relevance, the thesis is also
based on a foundation of very solid research which focused on identifying
a research gap and performing a very well-founded survey and contin-
gency-based research. The research gap relates to the omission of Mikes
& Kaplan’s risk taxonomy in the management control systems (MCS)
research. This gap is closed by relating the empirical investigation to the
approaches taken in two seminal scientific articles. Firstly, by including
the four risk types into Simons’ (1995) levers-of-control (LOC) framework,
the survey design of Widener (2007) is extended to incorporate Mikes &
Kaplan’s modern up-to-date definitions of risks. Secondly, by conducting
the contingency analysis of Sandino (2007) – instead of Widener’s struc-
tural equation modeling –, the performance effect of a fit between the
implemented and the risk type exposure adequate LOC MCS configura-
tion is explicitly evaluated.
Due to Peter’s professional position in the top management of an enter-
prise in the mechanical engineering industry, he investigates Austrian
and German enterprises in this industry. Peter analyses how the enter-
prises configure their LOC MCS systems with respect to the specific ex-
posures to the three risk types they face, and how much a fit between the
implemented and the exposure adequate systems contributes to the sys-
tems’ performance.
The results Peter derives from the survey and contingency-based re-
search give new and differentiated insights into how enterprises address
the challenge of aligning risk type exposures and LOC MCS configura-
tions and into the performance benefits resulting thereof. The results
obtained in the survey are statistically sound due to the large number of
survey respondents. In a nutshell, the insight provided by the 362 re-
spondents can be summarized as follows: Enterprises react to their spe-
Preface VII
cific risk type exposures by choosing one of two LOC MCS configura-
tions, i.e. a tight configuration in the case of a high exposure and a less
tight configuration in the case of a low exposure. This means that enter-
prises with a high (low) exposure to the three risk types have a tight (less
tight) configuration of their 4 lever-of-control management control sys-
tems composed of the 4 levers in the form of the beliefs, the boundary,
the diagnostic control and the interactive control systems. Furthermore,
companies enjoy positive performance benefits if the implemented LOC
MCS configuration fits to the tightness configuration implied by the enter-
prise’s specific exposure to the three risk types.
In summary: Peter Göstl’s doctoral thesis examines a highly relevant
practical problem, which is addressed with the help of a very solid re-
search foundation. Accordingly, its contribution is two-fold: Firstly, to pro-
fessionals who want to know how to configure their management control
systems in the light of the risk type exposures they face. Secondly, it
contributes to the scientific community by providing additional knowledge
that can be used for further research.
Finally, I want to express my thankfulness to all the commitment, effort,
fruitful discussions and interesting insights Peter delivered during the
years of his doctoral studies. It is a very great pleasure having such peo-
ple to work with. Thank you Peter!
Univ.-Prof. Dr. Walter S.A. Schwaiger, MBA

Table of contents
1 Introduction ........................................................................................ 1
1.1 Research questions and design ................................................ 3
1.2 Structure and outline ................................................................. 7
2 Literature Review ............................................................................. 11
2.1 Introduction to management control ........................................ 11
2.1.1 Control problem in management ..................................... 12
2.1.2 Definitions and evolution of management control ........... 14
2.1.3 Uncertainty, risk and management control ...................... 17
2.1.3.1 Risk management and management control............... 19
2.1.3.2 Kaplan & Mikes’ conceptualization of risk types.......... 24
2.1.4 Overlaps with other fields in management literature ....... 27
2.1.4.1 Cybernetics and management control ......................... 28
2.1.4.2 Agency theory and management control ..................... 30
2.1.4.3 Organizational theory and management control ......... 34
2.1.4.4 Contingency theory and management control............. 36
2.2 Design of management control systems ................................. 41
2.2.1 Control systems and package view in
management control ........................................................ 41
2.2.2 Conceptualizations and evolution of MCS frameworks ... 46
2.2.3 Simons’ levers of control framework ............................... 54
2.2.3.1 Beliefs systems ............................................................ 58
2.2.3.2 Boundary systems ....................................................... 59
2.2.3.3 Diagnostic control systems .......................................... 61
2.2.3.4 Interactive control systems .......................................... 63
2.2.3.5 Interrelationship of the levers of control ...................... 65
2.2.3.6 Criticism of the LOC framework .................................. 68
X Table of contents
2.3 Contingency-based studies in management control ............... 70

2.3.1 The concept of fit in contingent control theory................. 72
2.3.2 Drivers of the emergence of MCS ................................... 81
2.3.2.1 MCS and uncertainty ................................................... 82
2.3.2.2 MCS and strategy ........................................................ 85
2.3.2.3 MCS and size .............................................................. 88
2.3.2.4 MCS and age ............................................................... 89
2.3.2.5 MCS and ownership .................................................... 90
2.3.3 Contingency-based performance analysis
of MCS – state-of-the-art ................................................. 90
2.3.4 Interim conclusion on contingency-based studies
in MC ............................................................................... 98
3 Theory Development and Hypotheses .......................................... 101
3.1 Development of a risk-based MCS framework
by extension of the LOC framework ...................................... 102
3.2 Development of propositions ................................................. 112
3.2.1 Risk profile and (risk-based) MCS design and use ....... 113
3.2.1.1 Association between preventable risks
and (risk-based) controls ........................................... 113
3.2.1.2 Association between strategy execution risks
3.2.1.3 Association between external risks
3.2.2 Risk profile and packages of (risk-based) MCS ............ 121
3.2.3 Superior performance through matching risk profile
and (risk-based) MCS .................................................... 123
3.2.4 Overview of hypotheses ................................................ 125
3.3 Theoretical model of this study .............................................. 126
Table of contents XI
4 Methods ......................................................................................... 129

4.1 Data set ................................................................................. 129
4.2 Data collection ....................................................................... 131
4.2.1 Internal and external validity .......................................... 132
4.2.2 Survey............................................................................ 134
4.2.3 Database ....................................................................... 139
4.3 Variable measurement .......................................................... 140
4.3.1 Conceptual specification and epistemic
relationships in constructs ............................................. 141
4.3.2 Construct validity and reliability ..................................... 146
4.3.3 Risk profile ..................................................................... 149
4.3.4 MCS design and use ..................................................... 154
4.3.5 Strategy ......................................................................... 163
4.3.6 Performance .................................................................. 167
4.3.7 Control variables ............................................................ 170
4.3.8 Summary of constructs .................................................. 171
4.3.9 Descriptive statistics ...................................................... 173
4.4 Data analysis ......................................................................... 175
4.4.1 Multiple regression analysis .......................................... 175
4.4.2 Cluster analysis ............................................................. 179
4.4.3 Logistic regression analysis........................................... 182
4.5 Research framework of this study ......................................... 186
5 Results ........................................................................................... 189
5.1 Risk profile contingent design and use of MCS .................... 189
5.1.1 Theoretical model and quantitative techniques ............. 189
5.1.2 Analysis ......................................................................... 195
5.1.2.1 LOC framework ......................................................... 195
5.1.2.2 Risk-based MCS framework ...................................... 200
5.1.2.3 Additional results on MCS design and use ................ 203
5.1.3 Discussion of hypotheses .............................................. 207
XII Table of contents
5.2 Risk profile contingent packages of MCS.............................. 213

5.2.2 Analysis ......................................................................... 218
5.2.2.1 LOC framework ......................................................... 218
5.2.2.3 Additional results on predictability of MCS
cluster membership ................................................... 230
5.3 Risk profile contingent performance analysis of MCS ........... 235
5.3.2 Analysis ......................................................................... 243
5.3.2.1 LOC framework ......................................................... 243
5.3.2.3 Additional results on superior performance
through matching MCS and risk profile ..................... 253
6 Conclusions ................................................................................... 257
6.1 Findings and contributions .................................................... 257
6.2 Limitations and implications for future research .................... 260
Appendix ................................................................................................ 263
References ............................................................................................ 271
List of figures
Figure 1: Research design ...................................................................... 7

Figure 2: Outline of dissertation .............................................................. 8
Figure 3: Enterprise risk management – Integrated framework ............ 23
Figure 4: Kaplan & Mikes’ conceptualization of risk types .................... 27
Figure 5: Cybernetic feedback model ................................................... 29
Figure 6: Control strategy in agency theory .......................................... 33
Figure 7: Control strategy in organizational theory ............................... 36
Figure 8: The minimum necessary contingency framework.................. 39
Figure 9: Organic and mechanistic forms of MCS ................................ 43
Figure 10: Social and informational prerequisites of control ................... 47
Figure 11: Control types and control problems ....................................... 50
Figure 12: Levers of control .................................................................... 57
Figure 13: Relationship between levers of control and
realized strategies ................................................................. 67
Figure 14: Levels of contingent control analysis..................................... 70
Figure 15: Interaction fit .......................................................................... 74
Figure 16: Systems fit ............................................................................. 77
Figure 17: Gerdin & Greve’s classificatory framework for
different forms of contingency fit ........................................... 78
Figure 18: Theoretical model of Widener’s (2007) study ........................ 96
Figure 19: Theoretical model of Sandino’s (2007) study ........................ 97
Figure 20: Extending Simons’ LOC framework to develop a
risk-based MCS framework (Source: own illustration) ........ 107
Figure 21: Theoretical model of this study ............................................ 128
Figure 22: Predictive validity framework ............................................... 133
Figure 23: Reflective and latent models ............................................... 144
Figure 24: Formative and emergent models ......................................... 145
XIV List of figures
Figure 25: Conceptual specification of risk profile ................................ 151

Figure 26: Conceptual specification of Simons’ MCS –
design attributes .................................................................. 155
Figure 27: Conceptual specification of Simons’ MCS –
attention patterns ................................................................. 157
Figure 28: Conceptual specification of risk-based MCS ....................... 161
Figure 29: Conceptual specification of strategy.................................... 165
Figure 30: Conceptual specification of perceived firm performance .... 168
Figure 31: Conceptual specification of perceived usefulness
of MCS ................................................................................. 169
Figure 32: Research framework of this study based on the PVF ......... 187
Figure 33: Theoretical model for analyzing risk profile
contingent design and use of MCS ..................................... 190
Figure 34: Graphical depiction of significant results on risk profile
MCS design and use ........................................................... 208
Figure 35: Theoretical model for risk profile contingent
performance analysis of MCS ............................................. 237
Figure 36: Graphical depiction of significant results on risk profile
contingent performance ....................................................... 255
List of tables
Table 1: Overview of hypotheses ....................................................... 126

Table 2: Non-response bias ............................................................... 138
Table 3: Descriptive statistics for financial measures
from database ....................................................................... 140
Table 4: Factor analysis of survey constructs – risk profile ................ 153
Table 5: Factor analysis of survey constructs – MCS ........................ 159
Table 6: Factor analysis of survey constructs – risk-based
dimensions of MCS .............................................................. 163
Table 7: Factor analysis of survey constructs – strategy ................... 166
Table 8: Factor analysis of survey constructs – performance ............ 170
Table 9: Multitrait matrix ..................................................................... 172
Table 10: Descriptive statistics for survey items and constructs .......... 174
Table 11: Multiple regressions on design attributes of MCS ................ 196
Table 12: Multiple regressions on attention patterns of MCS .............. 198
Table 13: Multiple regressions on risk-based dimensions of MCS ...... 201
Table 14: Multiple regressions – additional results
on design attributes of MCS ................................................. 204
on attention patterns of MCS ................................................ 205
on risk-based dimensions of MCS ........................................ 206
Table 17: Cluster analysis of the LOC framework ................................ 219
Table 18: Discriminant analysis for the cluster solution
of the LOC framework .......................................................... 220
Table 19: Logistic regression for prediction
of MCS cluster membership ................................................. 222
Table 20: Cluster analysis of the risk-based MCS framework ............. 225
XVI List of tables
Table 21: Discriminant analysis for the cluster solution

of the risk-based MCS framework ........................................ 226
Table 22: Logistic regression for prediction
of risk-based MCS cluster membership ............................... 228
Table 23: Logistic regression – additional results on predictability
of MCS cluster membership ................................................. 231
Table 24: Logistic regression – additional results on predictability
of risk-based MCS cluster membership ............................... 232
Table 25: Logistic regression for predicting MCS
cluster membership via risk profile ....................................... 244
Table 26: Univariate analyses on performance – LOC framework ...... 245
Table 27: Multiple regressions on performance – LOC framework ...... 247
Table 28: Logistic regression for predicting risk-based MCS
cluster membership via risk profile ....................................... 249
Table 29: Univariate analyses on performance – risk-based
MCS framework .................................................................... 250
Table 30: Multiple regressions on performance – risk-based
MCS framework .................................................................... 252
List of equations
Equation 1: t-statistic ........................................................................... 136

Equation 2: Cronbach’s α .................................................................... 148
Equation 3: Final score of construct measures ................................... 148
Equation 4: Linear regression model .................................................. 175
2
Equation 5: Goodness of fit measure R ............................................. 176
Equation 6: F-ratio ............................................................................... 176
2
Equation 7: F-statistic for significance testing of R ............................ 177
Equation 8: Fchange-statistic .................................................................. 177
Equation 9: Variance inflation factor (VIF) .......................................... 179
Equation 10: Discriminant function........................................................ 181
Equation 11: Logarithmic regression model .......................................... 183
Equation 12: Measure of log-likelihood ................................................. 183
Equation 13: Deviance .......................................................................... 184
Equation 14: Likelihood-ratio ................................................................. 184
2
Equation 15: Goodness of fit measure Nagelkerke’s RN ..................... 184
Equation 16: Risk profile contingent design and use of MCS ............... 191
Equation 17: Calculation of dummy variable for STRATRISK .............. 203
Equation 18: Calculation of dummy variable for FIT ............................. 236
Equation 19: Predicted MCS cluster membership ................................ 238
Equation 20: Risk profile contingent performance analysis of MCS ..... 240
List of abbreviations
AGE measure of company age

AIC Akaike information criterion
BELIEF measure of beliefs systems
BOUND measure of boundary systems
CEO chief executive officer
COSO Committee of Sponsoring Organizations of
the Treadway Commission
COSTSTRAT measure of cost leadership strategy
DIFFSTRAT measure of differentiation strategy
DIAGNOST measure of diagnostic control systems
e.g. exempli gratia
ERM Enterprise Risk Management
EXTRISK measure of external risks
i.e. id est
INTERACT measure of interactive control systems
ISO International Organization for Standardization
LOC levers of control
MC management control
MCS management control systems or
management control systems’
OC organizational control
OLS ordinary least squares
OWN dummy variable of ownership structure
PERCPERF measure of perceived firm performance
PMS Performance measurement systems
PREVRISK measure of preventable risks
PVF predictive validity framework
XX List of abbreviations
rbFORMALMCS measure of risk-based formal controls

rbUSEMCS measure of risk-based use of controls
RQ research question
SE standard error
SIZE measure of organizational size
STRATRISK measure of strategy execution risks
USEFULMCS measure of usefulness of MCS
VDMA Verband Deutscher Maschinen- und Anlagenbau
VIF variance inflation factor
Abstract
This dissertation studies the interrelationship between management con-

trol systems (MCS), risk profile, and organizational performance by fol-
lowing a contingency approach. In doing so, an extension of Simons’
levers of control framework is put forward in order to integrate risk-based
dimensions of MCS and empirically test the extended framework. It is
hypothesized that the choice of MCS reflects the firm‘s risk profile, and
that firms that choose MCS design and use better suited to their risk pro-
file perform better than others. Using data from a survey of 362 Chief
Executive Officers of Austrian and German medium-sized companies in
the mechanical engineering industry, this study yields a model of fit that
relates types of risks to MCS design and use. I find that the choice
among specific control systems is associated with the types of risks an
organization faces. Specifically, it was found that preventable risks are
associated with an emphasis on formal controls, while strategy execution
risks and external risks are associated with an interactive use of control
systems. Furthermore, evidence on packages of MCS that are put in
place in practice is provided and configurations of rather loose and tight
MCS that differ in their risk profile derived. Finally, it is demonstrated that
a better fit between MCS and the organization’s risk profile is associated
with superior perceived and actual firm performance. This study contrib-
utes to an existing and growing body of literature in the field of manage-
ment accounting and control concerned with implications from increased
uncertainty on MCS design and use. Besides contributing to academic
literature, the practical output of this dissertation is an integrated picture
of the interrelationship between specific control systems put in place and
types of risks an organization faces. These contingencies should be tak-
en into account when setting up or developing MCS in organizations, as
they enable the stimulation of selective improvements and help to
achieve a competitive advantage.
1 Introduction
As the existence of enterprises is a direct result of the fact of uncertainty

(Power, 2007), the question of how firms cope with uncertainty to survive
in the long run is at the heart of management science (Knight, 1921).
While increasing dynamics of the environment of businesses has been
leading to advanced complexity within organizations during the twentieth
century (Ansoff, 1979), complexity within an organization leads to uncer-
tainty, which results in a lack of information regarding potential future
outcome (Galbraith, 1973). As a result, information tends to be diverse
and incomplete, leading to the institution of controls such as rules, docu-
mentation, and formalized structures (Child & Mansfield, 1972; Khand-
walla, 1975) to cope with evident coordination problems (Arrow, 1964).
Conclusively, it is evident that “control processes are a fundamental part
of organizational activity” (Otley & Berry, 1980, p. 232) and that the con-
cepts of control and uncertainty are intrinsically tied to each other.
As a consequence, it can be argued that the existence of control prob-
lems in management requires managers to exercise control in order to be
able to achieve organizational objectives (Merchant & Otley, 2007). While
the roots of the theory of management control reach back to the begin-
ning of the twentieth century (Giglioni & Bedeian, 1974) and management
control has been conceptualized in various ways (Chenhall, 2007), the
notion is recognized that systems of management control are “formal,
information-based routines and procedures managers use to maintain or
alter patterns in organizational activities” (Simons, 1995b, p. 5) in order to
1
successfully implement and control strategy. As the study of specific
aspects of management control systems (MCS) isolated from other or-
ganizational controls is criticized (Chenhall, 2003), it is advocated to con-
sider various functions and dimensions of organizational controls and
reflect on their interaction and interrelationship (Malmi & Brown, 2008). In
this respect, various frameworks have been developed in literature aim-
ing at classifying and structuring diverse sets of controls (e.g., Simons,
1
There are also other views in management control research. For a discussion of defini-
tions and evolution of management control see Section 2.1.2.

P. Göstl, Risk Profile Contingent Analysis of Management Control Systems,
Unternehmensführung & Controlling, https://doi.org/10.1007/978-3-658-28091-8_1
2 1. Introduction
1995b; Merchant & Van der Stede, 2012). Moreover, taking a broader
package approach of MCS “may facilitate the development of better theo-
ry of how to design a range of controls to support organisational objec-
tives, control activities, and drive organisational performance” (Malmi &
Brown, 2008, p. 288). In regard to design and use of MCS, the contin-
gency-based approach is most prominent (Otley, 2016) which aims to
identify “specific aspects of an accounting system which are associated
with certain defined circumstances and demonstrate an appropriate
matching” (Otley, 1980, p. 413). In general, it is assumed that managers
adapt the organizational control package of their organization (Otley,
1980) to the existence, extent, and changes in contingencies (Chenhall,
2003), in order to attain fit and, as a consequence, enhanced organiza-
tional performance (Donaldson, 2001).
Conclusively, one of the most fundamental contingent factors in man-
agement accounting and control research is uncertainty, the importance
of which is widely acknowledged in literature (Chapman, 1997; Merchant
& Otley, 2007) and which “has gained by far the widest attention in the
area of management accounting” (Otley, 2016, p. 50). However, while
“organizations are centrally, even definitionally, concerned with the man-
agement of uncertainty and the coordination of resources to create forms
of order for identifying risk and making decisions” (Power, 2007, p. 98), it
is argued in literature that “many organizational control activities take
place as if uncertainty barely exists” (Otley, 2014, p. 95). Therefore, the
notion of uncertainty has been addressed increasingly in recent man-
agement accounting and control research (e.g., Bredmar, 2015; Otley,
2
2012, 2014, 2016; Otley & Soin, 2014). As an example, Malmi &
Granlund (2009) argue that the propositions developed by Chenhall
3
(2003) through reviewing the respective research findings in regard to
uncertainty and MCS are too simplistic and “need to advance from this
stage to be able to argue that as uncertainty increases, certain forms of
2
An extensive overview of the status quo is provided by a set of 17 essays on how uncer-
tainty affects the design and operation of MCS (Otley & Soin, 2014).
3
Malmi & Granlund (2009) refer to Chenhall’s proposition that the “more uncertain the
external environment the more open and externally focused the MCS” (Chenhall, 2003,
p. 138).
1.1. Research questions and design 3
MCS used in a certain way would provide better decision making support”
(Malmi & Granlund, 2009, p. 603). In addition, it is well known that when
“uncertainty is organized it becomes a ‘risk’ to be managed” (Power,
2007, p. 6). Still, while recent literature argues that the concepts of risk
and risk management have moved to an issue of management control
(e.g., Otley & Soin, 2014; Soin & Collier, 2013), the area has received
little attention and there is “relatively little understanding about the (com-
plex) interrelation between risk, risk management and management ac-
counting and control practices” (Soin & Collier, 2013, p. 84).
In the light of the above, some interesting and promising approaches
have been developed in literature to facilitate improved insight into the
relationship between management control and risk. A particularly striking
approach has been presented by Mikes & Kaplan (2014, 2015), who
stress the importance of qualitative distinction among types of risks and
argue that “the inherent nature and controllability of the different types of
risk the organization faces” (Mikes & Kaplan, 2015, p. 40) demand certain
4
control models (Simons, 1995b) for these risks to be managed effective-
ly. Thus, a contingency perspective is proposed, and it is called for re-
search to conceptualize and empirically test fit between types of risks and
control models applied.
Overall, the assessment of scarce insight into the intertwinement of man-
agement control and uncertainty in general and the both obvious and
impressive approach by Kaplan & Mikes (2012) in detail raised my curios-
ity and made me want to shed some light on this unresolved but crucial
venture to control uncertainty and contribute to the contingency-based
literature on management control systems.
1.1 Research questions and design

It is argued that the ubiquitous nature of uncertainty was given insufficient
attention in MCS research so far (Otley & Soin, 2014). Still, literature
reports that MCS design and use is contingent to the uncertainty an or-
4
In their article introducing their newly developed classification of risk, Kaplan & Mikes
(2012, p. 53) explicitly refer to the levers of control framework of Simons (1995a) for fur-
ther information on control models.
4 1. Introduction
ganization faces, which is generally recognized in management account-

ing and control research (Chenhall, 2007; Otley, 2016) and was demon-
strated conceptually (Simons, 2000) and empirically (Widener, 2007).
Particularly, Simons’ levers of control framework (Simons, 1995b) was
pioneer in addressing risk as key aspect shaping MCS (Otley, 2012) and
asserts that strategic risks drive the emphasis on certain control systems.
Notwithstanding the importance of choosing MCS design and use in ac-
cordance to the context of an organization, the relation to the risk profile
of an organization is still hardly recognized in literature and thus little
guidance is offered to practitioners in this respect. This study aims to fill
5
this gap by addressing three research questions that contribute to the
discipline of contingency-based research in the field of management ac-
counting and control. Particularly, Kaplan & Mikes’ (2012) proposition that
different sources and degrees of controllability of types of risks demand
different control models in organizations for these risks to be managed
effectively is applied. Consequently, as will be argued below, this study
hypothesizes that the choice of MCS design und use reflects the firms’
risk profile, and that firms that choose MCS design and use better suited
to their risk profile perform better than others.
Therefore, the purpose of this dissertation is to examine the interrelation-
ship between MCS design and use, risk profile, and organizational per-
formance drawing on as well as linking Kaplan & Mikes’ (2012) classifica-
tion of risks and Simons’ (1995b) levers of control (LOC) framework. Fol-
lowing this, the research questions that derive from literature review and
motivate the aim of this dissertation are presented:
RQ1: How are the choices of (risk-based) control systems associated

with the nature of the firms’ risk profile?
5
In specifying the research questions, suggestions by Libby et al. (2002) are applied who
argue that “researchers should frame their theories at the least specific level” (Libby et
al., 2002, p. 796) in order to discriminate between existing theories and maximize contri-
butions to the theoretic disciplines. Furthermore, Libby’s et al. (2002) conclusion on Kin-
ney’s (1986) recommendations is considered which states that a research question
should address “the relation between two or more concepts, can be stated clearly and
unambiguously as a question, implies the possibility of empirical testing, and is important
to the researcher and others” (Libby et al., 2002, p. 794).
1.1. Research questions and design 5
RQ2: What different configurations of (risk-based) MCS (=packages)

are put in place in practice and does the risk profile have an in-
fluence on configuration membership?
RQ3: Are firm performance and perceived usefulness of MCS related
to the fit between (risk-based) MCS and the firms’ risk profile?
To address the questions above, quantitative data is analyzed, which is

gathered by a survey instrument and related to the design and use of
MCS by using a sample of medium-sized companies in the mechanical
engineering industry in Austria and Germany. Furthermore, an extension
of the LOC framework is put forward in order to integrate risk-based di-
mensions of MCS and empirically test the extended framework as well.
Regarding the first research question, it is demonstrated that types of
risks an organization faces affect MCS design and use and thus evidence
is provided for the risk profile of an organization to be regarded as con-
tingency factor in MCS research. In general, the choice among specific
control systems is associated with the types of risks an organization fac-
es along with strategic choice and organizational structure. Specifically, it
was found that preventable risks are associated with an emphasis on
formal controls – beliefs systems and boundary systems – while strategy
execution risks and external risks are associated with an interactive use
of control systems. With respect to the second research question, this
study finds evidence on packages of MCS, which are put in place in prac-
tice deriving configurations of rather loose and tight MCS. Moreover, it is
demonstrated that the risk profile significantly influences the configuration
of MCS applied by an organization. In addition, it is shown that the prob-
ability of belonging to the group of rather tight MCS is increased for or-
ganizations which are exposed to strategy execution risks and external
risks to a greater extent. Finally, in regard to the third research question,
it is indicated that a better fit between MCS chosen and the organization’s
risk profile is associated with superior perceived and actual firm perfor-
mance.
In addition to producing empirical evidence on the aforesaid research
questions, the LOC framework, which serves as base MCS framework for
this analysis, is further developed to put forward an extended risk-based
6 1. Introduction
MCS framework. In doing so, Simons’ LOC framework is extended in

order to analyze coherence of proposed hypotheses in a risk-based MCS
setting as well. The risk-based MCS framework represents a holistic ap-
proach aiming at considering systematical integration of risk as additional
feature of MCS, while retaining the elements of the original framework. It
is demonstrated that the additional dimensions of a risk-based MCS do
not emerge to disrupt the findings in regard to the LOC framework, but
rather provide for incremental improvements in reporting evidence for the
interrelationship between MCS design and use, risk profile, and organiza-
tional performance.
Finally, practical output of this dissertation is provided, as the findings of
this dissertation offer a more integrated picture of different natures of
risks and implications on MCS design and use for medium-sized compa-
nies of the mechanical engineering industry in Austria and Germany.
Thus, while the status quo of MCS design and use in this specific context
is depicted, the targeted population is invited to take benchmarks and
stimulate selective improvements to gain competitive advantage.
The research design of this dissertation is illustrated in the figure below
and is based on the predictive validity framework (PVF) (Libby et al.,
2002). The PVF is a framework that provides a description of the process
by which the research questions are specified, operationalized, and test-
ed (Libby et al., 2002). Accordingly, the PVF “provides a useful descrip-
tion of the hypothesis testing process, and focuses our attention on the
key determinants of the internal and external validity” (Libby et al., 2002,
p. 794). The conceptual level of the research design based on the PVF is
further specified in the course of theory development in Chapter 3 (see
Figure 21) and amended by the operational level by engaging in an oper-
ationalization process by which constructs are translated into operational
variables in Chapter 4 (Bisbe et al., 2007; Libby et al., 2002; see Figure
32).
1.2. Structure and outline 7
Following, the conceptual design of the research is presented:
Explanatory Other potentially

variables RQ1: Explained variables influential variables
Design and use
Conceptual level of the PVF (Libby et al., 2002)
RQ2: Packages of
of MCS
MCS
Link 1 Link 3
Risk profile MCS Firm and industry
design and use variables
FIT
Link 2
RQ3: Performance analysis of MCS
Performance
Otley‘s (1980) minimum necessary contingency framework
Figure 1: Research design

(Source: own illustration)
As shown in Figure 1, each research question relates to specific parts of

the research design. While RQ1 and RQ2 address Link 1 and RQ2 addi-
tionally the conceptualization of MCS design and use, RQ3 targets Link 2
of the PVF. Summing up, the research design illustrates the aim of this
dissertation to examine the interrelationship between MCS design and
use, risk profile, and organizational performance.
1.2 Structure and outline

In line with the research questions presented above, the structure of this
dissertation and the proceeding after the introduction is outlined as fol-
lows:
8 1. Introduction
Chapter 1
Introduction
Chapter 2
Literature Review
Introduction to Design of Contingency-based

management control management studies in management
(2.1) control systems (2.2) control (2.3)
Chapter 3
Theory Development and Hypotheses
Development of a
Development of Theoretical model
risk-based MCS
propositions (3.2) (3.3)
framework (3.1)
Chapter 4
Methods
Variable measurement
Data set and collection Research framework
and data analysis
(4.1 and 4.2) (4.5)
(4.3 and 4.4)
Chapter 5
Results
Risk profile contingent Risk profile contingent

Risk profile contingent
design and use of MCS performance analysis of
packages of MCS (5.2)
(5.1) MCS (5.3)
Chapter 6
Conclusions
Figure 2: Outline of dissertation

Chapter 2 provides the foundation of management control theory by re-

viewing theoretical and empirical literature in this field. Specifically, an
introduction to management control, a discussion of MCS frameworks in
general and Simons’ levers of control framework (Simons, 1995b) in de-
1.2. Structure and outline 9
tail, as well as a presentation of drivers of MCS design and use are ad-
dressed. Taking into account that the concept of uncertainty in manage-
ment control is the major underlying theme in this dissertation, special
focus will be delivered to this aspect.
Chapter 3 draws on the theoretical and empirical findings of contingency-
based research in management control theory and presents further con-
ceptual developments of Simons’ levers of control framework (Simons,
1995b) as well as testable propositions in order to examine the interrela-
tionship between MCS design and use, risk profile, and organizational
performance. Thus, theory is developed and the theoretical model illus-
trated by further specifying the conceptual level of the PVF depicted in
Figure 1.
Chapter 4 builds on the theoretical model (see Figure 21) comprising the
conceptual level of the predictive validity framework (PVF) and amends
the framework by the operational level (Libby et al., 2002). Thus, the
methods of this study are introduced and the choices and processes re-
garding data set, data collection, variable measurement, and data analy-
sis justified and discussed. Particularly, the operationalization process by
which constructs are translated into operational variables is addressed
(Bisbe et al., 2007; Libby et al., 2002) and the research framework com-
pleted (see Figure 32).
Chapter 5 presents the results of the empirical analysis and provides
evidence for and discussion of the hypotheses. Firstly, risk profile contin-
gent design and use of MCS will be examined in order to reveal associa-
tions between types of risks and specific control systems. Secondly, risk
profile contingent configurations of MCS will be addressed, to gain insight
into packages of MCS in practice. Thirdly, a risk profile contingent per-
formance analysis will be conducted, to provide an answer to the final
research question.
Chapter 6 summarizes the findings of this dissertation and presents the
contributions to the research field of management accounting and control.
Finally, a discussion of potential limitations of this study and key avenues
for future research conclude this dissertation.
2 Literature Review
This chapter reviews theoretical and empirical literature concerning man-

agement control (MC) research. Throughout this section, special focus
will be given to the aspect of uncertainty and its consequences, as this is
the major underlying theme of this dissertation. First of all, an introduction
to MC will be presented in order to build up a theoretical framework and
to provide specific terminology. Secondly, the design of management
control systems (MCS) will be addressed, introducing MCS frameworks in
general and Simons’ levers of control framework (Simons, 1995b) in de-
tail. Finally, driving forces in the emergence of MCS will be discussed
leading to an overview of empirical findings in contingency-based MC
research with a focus on uncertainty.
2.1 Introduction to management control

In 1965, Anthony marked the starting point of MC literature as a separate
topic of academic study with his widely quoted definition of MC as “the
process by which managers assure that resources are obtained and used
effectively and efficiently in the accomplishment of the organization’s
objectives” (Anthony, 1965, p. 17). In fact, roots of the theory of MC can
be traced back to the beginning of the twentieth century (Giglioni &
Bedeian, 1974). For example, Koontz explicitly identified fourteen princi-
ples of MC (Koontz, 1957, 1959), which were later revised (Koontz &
O’Donnell, 1972) and recognized as comprehensive management control
theory (Giglioni & Bedeian, 1974). Still, Otley considers Anthony’s (1965)
work to be the “main intellectual foundation for management control sys-
tems design and use” (Otley, 2003, p. 313) having “defined and confined
the study of management control systems” (Otley, 2003, p. 314).
In the following subchapters, an introduction to MC is provided to estab-
lish an understanding of the key aspects of its conceptualization. To
begin with, some general considerations as to the problem of control in
management are presented and definitions as well as the evolution of MC
are discussed. Subsequently, the connection of MC to the concepts of

12 2. Literature Review
uncertainty and risk is addressed and the way in which it overlaps with
other fields in management literature is presented.
2.1.1 Control problem in management

The problem of control in management had already been addressed in
the early twentieth century. In his general theory of business administra-
tion, Fayol (1916/1949) identified five functions of management: planning,
organizing, commanding, coordinating, and control. Nearly contempora-
neously, Taylor’s principles of scientific management highlighted the
problem of control, aiming to transfer control from workers to manage-
ment (Taylor, 1911/1919). Since these early landmarks, many different
6
definitions of control can be found in literature (e.g., Green & Welsh,
1988; Luneski, 1964) leading to ambiguous meanings of what was, at
that time, “one of the most neglected and least understood areas of man-
agement activity” (Dauten et al., 1958, p. 41). While domination and pow-
er had been the most common ideas of control originally, associations
with aspects of monitoring and regulating of activities have become more
7
apparent with time (Otley & Berry, 1980).
While research in this area was still in the early stages, Arrow empha-
sized the crucial role of uncertainty in organizational control as being a
complement of knowledge (Arrow, 1964). He argued that the problem of
organizational control was about keeping its members in step, in order to
maximize the organization’s objective function. More precisely, Arrow
stated that organizational control would be imperative “when two condi-
tions hold: (1) The objective of the organization is a function of a number
of interrelated decision variables concerning individual activities; (2) the
different members of the organization have different bodies of
knowledge” (Arrow, 1964, p. 404). Thus, Arrow’s view on organizational
6
For example, Rathe noted fifty-seven connotations of the term ‘control’ (Rathe, 1960, p.
32).
7
Otley & Berry stated that in the beginning, the most common idea of control had been
the “domination of one individual or group by another through the exercise of power” (Ot-
ley & Berry, 1980, p. 231). On the other hand, the focus of the term control on monitoring
and regulating of activities is affected by the original French term meaning “inspection”
and in line with connotations in several European languages (Otley & Berry, 1980, p.
231-232).
2.1. Introduction to management control 13
control incorporated concepts of coordination problems and information

asymmetry, aiming at specifying operating and enforcement rules in de-
centralized organizations. Therefore, it can be argued that the primary
function of organizational control is to ensure cooperation and mitigate
opportunistic behavior among members of organizations (e.g., Eisen-
hardt, 1985, 1989; Ouchi, 1979).
Moreover, in a cybernetic view, Daft & Macintosh conceptualize organiza-
tional control “as a three stage cycle: (a) planning a target or standard of
performance, (b) monitoring or measuring activities designed to reach
that target, and (c) implementing corrections if targets or standards are
not being achieved” (Daft & Macintosh, 1984, p. 44). Following this, they
referred to control functions such as target setting, monitoring, and coor-
dination and stated that MCS “should theoretically assist managers to
perform the control cycle” (Macintosh & Daft, 1987, p. 51). This apparent
dichotomy regarding the term management control had already been
ascertained by Giglioni & Bedeian (1974), who found that control can be
viewed as comprising of two aspects, namely directive action for effective
control over subordinates, and corrective action if necessitated by desired
and measured outcome.
In general, it is evident that “control processes are a fundamental part of
organizational activity” (Otley & Berry, 1980, p. 232; see also Flamholtz,
1983; McMahon & Ivancevich, 1976). Flamholtz argues that organiza-
tional control comprises of “actions or activities taken to influence the
probability that people behave in ways which lead to the attainment of
organizational objectives” (Flamholtz, 1983, p. 154; see also Kerr, 1983).
Similarly, Otley concisely defines the central problem of management
control as the challenge for organizations to “ensure that managers (and
workers) act in the organizational interest” (Otley, 2003, p. 313). More
precisely, he addresses the questions of how to design systems to be
able to evaluate organizational participants’ actions as well as how to
encourage motivation to act in the organizations’ best interests as main
aspects of the problem of management control. Consequently, aspects of
behavioral nature on the one hand and informational nature on the other
hand are of importance in addressing these issues (Otley, 2003).
To sum up, it can be argued that the existence of control problems in

management as stated above requires managers to exercise control in
order to be able to achieve organizational objectives (e.g., Merchant &
Otley, 2007). In this context, Merchant & Otley link control to “the generic
management process, which involves (1) setting objectives, (2) deciding
on preferred strategies for achieving those objectives, and then (3) im-
plementing those strategies while (4) making sure that nothing, or as little
as possible, goes wrong” (Merchant & Otley, 2007, p. 785). While differ-
ent definitions of the control function of management range from very
narrow to broader concepts, they basically vary in the processes chosen
to be included within them (Merchant & Otley, 2007).
2.1.2 Definitions and evolution of management control

In his classic view, Anthony (1965) distinguished between (1) strategic
planning, (2) management control, and (3) operational control as sepa-
rate processes of control. Therefore, MC connects strategic planning and
operational control, linking the functions of setting long-term objectives
and goals for the organization and ensuring that specific tasks are carried
out effectively and efficiently (Anthony, 1965). Accordingly, it was recog-
nized that control systems differ among organizational levels (Anthony,
1965), and that systematic differences in the application of control mech-
anisms can appear (Ansari, 1977; Walsh & Seward, 1990). At its most
basic level, in seeking universal patterns of control, Anthony’s interpreta-
tion of MC focuses on optimizing the relationship between input and out-
put, relying on financial controls as well as feedback and monitoring pro-
cesses and neglecting social-psychological or behavioral issues (Otley et
al., 1995). This narrow conceptualization of MC accounts for the criticism
of Anthony’s view as being restrictive, reducing it to a formal accounting-
based framework which falls short of capturing the richness of MC (e.g.,
Otley et al., 1995; Otley, 1999). While Anthony’s definition led to a simpli-
fication through defining a universal management control system inde-
pendent from differences in technology and environments of organiza-
tions (Otley & Berry, 1980), Otley & Berry regarded Anthony’s concept as
“valuable as an initial strategy, but […] a present embarrassment in im-
plying an over-narrow view of the management control process” (Otley &

Berry, 1980, p. 235).
8
Consequently, in the last decades, MC and MCS have been conceptual-
ized in different ways and a number of definitions have been proposed
(Malmi & Brown, 2008). Chenhall states that “[t]he definition of MCS has
evolved over the years from one focusing on the provision of more for-
mal, financially quantifiable information to assist managerial decision
making, to one that embraces a much broader scope of information. This
includes external information related to markets, customers, competitors,
non-financial information related to production processes, predictive in-
formation and a broad array of decision support mechanisms, and infor-
mal personal and social controls” (Chenhall, 2003, p. 129). A general
understanding of MCS is proposed by Merchant & Otley who argue that
MCS is “designed to help an organization adapt to the environment in
which it is set and to deliver the key results desired by stakeholder
groups, most frequently concentrating upon shareholders in commercial
enterprises” (Merchant & Otley, 2007, p. 785). Summing up, Chenhall
(2007) argues that the classic view of MCS has shifted from being a pas-
sive tool only providing information to managers to a more active role
enabling individuals to achieve their goals. Moreover, Mundy holds the
view that MCS serves both a controlling role and an enabling role (Mun-
dy, 2010; see also Adler & Borys, 1996). While the controlling role con-
centrates on mitigating information asymmetry problems, the enabling
role of MC focuses on improving decision-making and reducing uncer-
tainty (Mundy, 2010).
Furthermore, some concepts represent a broader notion of MC and frame
the entire strategic process in including strategic formulation (e.g., Si-
mons, 1990) or in encompassing strategic control processes (e.g., Goold
8
According to Chenhall (2003), the “terms management accounting (MA), management
accounting systems (MAS), management control systems (MCS), and organizational
controls (OC) are sometimes used interchangeably. MA refers to a collection of practices
such as budgeting or product costing, while MAS refers to the systematic use of MA to
achieve some goal. MCS is a broader term that encompasses MAS and also includes
other controls such as personal or clan controls. OC is sometimes used to refer to con-
trols built into activities and processes such as statistical quality control, just-in-time
management.” (Chenhall, 2003, p. 129)
& Quinn, 1993) to continually evaluate viability of strategy. Moreover,

Mintzberg (1987) advices against focusing on clearly set strategies and
stresses the importance of learning and adaptation for control systems in
uncertain environments. More recently, it is argued in literature that the
control function of management solely incorporates the last two steps of
the generic management process mentioned above (see Section 2.1.1),
and therefore focuses on effective strategy implementation. Merchant &
Van der Stede (2007, p. 6-7) argue that the terms MC and strategy im-
plementation have the same meaning und divide the functions of control
systems in strategic control and management control. While strategic
control focuses on the question of validity of strategy, MC is concerned
with strategy execution in term of its primary function to “influence behav-
iors in desirable ways” (Merchant & Van der Stede, 2007, p. 6). Similarly,
Anthony et al. define MC as “the systematic process by which the organi-
zation’s higher-level managers influence the organization’s lower-level
managers to implement the organization’s strategies” (Anthony et al.,
2014, p. 4). In fact, Anthony, who initially coined the term MC in 1965
(Anthony, 1965), already stated in a similar fashion in the late 80s that
management control is “the process by which managers influence other
members of the organization to implement the organization’s strategies”
(Anthony, 1988, p. 10). This represents a shift in definition which can
partly be attributed to the increased relevance of strategy concepts in
management and control literature (Simons, 1995b, p. 18-19). Further-
more, this demonstrates that MC concerns decentralized organizations
and that decentralization is the leading reason for systems of MC to be
put in place in order to enable goal sharing and cooperation (Anthony et
al., 2014).
This latter sense of MC stresses the behavior-influencing function of MC
as managers set controls to affect and lead individuals in organizations to
achieve desired organizational performance in accordance with strategic
objectives. This is in line with perceptions that the motivation of organiza-
tional participants is in fact the central function of MCS (Anthony, 1965, p.
113; Lawler & Rhode, 1976, p. 6). Otley (1999) argues that MCS “provide
information that is intended to be useful to managers in performing their
jobs and to assist organizations in developing and maintaining viable
patterns of behaviour” (Otley, 1999, p. 364). Therefore, the twofold pur-

pose of MCS, i.e. providing information for decision-makers as well as
influencing employee behavior, was advanced (Otley, 1999). In line with
this notion, Simons states that systems of MC are “formal, information-
based routines and procedures managers use to maintain or alter pat-
terns in organizational activities” (Simons, 1995b, p. 5). Simons’ concep-
tualization is about how managers control strategy in order to successful-
ly implement their intended strategies (Simons, 1995a, 2000) and is pre-
sented in more detail below (see Section 2.2.3).
2.1.3 Uncertainty, risk and management control

In MC literature, the fact that organizations operate in environments
which are subject to high degrees of uncertainty is little acknowledged
(Otley, 2012; Otley & Soin, 2014), despite uncertainty being a key feature
of any organizational setting (e.g., Otley, 2012; Soin & Collier, 2013; Soin
et al., 2014). Consequently, MCS have “tended to be regarded as static
and unchanging, rather than dynamic” (Otley & Soin, 2014, p. 1). While
organizations have been seen as a buffer against uncertainty in the last
9
century, globalization and inter-connectedness as well as organizations’
10
reactions to these developments promote uncertainty, which can be
seen to emerge from sources both external and internal of the organiza-
tions (Otley & Soin, 2014). In addition, constantly changing environments
require control systems to continuously adapt as well (Bourne, 2014),
transforming control systems from coherent systems to rather loosely
combined parts of enduring and innovative tools (Otley & Soin, 2014).
Therefore, changing obsolete controls as well as searching for best prac-
tice controls, i.e. control of management control, is an essential approach
9
Otley & Soin argue that production functions of organizations could be “buffered from
external change and allowed to develop well-programmed routines that led to considera-
ble operating efficiency” (Otley & Soin, 2014, p. 6).
10
For example, the organizations’ reactions to external changes caused by competitive
pressure leads to increased levels of uncertainty in the future (Otley & Soin, 2014, p. 7).
What is more, Otley argues that organizations’ failure to attempt to control all aspects of
the value chain, the consequential decline of overall holding organizations, and the con-
centration on smaller and more focused organizations increased exposure to uncertainty
(Otley, 2016).
to coping with uncertainty (Tessier, 2014; see also Tessier & Otley,
2012b). This change in the connotations of control is illustrated by Otley
& Soin: “Control can no longer be seen as a guarantee that predicted
outcomes will occur. Rather, control is a process which may be helpful in
guiding an organization through the stormy seas of its environment, and
assisting constant adaptation they may even encompass the change of
overall goals as some of the original goals become unrealistic” (Otley &
Soin, 2014, p. 8). Overall, control under conditions of uncertainty is one of
the abiding themes becoming apparent (Otley, 2012, 2016).
In general, uncertainty refers to a state where the information required
and the information possessed by an organization to perform a task dif-
fers from each other (Galbraith, 1977, p. 36-37). More precisely, Duncan
(1972) recognized similarities in the way in which the concept was de-
fined in literature and identified three common components of uncertainty:
“(1) the lack of information regarding the environmental factors associat-
ed with a given decision-making situation, (2) not knowing the outcome of
a specific decision in terms of how much the organization would lose if
the decision were incorrect; and (3) inability to assign probabilities with
any degree of confidence with regard to how environmental factors are
going to affect the success or failure of the decision unit in performing its
function” (Duncan, 1972, p. 318). In other words, uncertainty is “a lack of
ability to predict what the future will hold” (Otley, 2014, p. 83), encom-
passing the inability to predict future events as well as likely consequenc-
es (Otley, 2014). Conclusively, Otley (2014) argues that uncertainty is
rather related to individuals than to the external world, since it is not re-
garded as an objective phenomenon. In fact, in a completely determined
world with a future which is entirely predictable, one could still be uncer-
tain about what was going to happen next if the information with which to
understand or model the world was insufficient (Otley, 2014). More pre-
cisely, the adequacy of individuals’ (or groups’) predictive models to fore-
cast future events and their likely consequences determine the state of
uncertainty one is facing (Otley & Berry, 1980), leading to different types
11
and degrees of uncertainty for each individual (or group) (Otley, 2014).
In contrast to uncertainty, risk in a strict sense of the word occurs if the
range of future possibilities and their probabilities for manifestation are
known (Knight, 1921). However, it is evident that such circumstances are
rather subject to artificially closed systems with determined outcomes and
12
thus possess limited applicability in practice (Otley, 2014). Therefore,
Power’s argument is coherent: “Knightian uncertainties become risks
when they enter into management systems for their identification, as-
sessment and mitigation. […] When uncertainty is organized it becomes a
‘risk’ to be managed” (Power, 2007, p. 5-6). In general, it can be argued
that “[r]isk management processes represent one attempt to try to codify
the impact of many different types of uncertainty on major business activi-
ties” (Otley, 2014, p. 95).
2.1.3.1 Risk management and management control

According to Otley and from a MC perspective, the “single most important
emerging issue has been that of risk management, and the realisation by
management control researchers that it has been a neglected aspect of
study” (Otley, 2012, p. 251) in the last few years. While the proliferation of
risk management has led to an increased attempt to manage uncertain-
ties in organizations (Soin & Collier, 2013), Otley & Soin argue that risk
management as mechanism to tackle organizational uncertainty is ex-
tending traditional MC practices (Otley & Soin, 2014). Consequently,
13
recent literature highlights that an organization’s risk management sys-
tem is part of its design of the organizational control package (e.g., Otley,
2016, p. 54) and therefore interrelated with the field of MC (e.g., Arena et
11
Otley (2014) compares uncertainty to a rainbow, which appears to be a clearly perceived
phenomenon for all observers but which is actually perceived differently by each individ-
ual depending on one’s own position and movement.
12
Casinos or lotteries are practical examples where techniques of risk analysis can be
applied, although unexpected events can occur even in these situations (e.g., the casino
going bankrupt and being unable to deliver expected winnings) (Otley, 2014).
13
In their review of current developments in management control research, Speklé & Kruis
explicitly include the literature on risk management in their sample of papers to pick up
trends that constitute contemporary research in the field (Speklé & Kruis, 2014).
al., 2010; Bhimani, 2009; Collier & Berry, 2002; Merchant & Otley, 2007;
Mikes, 2009, 2011; Otley, 2012; Otley & Soin, 2014; Soin & Collier, 2013;
Soin et al., 2014; Speklé & Kruis, 2014; Woods, 2009). While there are
different views on the level and direction of incorporation of both research
fields, Merchant & Otley conclude that seeing “risk management as just
one (important) aspect of overall control systems design” (Merchant &
Otley, 2007, p. 787) is the most compelling view. Similarly, Soin & Collier
state that “risk management has moved away from being seen from the
finance silo’s view of value at risk and derivatives, and the accounting
silo’s view of disclosure in financial reports to a central concern with
management control” (Soin & Collier, 2013, p. 84).
Generally, Knight’s (1921) work on risk, uncertainty and profit is often
regarded as the starting point for risk management in literature (e.g., Soin
et al., 2014). In fact, there have been much earlier contributions to ex-
plaining concerns about risk, for example Bernoulli’s (1738/1954) utility
theory which added significant insights to risk theorizing and dominated
economics for decades (Harris, 2014). Nevertheless, in the last century,
key milestones in economic theory for ‘risk analysis’ (Harris, 2014) have
been set, for example Keynes’ (1921) treatise of probability calculation for
future events and its limitation when derived by similar events in the past;
von Neumann & Morgenstern’s (1953) development of game theory de-
lineating economically rational decision-takers which act on expected
outcomes arrived from measured risk preferences; Markowitz’ (1952)
coining of portfolio theory showing that investors can reduce risk by in-
vesting in diversified assets; and Black & Scholes’ (1973) contributions
on option pricing theory which deals with investing in options for delayed
decisions to reduce uncertainty for expected outcomes (Harris, 2014).
Although risk management reaches back to the beginning of manage-
14
ment science at the start of last century (Soin et al., 2014), the rise of
the research field can be attributed to the mid-1990s (Arena et al., 2010,
p. 660). The reason for this development is the increasingly uncertain
context in which organizations are usually being steered and thus the
14
For a comprehensive overview of the history of risk beginning in ancient times and the
history of risk measurement see Bernstein (1996a, 1996b) and McGoun (1995), respec-
tively.
increased complexity and constant change of the competitive environ-

ment of organizations (e.g., Chapman & Ward, 2003; Floricel & Miller,
2001; Melnyk et al., 2014; Miller, 1998; Rasmussen, 1997). However, in
regards to increased dynamics of the environment of businesses Otley &
Soin remark that it is “a moot point as to whether the rate of environmen-
tal change, or the degree of uncertainty which organizations now have to
face, has increased in recent years. We certainly seem to perceive it as
increasing, although this may be partly due to the future being less pre-
15
dictable than the past” (Otley & Soin, 2014, p. 1). These developments
have been linked to societal changes such as increased individualization
of behavior and interrelatedness of entities which led to concatenated
16
and mutual affecting events (Beck, 1992).
In addition, according to Soin et al. (2014), the intertwining of risk man-
agement and MC took place over the last 20 years due to an increased
importance of accountability which moved from traditional costing prac-
tices to accounts of performance (Miller & Power, 2013). Soin et al.
(2014) argue that “[u]nited by the pressure of a powerful discourse of
accountability, risk management has become inherently connected to
management control. In a sense, risk management’s job is to “cover the
back” for management control: It can be argued that management control
practice has always been a producer of assurance – and that new dis-
courses of accountability simply put pressure on management control to
produce this assurance more explicitly. This in turn links risk manage-
ment more tightly to traditional definitions of management control” (Soin
et al., 2014, p. 180).
While this resulted in the creation of accountability becoming an addition-
al core task for MC (Soin et al., 2014), the discourse of accountability
also expanded the scope and focus of risk management to a fairly gener-
ic repertoire of methods and instruments which aim at satisfying external
15
Douglas states that: “It is more plausible that uncertainty is normal and the whole idea of
certainty an illusion. […] If we recognize more uncertainty now, it will be because of
things that have happened to the institutional underpinning of our beliefs” (Douglas,
2001, p. 145).
16
Beck refers to individualization meaning “the variation and differentiation of lifestyles and
forms of life, opposing the thinking behind the traditional categories of large-group socie-
ties - which is to say, classes, estates, and social stratification” (Beck, 1992, p. 88).
reporting requirements and which can be applied relatively easily by any

organization (Power, 2007, 2009). As a result, reinforced by financial
17
scandals and major organizational failures, the issuance of new codes
has become a major topic of interest, bringing forth a multitude of stand-
ards, guidelines and principles trying to reveal and manage the challeng-
es resulting from increasing uncertainty (Mikes & Kaplan, 2015; Soin &
Collier, 2013). This trend towards regulations was started by one of the
first systematic conceptual frameworks for internal control, developed by
the Committee of Sponsoring Organizations (COSO, 1992) in the US
including guidance on risk assessment and introducing the concept of
‘value at risk’. More than a decade later, the framework was re-drafted
18
creating a standard for enterprise risk management (ERM) reflecting the
shift from internal audits to a holistic enterprise-wide risk management
which proposes a direct relationship between the organization’s objec-
tives, the enterprises risk management processes, and the entity’s units
depicted in the form of a cube as shown in the figure below (COSO,
2004).
17
For example, the BP Deepwater Horizon oil spill in the Gulf of Mexico which resulted in
“environmental, economic and reputational losses, but also highlights the consequences
of poor risk management practices” (Soin & Collier, 2013, p. 83).
18
The Committee of Sponsoring Organizations define ERM as “a process, effected by an
entity’s board of directors, management and other personnel, applied in strategy setting
and across the enterprise, designed to identify potential events that may affect the entity,
and manage risk to be within its risk appetite, to provide reasonable assurance regarding
the achievement of entity objectives” (COSO, 2004, p. 2).
Internal Environment
Subsidiary
Objective Setting
Business Unit
Event Identification
Division
Entity-Level
Risk Assessment
Risk Response
Control Activities
Information & Communication
Monitoring
Figure 3: Enterprise risk management – Integrated framework

(Source: slightly adapted from COSO, 2004, p. 5)
Williamson (2007) states that COSO’s framework on ERM “makes a val-

uable contribution to the emerging practice of ERM, but suffers serious
limitations” (Williamson, 2007, p. 1089), such as missing standards for
identifying ERM effectiveness and ignoring shared management of uncer-
tainties with external parties. In general, Power summarizes that the CO-
SO framework for ERM “represents a control process concept in which
risk management is related in ambition to entity objectives, to the produc-
tion of value and thereby to organizational strategy” (Power, 2007, p. 78).
In addition, the UK Turnbull report and its risk disclosure recommenda-
tions (ICAEW, 1999), legislation in the form of the Sarbanes-Oxley Act of
2002 in the US (Sarbanes-Oxley Act, 2002), and the International Stand-
ards Organisation’s ISO 31000 about principles and guidelines on the
implementation of risk management (ISO, 2009b) contributed to this de-
velopment among others. Despite this fact, Mikes and Kaplan state that:
“[…] one could assume that risk management has become a mature dis-
cipline, with proven, unambiguous concepts and tools that need only
regulations and compliance to be put into widespread practice. We disa-
gree. We believe that risk management approaches are largely unproven
and still emerging“ (Mikes & Kaplan, 2014, p. 3). What is more, Mikes &
Kaplan argue that it is crucial for further development of ERM practice to
“find fit between contingent factors and firms’ ERM practice, and to estab-
lish propositions of fit that will result in desired outcomes” (Mikes &
19
Kaplan, 2014, p. 10). Furthermore, while aiming at building a contin-
gency theory of ERM Kaplan & Mikes propose that “risk management will
be most effective when it matches the inherent nature and controllability
of the different types of risk the organization faces” (Mikes & Kaplan,
2015, p. 40).
2.1.3.2 Kaplan & Mikes’ conceptualization of risk types

Uncertainty in MC has been conceptualized in different ways, i.e. “rang-
ing from it being seen as an objective, external factor which can be
measured through to a view that it is a subjective perception which needs
to be observed and reacted to” (Otley & Soin, 2014, p. 6). While there are
20
various conceptualizations of risk in literature, Kaplan & Mikes (2012)
conducted extensive field research and designed a categorization of risk
that differentiates according to control models to be applied for risk miti-
gation and management.
Firstly, preventable risks are “[r]isks arising from within the company that
generate no strategic benefits” (Kaplan & Mikes, 2012, p. 55). According
to Kaplan & Mikes, these risks arise particularly as a result of break-
downs in standard operational processes and procedures as well as from
19
Mikes & Kaplan (2014) argue that the development of this proposition was stimulated by
mixed empirical findings in academic literature in regards to factors influencing ERM
adoption (e.g., Beasley et al., 2005; Kleffner et al., 2003; Liebenberg & Hoyt, 2003) and
effects of ERM adoption on performance (e.g., Baxter et al., 2012; Beasley et al., 2008;
Ellul & Yerramilli, 2012; Gordon et al., 2009; Hoyt, 2015; Hoyt & Liebenberg, 2011; Pa-
gach & Warr, 2011). As a consequence, recent studies try to reveal the variation of
ERM, hence exploring the details of risk management practices in a specific organiza-
tional context using small-sample or field studies (e.g., Arena et al., 2010; Mikes, 2009,
2011; Mikes et al., 2013; Woods, 2009).
20
For example, the distinction in market risks, credit risks, and operational risks applied in
the banking and insurance sector (Power, 2007, p. 103).
employees’ undesirable and unauthorized actions. As preventable risks

are inherently undesirable, organizations may prevent or cost-efficiently
minimize their occurrence. In order to do so, an integrated culture-and-
compliance model serves as a control model for these risks. Therefore,
guidelines and communication of mission statements, values, as well as
rules and code of conducts, i.e. beliefs and boundary systems (see Sec-
tions 2.2.3.1 and 2.2.3.2), serve as first line of defense against preventa-
ble risk events. In addition, monitoring operational processes, internal
controls, and internal audits complete the rules-based control model and
are crucial in striving to reduce the likelihood of preventable risks to zero
(Kaplan, 2014; Kaplan & Mikes, 2012; Mikes & Kaplan, 2014, 2015).
Secondly, strategy execution risks are “[r]isks taken for superior strategic
returns” (Kaplan & Mikes, 2012, p. 55). Kaplan & Mikes argue that these
21
risks are voluntarily accepted by companies as strategy execution risks
are necessary to capture potential gains and achieve high expected re-
turns through management of these risks. While both the likelihood and
impact of strategy execution risks can be identified and influenced, some
residual risks will always remain as they, in contrast to preventable risks,
cannot be reduced to zero. For example, risks taken on by companies
through their R&D activities are typical strategy execution risks which aim
at generating superior returns. While a rules-based control model is es-
sential for managing preventable risks, for managing strategy execution
risks it is crucial to reduce the probability of materialization of these as-
sumed risks and, should these risk events occur, to improve the ability of
the organization to contain and control these risks. Therefore, control
models to manage strategy execution risks are supposed to comprise
interactive controls to focus on enabling organizations to take on higher-
risk, higher-reward strategies in order to generate superior returns rather
than stopping organizations from undertaking risky ventures a priori
Finally, external risks, the third category of risk, “arise from events out-
side the company and are beyond its influence or control” (Kaplan &
21
For example, in drilling several miles below the surface of the Gulf of Mexico, BP ac-
cepted high risks with the hopes of extracting high values of oil and gas (Kaplan &
Mikes, 2012, p. 51).
Mikes, 2012, p. 51). Kaplan & Mikes state that external risks comprise
22
events that managers can neither predict nor influence, for example
natural and political disasters and major macroeconomic shifts. In addi-
tion, these risks are “closely entwined with the firm’s strategic choices
and are therefore related to strategy execution risk” (Mikes & Kaplan,
2015, p. 40). Therefore, sources of external risks are also competitive
risks which include emergence of disruptive technologies and radical
strategic moves by industry players such as customers, suppliers, and
competitors. As external risks are outside the organization’s control, the
control models to manage external risks should focus on identification of
risk events, assessment of potential impact, and formulation of mitigation
strategies determining the organization’s resilience in case of materializa-
tion of risk events. In doing so, through using experience, intuition, and
imagination a process of risk envisionment is crucial in order to envision
plausible future disaster scenarios. Typical approaches regarding exter-
23 24 25
nal risks are tail-risk stress tests , scenario planning , and war-gaming
22
Kaplan (2014) notes that managers often “don’t know they don’t know” about external
risk events which corresponds to Donald Rumsfeld’s “unknown unknowns”, i.e. things
that we did not know that we did not know (Otley, 2012).
23
Stress-testing is used to assess major changes in showing how an event affects situa-
tions (Kaplan & Mikes, 2012).
24
Scenario planning refers to long-range analysis for “defining the plausible boundaries of
future states of the world” (Kaplan & Mikes, 2012, p. 58). As an example, participants se-
lect driving forces and assess the long-term impact on organizations and its strategies
(Kaplan & Mikes, 2012).
25
War gaming assesses “a firm’s vulnerability to disruptive technologies or changes in
competitors’ strategies” (Kaplan & Mikes, 2012, p. 58) through devising plausible strate-
gies and examining potential competitors’ strategies aiming at attacking the organiza-
tion’s strategy (Kaplan & Mikes, 2012).
Category Preventable Strategy External

Risks Execution Risks Risks
Definition Risks arising from Risks taken for External, uncontrol-

within the company superior strategic lable risks
that generate no return
strategic benefits
Risk Mitigation Avoid or eliminate Reduce likelihood Reduce impact

Objective occurrence cost- and impact cost- cost-effectively
effectively effectively should risk event
occur
Control Model Integrated culture- Interactive discus- “Envisioning” risks

and-compliance sions about risks to
model strategic objectives
Figure 4: Kaplan & Mikes’ conceptualization of risk types

(Source: adapted from Kaplan & Mikes, 2012, p. 55)
A key feature of Kaplan & Mikes’ (2012) conceptualization of risk types

(see Figure 4) is the approach that each category of risk requires a differ-
ent control model and that the effectiveness of the organization’s risk
management, among others, is contingent on the risk profile an organiza-
tion faces. Nevertheless, as the risk management of an organization can
be regarded as part of its design of the organizational control package
(e.g., Otley, 2016, p. 54, see also Section 2.1.3.1), the proposition can be
derived that the effectiveness of the organizational control system is de-
pendent on the match between its design and use and the inherent na-
ture and controllability of the risk types the organization faces.
2.1.4 Overlaps with other fields in management literature

As is shown above, control is a core function of management and there-
fore connected with other fields in management literature. As demon-
strated by Merchant & Otley (2007), MC literature significantly overlaps
with the field of cybernetics, agency theory, internal control, risk man-
agement, and contingency theory. Additionally, Chenhall (2003) identi-
fies, among others, psychology (e.g., Birnberg et al., 2007; Hall, 2016) as
well as organizational theory and behavioral economics (e.g., March &
Simon, 1967) to be areas of relevance to understanding MC. To provide

an overview, this section aims at briefly introducing some of these im-
portant fields and their interrelatedness with MC to demonstrate how MC
is embedded in the corresponding body of literature.
2.1.4.1 Cybernetics and management control

As feedback, monitoring, and correction processes that ensure that de-
sired goals are met have been important aspects in organizational control
as well as within the classic view of MC since the beginning, the field of
cybernetics forms an integral part of and has considerably influenced MC
26
(Otley et al., 1995, p. 34-35). Cybernetics refers to “the entire field of
control and communication theory” (Wiener, 1948, p. 11) and was found-
ed by Wiener through his seminal work on control and communication
processes in machines, social systems, and living things (Wiener, 1948).
According to Otley & Berry, “cyberneticians are primarily concerned with
inner structures of variety, probability and logic which may be used to
characterize organisations” (Otley & Berry, 1980, p. 235). Covering wide
areas of application, cybernetic models usually include correcting feed-
back loops being dependent on comparisons of actual and expected per-
27 28
formance as well as feedforward loops involving predictions of out-
come to trigger reactions (Merchant & Otley, 2007, p. 786; Wiener, 1948).
In general, the “major contribution of cybernetics has been in the study of
26
The term Cybernetics was derived from the Greek word for steersman (Wiener, 1948, p.
11).
27
Relating to feedback activities Wiener states that “when we desire a motion to follow a
given pattern the difference between this pattern and the actually performed motion is
used as a new input to cause the part regulated to move in such a way as to bring its
motion closer to that given by the pattern” (Wiener, 1948, p. 6-7). Moreover, an often-
cited example of a simple cybernetic model in a machine setting is that of a thermostat.
Such a device typically includes a correcting feedback loop in measuring the actual tem-
perature, comparing this temperature to the desired one, and setting corrective actions
through switching on a heater if necessary (e.g., Lawler & Rhode, 1976, p. 40-41; Mer-
chant & Otley, 2007, p. 786).
28
In the early 1970s, Koontz & Bradspies applied to concept of feedforward to managerial
control problems (Koontz & Bradspies, 1972). Moreover, Otley & Berry emphasize the
importance of anticipatory controls, i.e. feedforward controls, as aspects of organization-
al control (Otley & Berry, 1980, p. 232).
systems in which complexity is paramount” (Otley et al., 1980, p. 34; see

also Ashby, 1956).
Standard
Inputs Process Outputs
Feedback
Figure 5: Cybernetic feedback model

(Source: Simons, 2000, p. 75)
Consequently, control systems are largely concerned with feedback and

feedforward processes which aim to explain the behavior of complex
systems and promote the system-based view of control (Collier, 2005, p.
323-324; Otley et al., 1995, p. 34). Moreover, Otley & Berry identified four
29
necessary conditions for a process to be regarded as controlled: “(1) an
objective for the system being controlled[,] (2) a means of measuring
results along the dimensions defined by the objective[,] (3) a predictive
model of the system being controlled[,] (4) a choice of relevant alternative
actions available to the controller” (Otley & Berry, 1980, p. 236). Howev-
er, it is recognized that organizational goals as well as corresponding
measures are often vague and ambiguous, predictive models unreliable
because of complex organizational behavior, and corrective actions con-
strained by a factual limited range of potential actions (Otley & Berry,
1980, p. 241).
Having induced important insights in the design of organizational control
30
systems (e.g., Otley & Berry, 1980), Beer (1962, 1966, 1972) was a
29
Otley & Berry derived these conditions from Tocher’s (1970, 1976) general control
framework rooted in cybernetic theory (Otley & Berry, 1980, p. 236).
30
Beer compared the control mechanism in an organization with the human nervous sys-
tem and argued that both needed to be adopted at various levels (Beer, 1972).
pioneer in linking cybernetic principles to the control of human economic

organizations and therefore to management issues (Merchant & Otley,
2007, p. 786). Furthermore, the rise of general systems theory (e.g., Ber-
talanffy,1972; Kast & Rosenzweig, 1972) which deals with high levels of
complexity through focusing on characteristic properties that are depend-
ent on the specific level of complexity led to further progress in literature
31
(Otley et al., 1995). According to Merchant & Otley, its “central contribu-
tion has been the systemic approach it adopts, focusing on the overall
control of organizational activities, in contrast to the systematic approach
dominant in accounting-based control approaches” (Merchant & Otley,
2007, p. 786). Still, the insights for design guidelines and its application
on MCS remain on a general rather than a precise level (Merchant &
Otley, 2007, p. 786; Otley & Berry, 1980, p. 234).
2.1.4.2 Agency theory and management control

Another important stream of research for understanding organizational
control mechanisms and MC is that of agency theory. Having its roots in
information economics, agency theory started expanding into risk-sharing
literature in the 1960s, exploring cooperation between parties that have
different attitudes towards risk (Arrow, 1971; Eisenhardt, 1989; Wilson,
1968). According to Merchant & Otley (2007), agency theory is “the appli-
cation of microeconomic theory to some of the problems of management
control, particularly those related to the design of optimal incentive con-
32
tracts” (Merchant & Otley, 2007, p. 786). In management accounting
research, agency theory basically addresses two questions: “(i) how do
features of information, accounting, and compensation systems affect
(reduce or make worse) incentive problems, and (ii) how does the exist-
31
Ackoff defines that: „A system is a set of interrelated elements. Thus a system is an
entity which is composed of at least two elements and a relation that holds between
each of its elements and at least one other element in the set. Each of a system's ele-
ments is connected to every other element, directly or indirectly. Furthermore, no subset
of elements is unrelated to any other subset” (Ackoff, 1971, p. 662).
32
A comprehensive review of agency theory related to literature on MCS is provided by
Baiman (1990). In addition, Shields (1997) reviews studies in MCS research which have,
among others, employed agency theory.
ence of incentive problems affect the design and structure of information,

accounting, and compensation systems” (Lambert, 2007, p. 247).
33
In the view of this theory, organizations are legal fictions and in fact
recognized as nexuses of contracts to display relationships among indi-
viduals (Jensen & Meckling, 1976, p. 310). These agency relationships
are defined as contracts “under which one or more persons (the princi-
pal(s)) engage another person (the agent) to perform some service on
their behalf which involves delegating some decision making authority to
the agent” (Jensen & Meckling, 1976, p. 308). The contract determines
the rights and behaviors of the individuals and is implemented “by estab-
lishing appropriate incentives for the agent and incurring monitoring costs
designed to limit the aberrant activities of the agent” (Jensen & Meckling,
1976, p. 308). As a consequence, the agent completes tasks or makes
decisions on behalf of a principal, who is bearing the risk (e.g., Eisen-
hardt, 1985). While principal-agent-theory can be employed with different
kind of relationships, a typical application is the analysis of the relation-
ship between the owner and the manager of a firm (Eisenhardt, 1989).
This potential conflict of interest between principal and agent is essential
in agency theory and can lead, according to Eisenhardt (1989), to two
sets of problems. First of all, an agency problem occurs when there is a
goal conflict as well as information asymmetry between principal and
agent. A goal conflict arises if the principal and the agent have divergent
preferences for the agent’s behavior, for example if the agent is assumed
to be effort averse or opportunistic (e.g., Eisenhardt, 1985). In this case,
the agent has private information about the action choice and/or the state
34
of information which is used in favor of the agent and prevents the prin-
cipal from verifying (or only at extensive costs) if the agent behaved ap-
propriately (Baiman, 1990; Eisenhardt, 1989). Secondly, another aspect
is the problem of risk sharing, which arises when both parties have differ-
ent preferences towards risk. Usually it is assumed that the agent is more
33
Jensen & Meckling (1976) explain that by legal fiction it is meant that organizations being
artificial constructs under law are treated as individuals (Jensen & Meckling, 1976, p.
310).
34
The problem of asymmetric or incomplete information in favor of the agent leads to so
called ‘hidden action’ and/or ‘hidden information’ problems (e.g., Bergen et al., 1992).
averse to risk than the principal, as agents are less able to diversify their
35
employment than principals their investments (Eisenhardt, 1989).
In general, the primary concern of agency theory is to develop control
arrangements to encounter a conflict of interest between principal and
agent in order to maximize the principal’s objective function (e.g., Eisen-
hardt, 1989). This is done by determining the most efficient contract gov-
erning the relationship between the parties and taking into account as-
sumptions about people, organizations, and information. Specifically, it is
to be decided to what extent a behavior-oriented contract or an outcome-
oriented contract is more efficient in a specific setting, dependent on goal
conflict, information asymmetry, risk preferences, outcome uncertainty
and measurability, task programmability and length of agency relationship
(Eisenhardt, 1989).
As argued by Eisenhardt (1985, 1989), in the special case of complete
information, the behavior of the agent is observable and thus a behavior-
based contract optimal, as both parties know the agent’s actions. This is
not the case if the principal is unaware of the agent’s behavior and there-
fore cannot assess if the agent behaved in the principal’s best interest.
Relying on behavior-based contracts and rewarding the agent for an
agreed behavior without being able to monitor the agent’s actions may
result in the agent to shirk. To overcome this dilemma, it is essential for
the principal to purchase information through surveillance mechanisms
and reward appropriate behavior. Alternatively, the principal rewards the
agent based on outcomes, which is a surrogate measure for behavior.
However, Eisenhardt (1985, 1989) states that while outcome-based con-
tracts encourage efforts by the agent, this scheme also shifts risk from
the principal to the agent and therefore comes at the price of rewarding or
penalizing for outcomes which are at least partially outside of the agent’s
control. According to agency theory the optimal strategy for control is thus
a function of the costs of information systems which are required to rely
35
Whereas the simple model assumes a more risk averse agent than principal, it is evident
that individuals vary considerably in their preferences and attitudes towards risk (e.g.,
Eisenhardt, 1989; MacCrimmon & Wehrung, 1986). Therefore, there are several exten-
sions to this model which relax this assumption. For example, a wealthy agent may be
less risk averse which makes it more attractive to pass risk from the principal to the
agent in using outcome-based contracts (Eisenhardt, 1989).
on behavior-based contracts as well as the costs of risk sharing which

arise in outcome-based contracts as a consequence of the role of uncer-
tainty (Eisenhardt, 1985, 1989). This trade-off is in fact “the heart of prin-
cipal-agent-theory” (Eisenhardt, 1989, p. 61) and leads to optimal “incen-
tive schemes to gain from employees or agents commitment to organiza-
tional goals” (Chenhall, 2003, p. 157).
Summing up, the following table gives an overview of the key aspects of
agency theory in regard to the appropriate control strategy:
Control strategy = F (costs of information systems, uncertainty)
1. Compare costs of: Behavior control vs. outcome control
- Behavior - Risk sharing

measurement - Outcome measurement
2. Choose least expansive alternative

Assumptions: - Uncertain outcome and risk averse agent
- Divergent preferences between principal and
agent for agent‘s behavior (i.e., effort averse agent)
Figure 6: Control strategy in agency theory

(Source: Eisenhardt, 1985, p. 137)
It can be concluded that agency research aims at implementing the opti-

mal contract with a minimum of agency costs which comprise of costs of
36
monitoring and risk sharing (Lambert, 2007). Furthermore, agency theo-
ry posits that the optimal contract applied by the principal determines the
implementation of control arrangements in order to direct the behavior of
the agent towards the principal’s goals (e.g., Baiman, 1990; Lambert,
2007; Ross, 1973). Hence, it is demonstrated how firm performance can
be improved by implementing different control mechanisms and therefore
36
As first-best solutions can only be achieved by absence of agency costs and therefore
perfect information of all parties, agency theory evidently deals with second-best solu-
tions (Bromwich, 2007, p. 152).
offers important insights on MC design. In other words, an explanation is

provided as to why MC is essential in accomplishing the organization’s
objectives. While this literature has undeniably led to important insights in
the design of control systems, particularly in the design of reward sys-
tems (Merchant & Otley, 2007), it has also been criticized that its practical
relevance is limited due to its relative abstraction from real situations
(Bromwich, 2007; Merchant & Otley, 2007). More precisely, an insuffi-
cient consideration of the context in which agents and principals act as
well as trade-offs with other elements of control systems have been re-
garded as ideas for further development (Chenhall, 2003; Shields, 1997).
2.1.4.3 Organizational theory and management control

Another important research field underlying MC literature is organization-
al theory which aims at providing solutions to the problem of control in
organizations in order to obtain “cooperation among a collection of indi-
viduals or units who share only partially congruent objectives” (Ouchi,
1979, p. 833). In organizational theory, the control problem is considered
as undesired behavior in a superior-subordinate setting which results
from divergent interests and asymmetric distribution of information (Ei-
senhardt, 1989).
According to organizational approaches, control can be accomplished by
organizational design and therefore the impact of organizational structure
on control systems is considered (Eisenhardt, 1985). Ouchi (1979) identi-
fies two ways for effective control in organizations: “either it can go to the
expense of searching for and selecting people who fit its needs exactly,
or else it can take people who do not exactly fit its needs and go to the
expense of putting in place a managerial system to instruct, monitor, and
evaluate them” (Ouchi, 1979, p. 840).
In essence, organizational theorists suggest two fundamental different
control strategies in approaching the problem of control, namely perfor-
mance evaluation and socialization (Ouchi, 1979; Eisenhardt, 1985).
Performance evaluation refers to a cybernetic process of monitoring and
rewarding performance emphasizing the information aspects of control
(Eisenhardt, 1989). As either the behavior or outcome of an employee’s
behavior can be monitored and evaluated, performance evaluation in

organizational theory is in line with the control mechanisms in agency
theory as shown above. On the other hand, the control strategy of social-
ization aims at minimizing the divergence of preferences and thus in-
creasing goal congruence among organizational members. This coopera-
tion of members can be achieved through aligning interests among mem-
bers by people policies and socialization processes such as selection and
training (Eisenhardt, 1985). While both control strategies aim at aligning
effort of employees towards the achievement of organizational objectives,
they differ in terms of incentives. Performance evaluation control mecha-
nisms provide extrinsic incentives to accomplish control, whereas sociali-
zation processes or social controls intrinsically align the interest of the
members (Eisenhardt, 1985).
Ouchi (1979) argues that the choice of the optimal control strategy is
contingent on the information characteristic of a task, i.e. task program-
mability and outcome measurability. While outcome-based controls re-
quire a possibility to measure the outcome of a task, behavior-based
controls demand knowledge of the transformation process in terms of
task programmability (Ouchi, 1979). According to Ouchi (1979), in the
case that neither the outcome can be reasonably measured nor task pro-
grammability is given, the strategy of socialization via social or clan con-
trols is the most efficient form of control to be implemented. The following
figure provides an overview of the relationship between different control
strategies and task characteristics.
Control strategy = F (task characteristics)
Task Programmability
Perfect Imperfect
Behavior or Outcome
High
Measurability
Outcome control control

Outcome
Behavior Socialization
Low
control “Clan“ control
Figure 7: Control strategy in organizational theory

(Source: Eisenhardt, 1985, p. 135)
There are several similarities between organizational theory and agency

theory. For instance, the assumptions of self-interested behavior and
information asymmetry as well as the goal of aligning interests in order to
achieve objectives can be found in both approaches. Not surprisingly, as
similarly found with agency theory, the literature on organizational theory
has provided important insights into the design of control systems in or-
ganizations (Chenhall, 2003). According to Chenhall (2003) the “concepts
and ideas from organizational theory continue to provide a coherent and
rich foundation to examine traditional and new MCS within contemporary
settings” (Chenhall, 2003, p. 157).
2.1.4.4 Contingency theory and management control

Originally, contingency formulations have their roots in organizational
theory of organizational structures, which reaches back to the mid-1950s
(Otley, 2003, p. 314), and developed in the field of management account-
ing in the 1970s (e.g., Gordon & Miller; 1976; Hayes, 1977), aiming to
codify appropriate organizational structure design dependent on specific
circumstances “in an attempt to explain the varieties of management
accounting practice that were apparent at that time” (Otley, 2016, p. 46).
Shortly after, contingency theory as a theoretical framework “has come to

dominate the published work on the behavioural and organisational as-
pects of management accounting” (Otley, 1980, p. 413). The widespread
rise in the use of contingency frameworks at that time was supported by
the parallel development of the contingency theory of organizations on
37
the one hand and contradictory empirical findings within management
accounting studies on the other (Otley, 1980, 2016). In fact, in the begin-
ning, contingency theory was used to attempt to explain different ap-
proaches and the variety of management accounting practices which
existed and which were not in line with universalistic theory (Otley, 1980,
2016). As a result, a vast and diverse body of contingency-based litera-
ture has been created (e.g., Chapman, 1997; Chenhall, 2003, 2006,
2007; Chenhall & Chapman, 2006; Dent, 1990; Donaldson, 2001; Dun-
can & Moores, 1989; Fisher, 1995, 1998; Gerdin & Greve, 2004; Itz-
kowitz, 1996; Luft & Shields, 2003) which finds itself situated between
universalistic and situation-specific approaches (Fisher, 1995, p. 29).
A universalistic approach in the domain of management accounting and
control systems would imply that an optimal design of control systems
exists which is universally valid in all settings of organizations, a view
which has been strongly challenged by contingency-based empirical find-
ings (Fisher, 1995, p. 29). On the contrary, the situation-specific ap-
proach presumes that general models cannot be applied as the setting
affecting control system design is to be studied in individual case re-
search (Fisher, 1995). Fisher (1995) points out that the situation-specific
approach is in fact very similar to the contingency approach, as both pre-
sume that control system design depend on specific and individual fac-
tors of the organization. However, while contingency-based studies aim
at identifying classes of contingent variables to explain the specific design
of control systems, this procedure is pointless in situation-specific ap-
proaches due to the number of possible combinations of contingent fac-
tors (Fisher, 1995, p. 29). Therefore, generalizations are not possible as
37
For example, conflicting findings of Hopwood (1972) and Otley (1978) regarding the
budget-based superior evaluation style, job-related tension, and managerial performance
have led to a stimulation of the development of contingency theory of management ac-
counting (Brownell & Dunk, 1991, p. 693; Otley, 2003, p. 313).
unique factors lead to a unique design of control systems, resulting in a

virtually infinite number of possible combinations of contingency settings
(Fisher, 1995).
According to Chenhall, the term contingency means “that something is
true only under specified conditions” (Chenhall, 2007, p. 191). Donaldson
specified a contingency as “any variable that moderates the effect of an
organizational characteristic on organizational performance” (Donaldson,
2001, p. 7). In this context, Otley specified that “a contingency theory
must identify specific aspects of an accounting system which are associ-
ated with certain defined circumstances and demonstrate an appropriate
matching” (Otley, 1980, p. 413). Therefore, the underlying premise of the
contingency approach in management accounting is that there is no uni-
versalistic approach to all organizations in all circumstances in the design
of optimal management accounting and control systems but rather that
choice of design is dependent on contingent factors (Merchant & Otley,
2007, p. 787; Otley, 1980, p. 413).
Drawing upon insights from earlier contributions to organizational theory,
the contingency approach identified several classes of contingent varia-
bles which are considered to have important implications in the design of
organizational control mechanisms (Merchant & Otley, 2007, p. 787).
While various aspects of uncertainty have been a fundamental factor
since the beginning of contingency theory (e.g., Brownell & Dunk, 1991;
Burns & Stalker, 1961; Ditillo, 2004; Galbraith, 1973; Lawrence & Lorsch,
1967; Perrow, 1970; Thompson, 1967), this class of contingency variable,
38
most commonly addressed as environmental uncertainty, is regarded
as the most significant contingency factor influencing the design and use
of MCS thus far (Merchant & Otley, 2007, p. 787; Otley, 1980, p. 423).
Besides uncertainty, empirical research in management accounting and
control literature also found, among others, strategy (e.g., Langfield-
Smith, 1997, 2007), technology (e.g., Daft & Macintosh, 1984; Khandwal-
la, 1977), structure (e.g., Bruns & Waterhouse, 1975; Chenhall & Morris,
1986), culture (e.g., Harrison & McKinnon, 1999; Henri, 2006b; Merchant
38
Other concepts with similar connotation refer to unpredictability, non-routineness, dyna-
mism, task uncertainty, etc.
et al., 1995), organizational size (e.g., Khandwalla, 1972; Merchant,

1981), company age (e.g., Bruns & Waterhouse, 1975; Davila, 2005),
and ownership (King & Clarkson, 2015; Speckbacher & Wentges, 2011)
to be important contingency variables acting as significant drivers of MCS
39
design (see Section 2.3.2 for further discussion).
To study these contingency-based design choices, Otley (1980) suggest-
ed a minimum necessary contingency framework which is widely recog-
nized as useful in literature (e.g., Mikes & Kaplan, 2014) and is shown
below.
Contingent variables
Variables that cannot Organisational objectives

be influenced by the organisation
Organisational control package
AIS Other MIS Organisational Other control

design design design arrangements
Intervening variables
Other factors
Organisational effectiveness
(measured in relation to objectives)
Figure 8: The minimum necessary contingency framework

(Source: Otley, 1980, p. 421)
[AIS = Accounting information systems; MIS = Management information systems]
39
For a review of contingency studies in management accounting and control, see e.g.,
Chapman (1997), Chenhall (2003, 2006), Fisher (1995) and Otley (1980, 2016).
In Otley’s contingency framework, the contingent variables are consid-

ered to be outside the control of the organization, while controllable vari-
ables are recognized as part of the organizational control package (Otley,
1980). An exception to this determination is the use of organizational
objectives as contingency variables which determine assessment prac-
tice of organizational effectiveness and which reflect the basic direction of
an organization, for example stability versus growth. Otley argues that an
organization “adapts to the contingencies it faces by arranging the factors
it can control into an appropriate configuration that it hopes will lead to
effective performance” (Otley, 1980, p. 422). This configuration is regard-
ed as package of controls which comprises accounting information sys-
tems, management information systems, organizational design, and other
control arrangements. Additionally, it has been noted that factors which
are contingency variables for the organizational control package as well
as other factors potentially affect the level of performance as well (Otley,
1980, p. 422).
Consequently, a match of an organization’s control package to its contin-
gencies is seen as fit, a concept that constitutes in fact the “heart of con-
tingency theory” (Donaldson, 2001, p. 181). Furthermore, the “basic
premise of contingency theory is that a proper “fit” will result in higher
performance” (Fisher, 1995, p. 47). Therefore, it can be argued that the
concept of fit denominates the alignment of MCS design, contingent fac-
tors, and organizational performance, and as “the fit of organizational
characteristics to contingencies leads to high performance, organizations
seek to attain fit” (Donaldson, 2001, p. 2). In literature, there are three
main concepts of fit, i.e. selection fit, interaction fit, and systems fit, which
have implications on valid conclusions and differ in their assumptions, as
well as in their required statistical methods for analysis and explanatory
power (Chenhall & Chapman, 2006; see also Section 2.3.1). While con-
tingency theory of control systems has been criticized for being an ap-
proach of ‘it all depends’ rather than an actual theory (Merchant & Otley,
2007, p. 787-788), all of these concepts of fit have contributed to build a
contingency-based literature in the design and use of MCS.
2.2. Design of management control systems 41
2.2 Design of management control systems

In the following subchapters, the design of MCS and the literature on
classifications and categorizations of MCS will be addressed. After an
introduction to control systems and the notion of the package view in MC,
the evolution of the predominant frameworks of MCS is presented. Final-
ly, Simons’ levers of control framework (Simons, 1995b) is discussed in
more detail as it will subsequently serve as the base framework for the
empirical analysis of this study.
2.2.1 Control systems and package view in management control

Defining what is meant by MC or MCS respectively is already a chal-
lenge, as a number of overlapping as well as differing descriptions exist
in literature (see Section 2.1.2). Not surprisingly, these inconsistencies
lead to different interpretations of the same labels (Bisbe et al., 2007;
Malmi & Brown, 2008; Van der Stede, 2001) resulting in mixed empirical
findings in literature (Bisbe et a., 2007; Otley & Fakiolas, 2000). In addi-
tion, Chenhall advises against studying specific aspects of MCS isolated
from other organizational controls as such an approach creates potential
for serious misspecification of the underlying model (Chenhall, 2003, p.
131). Therefore, to overcome these concerns, various functions and di-
mensions of organizational controls should be considered and their inter-
action and interrelationship reflected upon (Chenhall, 2003, 2007; Malmi
& Brown, 2008). In this respect, various taxonomies have been devel-
oped in literature aiming at classifying and structuring diverse sets of
controls. For example, Fisher (1995) lists several attributes to classify
and describe control systems and its design, i.e. mechanistic vs. organic
control, tight vs. loose control, objective vs. subjective control, short-term
vs. long-term control, individual vs. group control, interactive vs. pro-
grammed control, administrative vs. interpersonal control, and behavior
vs. outcome control (Fisher, 1995, p. 28).
A widely used and important taxonomy for control systems is classifying
MCS as ranging from mechanistic to organic (Chenhall, 2003, 2007). On
the one hand, mechanistic controls “rely on formal rules, standardized
operating procedures and routines” (Chenhall, 2007, p. 168). Such con-
trols are also referred to as formal bureaucratic controls which impose

rules to control the behavior and work output of employees (Ouchi, 1977,
1979) and which are associated with hierarchies and goal setting in or-
ganizations (Galbraith, 1973). On the other hand, organic controls “are
more flexible, responsive, involve fewer rules and standardized proce-
dures and tend to be richer in data” (Chenhall, 2007, p. 168). The follow-
ing table provides an overview and grouping of various control types and
elements of MCS with regards to their nature of control (Chenhall, 2007):
More organic
Clan controls (Ouchi, 1980; Govindarajan & Fisher, 1990)

Social controls (Merchant, 1985a; Rockness & Shields, 1984)
Personnel controls (Merchant, 1985a; Abernethy & Brownell, 1997)
Sophisticated integrative mechanisms (Abernethy & Lillis, 1995)
Prospect controls (Macintosh, 1994)
MCS that provide broad scope information, flexible aggregations and integrative infor-
mation, and information provided in a timely way (Chenhall & Morris, 1986)
Static/flexible budgets (Brownell & Merchant, 1990)
Participative budgets (Shields & Shields, 1988)
Low reliance on accounting controls (Hirst, 1981; Brownell, 1982; 1987)
Budget slack (Merchant, 1985b; Dunk, 1993)
Competitor-focused accounting (Guilding, 1999)
Strategic interactive controls (Simons, 1995)
Product development information (Davila, 2000)
Enabling controls (Ahrens & Chapman, 2004)
Figure 9: Organic and mechanistic forms of MCS (continued)

More mechanistic
Budget constrained performance evaluation style· (Hopwood, 1972)

Budget control (Rockness & Shields, 1984)
High reliance on accounting controls (Hirst, 1981; Brownell, 1982, 1987)
High budget use (Bruns & Waterhouse, 1975; Merchant, 1981)
Narrow scope (Chenhall & Morris, 1986)
Sophisticated capital budgeting (Larcker, 1981; Haka, 1987)
Sophisticated controls (Khandwalla, 1972)
Operating procedures, budgets and statistical reports (Macintosh & Daft, 1987).
Administrative use of budgets (Hopwood, 1972; Merchant, 1981)
Inter personnel controls (Bruns & Waterhouse, 1975)
Output and results controls (Merchant, 1985b; Macintosh, 1994)
Behavior controls (Ouchi, 1979; Merchant, 1985b; Rockness & Shields, 1984)
Patriarchal control (Whitley, 1999)
Action controls (Merchant, 1985b; Chenhall, 1997)
Diagnostic controls (Simons, 1995)
Coercive controls (Ahrens & Chapman, 2004)
Figure 9: Organic and mechanistic forms of MCS

(Source: adapted from Chenhall, 2007, p. 169)
Another essential categorization of controls is distinguishing their charac-

teristic of being either formal or informal in nature (Ittner & Larcker, 2001;
Langfield-Smith, 2007; Pitkänen & Lukka, 2011). According to Langfield-
Smith (2007), formal controls comprise of rules, procedures and budget-
ing systems which are the more visible components of control systems in
organizations. These controls include ex-post feedback, i.e. output or
result controls which ensure that specific targets are met through monitor-
ing, measuring, and corrective actions, as well as feed-forward or ex ante
controls such as administrative, personnel, or behavior controls (Lang-
field-Smith, 2007). In contrast to formal controls, informal controls are not
40
designed consciously but rather derived from organizational culture, for
40
Formal controls may also be derived from organizational culture, for example a formally-
worded mission statement which reflects organizational values and beliefs (Langfield-
Smith, 2007).
example the unwritten policies of an organization (Langfield-Smith, 2007;

Ouchi, 1979). Ouchi (1979) introduced clan controls stating that “a clan
may serve as the basis of control in some organizations” (Ouchi, 1979, p.
837) and characterized them by shared values and beliefs (Ouchi, 1979).
While most research focuses on formal controls, Langfield-Smith points
out that “the effectiveness of formal controls may be dependent on the
extent and effectiveness of informal controls that are also in place” (Lang-
field-Smith, 2007, p. 755; see also Flamholtz, 1983; Otley, 1980).
41
Therefore, the concept of MCS operating as a package of interrelated
control systems first introduced by Otley (1980) has been regularly ad-
dressed in literature (e.g., Abernethy & Chua, 1996; Alvesson & Kärre-
man, 2004; Chenhall, 2003; Fisher, 1998; Flamholtz et al., 1985; Malmi &
Brown, 2008). While MCS research has been revealing a tendency to
examine and focus on specific aspects of control systems (Chenhall,
2003; Dent, 1990), the package view of MCS aims at adopting a more
comprehensive and integrated approach (Malmi & Brown, 2008). Malmi &
Brown (2008) argue that there are several reasons for MCS to be consid-
ered as a package. First of all, the components of a MCS do not operate
in isolation from each other but rather form part of a broader control sys-
tem (Chenhall, 2003). Thus, in order to avoid erroneous conclusions, the
context of other components must be taken into account when studying
the effect of any control system (Chenhall, 2003; Fisher, 1998). Secondly,
and as a consequence, as the use and impact of an individual control
system is related to the functioning of the existing package of interrelated
control systems, considering an overall package of control is necessary
(Malmi & Brown, 2008). In this context, Abernethy & Brownell (1997)
argue that “[i]t is clear that organizations rely on combinations of control
mechanisms in any given setting, yet virtually nothing is known about
how the effects of any one control are governed by the level of simulta-
neous reliance on other forms” (Abernethy & Brownell, 1997, p. 246).
41
Otley first used the term package to address separate parts of an overall MCS arguing
that he “felt unhappy with using the term ‘system’ because it seemed to imply a designed
system of well-coordinated parts, and many overall MCSs did not seem to possess this
property. I used the term ‘package’ to imply a set of pieces that were put together without
ensuring that they were fully coordinated” (Otley, 2016, p. 53).
Thirdly, while much MCS research has focused on formal accounting-

based controls, consideration needs to be given as to how these relate to
other controls, for example cultural or administrative controls, and wheth-
er in certain contexts these various controls can complement or substitute
one another (Malmi & Brown, 2008).
Reflecting on the packages view of MCS, Otley (2016) stresses the im-
portance to note that the “elements of an overall control system may not
be well-integrated or coordinated” (Otley, 2016, p. 53), a phenomenon
which is referred to as loose coupling (Orton & Weick, 1990). Drazin &
Van de Ven (1985) argue that organizational design choices not only
require organizations to select MC practices that match the set of contin-
gencies, but also ensuring that the MC practices are internally consistent.
This aspect has been addressed by Grabner & Moers (2013) in their ap-
proach to analytically define the idea of internal consistency. Grabner &
Moers (2013) argue that the key to separating MC as a system from MC
as a package is the concept of inter-dependency. In contrast to MC as a
system, MC as a package takes into account the complete set of con-
trols, regardless of whether they are interdependent or whether their po-
tential interdependency is considered when making decisions on MC
design (Grabner & Moers, 2013). In addition, Gong & Ferreira (2014)
examine the effect of internal consistency in MCS design on firm perfor-
mance and show that there is a positive relationship between the two.
Ultimately, Otley (2016) stresses the danger that ongoing external
changes lead to control systems becoming internally inconsistent and
incoherent, and points out that, in practice, the packages of MC are con-
stantly modified and developed.
One of the challenges in studying MCS as a package is the distinction
between MCS and decision- or information-support systems as well as
the issue of what conceptually constitutes a MCS package, which can
turn out to be ambiguous in practice (Malmi & Brown, 2008). In addition,
as MCS packages are regarded as complex systems, Malmi & Brown
(2008) argue that it is challenging to empirically examine their appear-
ances. This is the case for field and case studies as well as for survey
methods, which face the difficulty of developing survey instruments that
capture the whole spectrum of MCS packages in a meaningful way
(Malmi & Brown, 2008). Finally, it can be argued that the package view of
MCS has led to the development of various MCS frameworks (e.g., Mer-
chant & Van der Stede, 2012; Otley, 1999; Ouchi, 1979; Simons, 1995)
which are discussed in the subsequent sections below.
2.2.2 Conceptualizations and evolution of MCS frameworks

Resulting from the complexity of the field of control, a number of authors
have introduced approaches to its study and developed frameworks in
order to identify contrasting archetypes of control (for a review see Mer-
chant & Otley, 2007). Among the many control typologies, Ouchi’s control
framework (Ouchi, 1977, 1979, 1980; Ouchi & Maguire, 1975), rooted in
organizational contingency theory (Rockness & Shields, 1984) and trans-
action cost theory (Coase, 1937; Williamson, 1981) has earned great
recognition in early MCS research (Merchant & Otley, 2007). Central to
Ouchi’s object-of-control framework is “the problem of obtaining coopera-
tion among a collection of individuals or units who share only partially
congruent objectives” (Ouchi, 1979, p. 833; see also Section 2.1.4.3).
According to Ouchi (1979), two contextual factors are determining the
use and effectiveness of controls and the choice of the optimal control
strategy, i.e. knowledge of desirable behavior and the ability to measure
outcome (see Figure 7). In his framework a trichotomy of organizational
controls is developed and each mechanism categorized as either market
control, bureaucracy control, or clan control (see Figure 10 below).
Type of Social Informational

Control Requirements Requirements
Market Norm of Reciprocity Prices
Norm of Reciprocity
Bureaucracy Rules
Legitimate Authority
Norm of Reciprocity
Clan Legitimate Authority Traditions
Shared Values, Beliefs
Figure 10: Social and informational prerequisites of control

(Source: Ouchi, 1979, p. 838)
With regards to market control, a market is a very efficient mechanism of

control (Arrow, 1974b), as all relevant information for efficient decision-
making is conveyed by the price (Ouchi, 1979). In addition, the problem
of goal incongruity is solved through employees’ commitment to organiza-
tional objectives by self-interest based on the price mechanism. There-
fore, each employee can be rewarded in direct proportion to their contri-
bution and divergent behavior can only be pursued at the employees’
own economic costs (Ouchi, 1979). Therefore, “competitive market reas-
sures both parties that the terms of exchange are equitable” (Ouchi,
1980, p. 130). However, as there would be no reason for formal organiza-
tions to exist in a frictionless market (Williamson, 1973), it is evident that
42
in most cases some market defects exist. As “every bureaucratic organ-
ization constitutes an example of market failure” (Ouchi, 1980, p. 133), in
such cases bureaucratic mechanisms are necessary (Ouchi, 1979,
1980).
These bureaucratic controls are formal control mechanisms which rely on
rules to guide decision-making and behavior. In this sense, rules specify
processes or set standards of output or quality at increased cost of ad-
42
In his transaction cost approach, Williamson (1981) explains the existence of firms and
argues that, in specific circumstances, firms can be more efficient as markets which re-
sults in lower transaction costs.
ministration. As the two generic types of bureaucratic controls are behav-

ioral controls and output controls, the efficiency of these controls is highly
dependent on the degree of performance ambiguity. Therefore, as the
employees’ commitment to organizational objectives is determined by
employees’ self-interest as affected by personal surveillance and direc-
tion of subordinates, a legitimate authority is required in addition to a
norm of reciprocity “to create an atmosphere in which such directives will
43
be willingly followed” (Ouchi, 1979, p. 836). However, in cases of am-
biguous performance evaluations, for example highly unique tasks or
teamwork where contributions of single employees are almost impossible
to evaluate, bureaucracy control mechanisms may fail demanding clan
mechanisms to be introduced (Ouchi, 1979, 1980).
The third control mechanisms in Ouchi’s (1979) control framework, clan
controls, are the least formal controls and refer to socialization processes
in organizations which reduce the need for costly surveillance and evalu-
ation. Therefore, these mechanisms are appropriate in situations of high
levels of uncertainty (Alvesson & Kärreman, 2004; Ouchi, 1979, 1980)
and aim to reduce goal incongruity by establishing shared beliefs and
values. For this purpose, traditions, rituals, and ceremonies as well as
implicit information systems are key aspects for decision-making activi-
ties. Lacking in the price mechanism of the market and the explicit rules
of the bureaucracy, clan controls are the most demanding control mech-
anism in terms of social agreement which “relies for its control upon a
deep level of common agreement between members on what constitutes
proper behavior” (Ouchi, 1979, p. 838).
Summing up, Ouchi (1979, 1980) argues that the optimal control strategy
is contingent on the social and informational characteristics of an organi-
zation. While Ouchi (1979, 1980) regards market and clan mechanisms
as superior forms of control due to fewer inefficiencies, he recognizes
43
A norm of reciprocity is a social agreement which ensures, with regard to market mech-
anisms, that a party attempting to cheat in a market transaction “will be punished by all
members of the social system, not only by the victim and his or her partners” (Ouchi,
1979, p. 838). Similarly, in regard to the other mechanisms, the norm of reciprocity as-
certains that “in exchange for pay, an employee gives up autonomy in certain areas to
his organizational superiors, thus permitting them to direct his work activities and to mon-
itor his performance” (Ouchi, 1979, p. 838).
that “[r]eal organizations will each contain some features of each of the
modes of control” (Ouchi, 1979, p. 840).
This approach by Ouchi (1979) was further developed by Merchant
(1985b) and Merchant & Van der Stede (2012), who noted that all con-
trols are behavioral controls and refined the terminology through renam-
ing the types of controls as action, results, and personnel/cultural controls
(Merchant & Otley, 2007). In its conceptualization, MC primarily has an
internal focus aiming at influencing employees’ behavior in order to en-
sure that firm’s objectives are not harmed but supported. In contrast to
this, strategic control processes have an external focus dealing with how
firms can establish a competitive advantage and compete in its industry
(Merchant & Van der Stede, 2012). Specifically, Merchant & Van der
Stede (2012) identified three causes for the needs of MCS which can
occur simultaneously and in any combination, i.e. lack of direction, moti-
vational problems, and personal limitations, and which are encountered
by different types of control (see Figure 11). While a lack of direction oc-
curs if employees simply do not know the organizational objectives and
how to contribute to them, motivational problems exist due to individuals’
self-interestedness and colliding individual and organizational objectives.
Both of these aspects are referred to as a lack of goal congruence in
management accounting and control literature (Merchant & Van der
Stede, 2012). On the other hand, personal limitations appear if employ-
ees are unfit to perform well despite of being aware of objectives and
being highly motivated (Merchant, 1985b; Merchant & Van der Stede,
2012). Merchant & Van der Stede (2012) point out that some limitations
are person-specific, for example lack of training, experience, knowledge,
or aptitude. In addition, there are also aspects suggested by psychology-
based research which concern potentially all individuals, for example the
tendency to overestimate the likelihood of common or recently occurred
events compared to rare or not recently occurred events, respectively
(Merchant & Van der Stede, 2012).
Control problems
Lack of Motivational Personal

Control types direction problems limitations
Results controls
Results accountability x x
Action controls
Behavioral constraints x
Preaction reviews x x x
Action accountability x x x
Redundancy x
Personnel/cultural controls
Selection and placement x x x
Training x x
Provision of necessary resources x
Creation of a strong organizational culture x x
Group-based rewards x x
Figure 11: Control types and control problems

(Source: Merchant & Van der Stede, 2012, p. 210)
The first type of controls in Merchant’s (1985b) and Merchant & Van der
Stede’s (2012) framework is results controls, which involves “rewarding
individuals […] for accomplishing particular results or outcomes” (Mer-
chant, 1985b, p. 17) and “influenc[ing] actions or decisions because they
cause employees to be concerned about the consequences of their ac-
tions or decision” (Merchant & Van der Stede, 2012, p. 30). Therefore,
44
results controls empower employees, as the organization does not dic-
tate which actions not to take and this is particularly necessary for the
successful realization of decentralized organizations. While pay-for-
performance is the most prominent example for this type of control, there
are also other rewards such as autonomy, promotions, job security, and
recognition. In general, implementation of results controls involves the
following steps: “(1) defining the dimension(s) on which results are de-
sired; (2) measuring performance in the chosen dimensions; (3) setting
performance targets for employees to attain for each of the measures;
44
The employee empowerment approach has become a major trend since the 1990s, see
for example Seibert, Silver & Randolph (2004).
and (4) providing rewards for targets attainment to encourage the behav-
iors that will lead to the desired results” (Merchant & Van de Stede, 2012,
p. 33). In addition, for feasibility of results controls there are three pre-
conditions which should all be present: organizations must know and
communicate desired results, employees must be able to affect the re-
sults, and finally, controllable results must be effectively measurable
(Merchant, 1985b; Merchant & Van der Stede, 2012). Thus, the control-
lability principle is central to responsibility accounting which recognizes
that “results measures are useful only to the extent that they provide in-
formation about the desirability of the actions or decisions that were tak-
en” (Merchant & Van der Stede, 2012, p. 37) and are not effective in situ-
ations where significant uncontrollable influences affect the measures
(Merchant & Van der Stede, 2012). In regards to effective measurability,
Merchant & Van der Stede (2012) state that to “evoke the right behavior,
in addition to being congruent and controllable, results measures should
be precise, objective, timely, and understandable. And even when a
measure has all of the above qualities, it should also be cost efficient”
(Merchant & Van der Stede, 2012, p. 38).
Secondly, action controls involve “ensuring that employees perform (do
not perform) certain actions known to be beneficial (harmful) to the organ-
ization” (Merchant & Van der Stede, 2012, p. 81). Merchant & Van der
Stede (2012) point out that, as the employees’ actions are the focus of
control, these are the most direct management controls which can take
the forms of behavioral constraints, preaction reviews, action accountabil-
45
ity, and redundancy. While behavioral controls can be applied physically
or administratively and aim at preventing employees from taking undesir-
46
able actions, preaction reviews are demanded for approval of proposed
actions. Action accountability, on the other hand, involves defining ac-
ceptable (unacceptable) actions, communicating and observing these
45
Behavioral controls include physical controls and administrative controls. While typical
examples of physical constraints include computer passwords or fingerprint readers,
administrative controls include, among others, restrictions of decision-making authorities
or separation of duties, a basic requirement of internal control (Merchant & Van der
Stede, 2012).
46
For example, reviewing planned actions and budgets at higher levels of an organization
are a form of common preaction review (Merchant & Van der Stede, 2012).
actions, and rewarding (punishing) corresponding behavior. In addition,

redundancy increases the possibility that an action is undertaken properly
and satisfactorily. In general, for action controls to be effective, both the
knowledge of desired actions and the ability to ensure that these actions
are taken are essential (Merchant, 1985b; Merchant & Van der Stede,
2012).
Finally, personnel controls and cultural controls are therefore necessary
as “results controls [and] action controls usually cannot be made near-
perfect, or at least it is prohibitively expensive to make them near-perfect”
(Merchant & Van de Stede, 2012, p. 88). According to Merchant & Van
der Stede (2012), personnel controls “motivate employees to control their
own behavior” (Merchant & Van der Stede, 2012, p. 88) and serve three
purposes. Firstly, expectations of the organization are clarified and em-
ployees’ insight into organizational objectives strengthened. Secondly,
personnel controls enable employees to do a good job through providing
capabilities and resources. Thirdly, the application of personnel controls
promote engagement in self-monitoring, pushing employees to be natu-
rally committed to their organization and its objectives, resulting in intrin-
sic motivation and loyalty. The implementation of these controls is con-
ducted via selection and placement, i.e. finding people who match certain
tasks (e.g., Campbell, 2012), training, i.e. developing people’s skills, and
job design and resourcing, i.e. providing suitable work environments and
necessary resources for employees to be able to perform well (Merchant,
1985b; Merchant & Van de Stede, 2012).
In contrast to personnel controls, cultural controls “are designed to en-
courage mutual monitoring” (Merchant & Van der Stede, 2012, p. 90) and
therefore motivate employees “to control each other’s behavior” (Mer-
chant & Van der Stede, 2012, p. 88). Merchant & Van der Stede (2012)
argue that these controls impose significant group pressure on individuals
who do not recognize and adapt to organizational norms and values, i.e.
organizational culture. These cultural norms comprise of unwritten and
written rules and can be established in many ways, for example codes of
conduct, group rewards, intra-organizational transfers, physical and so-
cial arrangements, and tone at the top (Merchant & Van der Stede,
2012).
In addition to specifying new archetypes of control, Merchant & Van der

Stede (2012) also discuss the notion of control system tightness as well
as direct and indirect costs of controls. Tight control is defined as a “high
degree of assurance that employees will behave in the organization’s
best interest” (Merchant & Van der Stede, 2012, p. 131) and can be
achieved with all types of controls depending on the situation of an organ-
ization. Although the direct costs of controls must be considered when
designing a MCS, Merchant & Van der Stede (2012) stress that indirect
47
costs caused by harmful side effects are sometimes of greater im-
portance. Harmful side effects of controls are not unique to a certain type
of control and not completely avoidable. While the risk of harmful side
effects can be regarded as smaller with personnel controls, inappropriate-
ly designed controls generally create more severe side effects the tighter
they are applied (Merchant & Van der Stede, 2012). Overall, Merchant &
Van der Stede (2012) conclude that the design of an organization’s MCS
48
should be based on the net benefits of controls, and that there are
“many control benefits and costs that are hard to discern, but for control
systems to have desirable effects, organizations must inevitably fine tune
them as the situation calls for, using best assessment, knowledge, and
insights available” (Merchant & Van der Stede, 2012, p. 218).
Another framework was proposed by Otley (1999) who pursues a holistic
view of control systems, recognizing that there are many alternative con-
trol system configurations which also perform well. Otley (1999) ties in
with Anthony’s (1965) traditional framework (see Section 2.1.2) and aims
at incorporating aspects of strategy and operations which were intention-
ally neglected by Anthony (1965). Otley (1999) argues that there are five
central issues that need to be addressed and proposed the following
questions for his descriptive framework, intended to be used as a guide
for case-based research (Merchant & Otley, 2007):
47
For example, harmful side effects comprise of behavioral displacement, gamesmanship,
operating delays, or negative attitudes (Merchant & Van der Stede, 2012).
48
Net benefits of controls are the benefits of implementing a control minus the direct and
indirect costs of a control caused (Merchant & Van der Stede, 2012).
1. “What are the key objectives that are central to the organization’s
overall future success, and how does it go about evaluating its
achievement for each of these objectives?
2. What strategies and plans has the organization adopted and what are
the processes and activities that it has decided will be required for it to
successfully implement these? How does it assess and measure the
performance of these activities?
3. What level of performance does the organization need to achieve in
each of the areas defined in the above two questions, and how does it
go about setting appropriate performance targets for them?
[…]
4. What rewards will managers (and other employees) gain by achiev-
ing these performance targets (or, conversely, what penalties will they
suffer by failing to achieve them)?
5. What are the information flows (feedback and feed-forward loops) that
are necessary to enable the organization to learn from its experience
and to adapt its current behaviour in the light of that experience?” (Ot-
ley, 1999, p. 365-366)
Otley’s framework was further developed by Ferreira & Otley (2009) who
extended the framework to 12 questions to provide “a useful checklist of
the major aspects of control systems design that may need to be included
in a comprehensive analysis of such systems” (Merchant & Otley, 2007,
p. 789-790).
To this day, one of the most influencing frameworks for MCS (Otley,
2016, p. 55) remains that developed by Simons (1995b). As Simons’
levers of control framework is applied in the empirical part of this study, it
is presented in more detail in the following section.
2.2.3 Simons’ levers of control framework

In the late 1980s and early 90s, Simons conducted a number of case
studies (Simons, 1987, 1990, 1991, 1994) seeking to answer the ques-
tion of how to balance innovation and control (Simons, 1995b, p. ix). This
extensive research was groundwork for Simons’ levers of control (LOC)
framework (Simons, 1990, 1991, 1995a, 1995b, 2000), which comprises
of a “comprehensive theory for controlling business strategy” (Simons,

1995b, p. 3) and introduces opposing forces that manage tensions “be-
tween freedom and constraint, between empowerment and accountabil-
ity, between top-down direction and bottom-up creativity, between exper-
imentation and efficiency” (Simons, 1995b, p. 4).
The starting point for conceptualizing the LOC framework was transcend-
49
ing the command-and-control rhetoric of traditional MC and adapting to
the requirements of competitive markets, where a high pace of product
and market innovation, knowledge intensiveness and employees’ em-
powerment highlight and demand a new philosophy for control and man-
agement (Simons, 1995b). As a result, the LOC framework as an “action-
oriented theory of control” (Simons, 1995b, p. ix) aimed to provide an
effective control of strategy through managing the inherent tension in
modern organizations between predictable achievement of goals and
creative innovation or, in other words, between ensuring that employees
are working towards organizational goals and that the individual has free-
50
dom to innovate (Simons, 1995b).
Simons argues that the sources from which those tensions arise are
threefold, namely the dynamics of (1) creating value, (2) strategy making,
and (3) human motives. The tension from the dynamics of creating value
stems from the fact that organizations are usually created by individuals
51
who aim to turn a set of unique opportunities into value, but who are
facing constraints due to excess complexity and limited cognitive capaci-
52
ty. Therefore, as managers have to engage in multiple roles, organiza-
49
This so-called command-and-control rhetoric reaches back to the 1960s and implicates
MC with terms such as standardization and efficiency, keeping things on track without
surprises, results according to plans, and top-down strategy setting etc. (Simons, 1995b,
p. 3).
50
Since Simons’ (1995b) LOC framework there has been considerable research on the
tension between control and innovation. For further thoughts on formalized MCS and
creativity see Adler & Chen (2011) and Pfister (2014).
51
Simons refers to a unique set of opportunities which an organization can identify as
opportunity space, and argues that, in fact, organizations face unlimited opportunity (Si-
mons, 1995b, p. 14-16). This aspect is put in contrast to the study of economics, which is
mainly concerned with choices among restricted sets of opportunities (Arrow, 1974a;
Simons, 1995b).
52
Mintzberg argues that managers have to act as figureheads, leaders, liaisons, monitors,
information disseminators, spokesmen, entrepreneurs, disturbance handlers, resource
tional attention must be allocated in productive ways in order to continual-

ly earn an organization’s right to exist (Simons, 1995b).
As it is usually required of modern organizations that both intended and
emergent strategies are pursued (Mintzberg, 1987), Simons argues that a
theory for controlling strategy has to simultaneously consider top-down as
well as emergent aspects in strategy formation (Simons, 1995b, p. 20-21;
Tuomela, 2005, p. 297). As a result, an area of conflict appears between
analytical, conceptual and hierarchical strategy formation on the one
hand and incremental strategies which seize opportunities on the other
hand. Nevertheless, Mintzberg reasons that in practice “all strategy mak-
ing walks on two feet, one deliberate, the other emergent. For just a pure-
ly deliberate strategy making precludes learning, so purely emergent
strategy making precludes control” (Mintzberg, 1987, p. 69).
Finally, according to Simons (1995b) the dynamics of human motives
highlight an area of tension which has to be balanced in effective control
systems. While management theories are demanded to make assump-
tions about human behavior, there have been dramatic changes in the
53
view of human motives over time. In his theory Simons argues that indi-
viduals in organizations are ethical, desire to achieve and contribute, and
possess significant creative potential. However, it is recognized that or-
ganizational blocks exist which may cause individuals to act against per-
sonal moral codes or prevent contributions by failing to provide resources
or opportunities (Simons, 1995b).
Therefore, it is shown that effective control systems balance conflicts
between “(1) unlimited opportunity and limited attention, (2) intended and
emergent strategy, and (3) self-interest and the desire to contribute” (Si-
mons, 1995b, p. 28). These tensions can be managed by integration of
allocators, and negotiators and thus must allocate their restricted attention to these mul-
tiple roles (Mintzberg, 1973, p. 167-169; Simons, 1995b, p. 17)
53
For example, at the beginning of twentieth century, Taylor (1911/1919) perceived work-
ers to be solely motivated by financial incentives. Thus, in pursuit of efficiency through
piece rate incentives, it was aimed at improving repetitive tasks and ensuring that behav-
ior complied with prescribed procedures (Taylor, 1911/1919). Some decades later, social
aspects in performance implications were elaborated and motivations for human beings
extended by aspects of self-actualization (Maslow, 1954). Later again, economists
viewed individuals as self-interested effort-averse agents who aim at maximizing their
utility function (e.g., Jensen & Meckling, 1976).
four levers of control, which are (1) beliefs systems, (2) boundary sys-
tems, (3) diagnostic control systems, and (4) interactive control systems
(Simons, 1995b). These levers are applied in order to control four key
constructs which have to be analyzed for successful strategy implemen-
tation: (1) core values, (2) risks to be avoided, (3) critical performance
variables, and (4) strategic uncertainties. The following figure provides an
overview of the key aspects of Simons’ framework:
Beliefs Boundary
Systems Systems
Core Risks to
Values Be Avoided
Business
Strategy
Critical
Strategic
Performance
Uncertainties
Variables
Interactive Diagnostic
Control Systems Control System
Figure 12: Levers of control

(Source: Adapted from Simons (2000), p. 303; adapted from Simons, 1995b, p. 159)
As can be seen in the figure above, an organization’s business strategy

and thus how firms compete and positions itself vis-à-vis its competitors
is at the core of Simons’ view of MCS. The selective use of the four lev-
54 55
ers determines dynamic tension between positive and negative forces
and is crucial to allow for effective control of strategy. Therefore, the key
to successful strategy implementation is the distribution of management
attention and the choosing of appropriate combinations of all levers of
control (Simons, 1995b). These levers will be discussed in more detail
below.
2.2.3.1 Beliefs systems

Simons defines beliefs systems as “explicit set of organizational defini-
tions that senior managers communicate formally and reinforce systemat-
ically to provide basis values, purpose, and direction for the organization”
(Simons, 1995b, p. 34). These formal control systems use instruments
such as mission statements, credos, and statements of purpose etc. to
communicate the core values which are linked to the business strategy
(Simons, 1995b). In addition, Otley considers an organizational culture
which has been established for a longer period of time to be an even
more profound beliefs system than conventional communication tools
(Otley, 2003, p. 317).
Primarily, beliefs systems are designed to inspire and motivate individu-
als in their organizational search for creating value and guide the creative
process of exploring new opportunities (Marginson, 2002; Simons,
1995b). In essence, “control is established by creating shared vision and
54
Simons defines internal controls as controls that are “designed to safeguard assets from
misappropriation and ensure reliable accounting records and information systems” (Si-
mons, 1995b, p. 84). Internal controls differ from boundary systems as they are not con-
cerned which risks to be avoided but rather specify detailed procedures for information
handling (Simons, 1995b, p. 84-85). While internal controls are the most basic building
block for effective control, they are not considered a lever of control as these systems
“contain little information of importance to managers” (Simons, 1994, p. 170).
55
Simons uses terms of Chinese philosophy and compares the four levers of control with
the yin and yang. Whereas boundary systems and diagnostic control systems create
constraints and represent yin, i.e. negative controls, beliefs systems and interactive con-
trol systems create inspirational forces and represent yang, i.e. positive controls (Si-
mons, 1995b, p. 7-8).
values amongst employees” (Otley, 2003, p. 317). In doing so, they have
to be broad enough to provide inspirational appeal to all organizational
participants and use symbolic information which is of special importance
in modern decentralized organizations (Simons, 1995b). As is generally
well understood by successful leaders, symbolism is essential in generat-
ing inspiration and belief (Feldman & March, 1981; Westley & Mintzberg,
1989). As a result, managers attempt to direct organizations by “(1) as-
serting uniqueness, (2) providing prestige to group membership, and (3)
using formal beliefs as symbols of what the organization represents” (Si-
mons, 1995b, p. 37). This results in increased commitment and positively
influences the perceived distinctiveness and stability of organizations
(Ashfort & Mael, 1989). As committed individuals are more willing to
make an effort to reach organizational goals, organizational inertia is
challenged (Mundy, 2010, p. 501) and the level of performance usually
increases (Locke et al., 1988).
2.2.3.2 Boundary systems

In contrast to beliefs systems, boundary systems “delineate the accepta-
ble domain of activity for organizational participants” (Simons, 1995b, p.
39) and “establish limits, based on defined business risks, to opportunity-
seeking” (Simons, 1995b, p. 39). As it is not possible to address all op-
portunities and specify how they should be faced by organizational partic-
56
ipants, these systems are usually proscriptive systems which are stated
in negative terms to limit managerial authority and discretion (Simons,
1995b; Otley, 2003). Furthermore, boundary systems are formal control
systems that come into effect via codes of business conduct or setting of
strategic boundaries, both through analyzing the risks connected with the
respective business strategy (Simons, 1995b).
Basically, the sources for business conduct boundaries are (1) society’s
laws, (2) the organization’s beliefs systems, and (3) codes of behavior
supported by external stakeholders (e.g., industry associations) (Gate-
wood & Carroll, 1991; Simons, 1995b). The level of organizational trust
56
Simons mentions the Ten Commandments from the Old Testament to be an excellent
example for a boundary system (Simons, 1995b, p. 41).
and uncertainty (e.g., Leblebici & Salancik, 1982; Simons, 1995b), per-
formance pressure (e.g., Rich et al., 1990) as well as prior experience
with discrete incidents (e.g., Andrews, 1989) is argued to have an influ-
ence on business conduct implementation. In addition, Schwartz (2001)
reports evidence that business code of conducts in fact influence behav-
ior of employees and finds a number of reasons why codes are or are not
57
complied with. However, while these systems limit the freedom in indi-
vidual creativity, they can also be liberating in protecting against pressure
from superiors to engage in inappropriate behavior (e.g., Brenner & Mo-
lander, 1977).
On the other hand, Simons (1995b) argues that strategic boundaries aim
at supporting organizational strategies and guide opportunity-seeking
behavior in limiting search activities. For this purpose, it is usually speci-
fied which business opportunities not to pursue in order to avoid a waste
58
of resources such as financial capital or management attention. Fur-
thermore, strategic boundaries can be used to limit opportunity sets
59
which may lead to exit existing businesses. For both business conduct
and strategic boundaries, the means of enforcement are sanctions which
must imply credible threats to be effective (Simons, 1995b).
Nevertheless, boundary systems are regarded a prerequisite for organi-
zational freedom and flexibility as they enable delegation of decision
60
making and actually facilitate entrepreneurial behavior (Simons, 1995b).
57
Schwartz (2001) identified five reasons for employees’ non-compliance with the business
code of conduct: “(a) self-interest (i.e., greed, being a star, financial distress, avoid har-
assment); (b) dissatisfaction (i.e., with one's job or level of reimbursement); (c) environ-
ment (i.e., peer pressure, supervisors' behaviour, opportunity); (d) company's best inter-
est; and (e) ignorance (i.e., never aware, didn't perceive, forgot)” (Schwartz, 2001, p.
253-254). On the other hand, employees tend to comply with the code due to: “(a) per-
sonal values; (b) fear of discipline; and (c) a feeling of loyalty to the company” (Schwartz,
2001, p. 254).
58
Checklists and asset acquisition systems (capital budgeting systems setting a hurdle
rate for profitability) are instruments to set minimum boundaries (Simons, 1995b, p. 49-
51).
59
For example, John Welch, Jr., chairman of General Electric, stated repeatedly that GE
would exit any business in which GE is not able to achieve a number 1 or 2 position on
the world market (Simons, 1995b, p. 49).
60
Simons compares boundary systems with brakes in a car and suggests understanding
their primary function as possibility to go fast instead of slowing down (Simons, 1995b, p.
41).
Therefore, beliefs and boundary systems complement each other in fram-

ing the strategic domain and in transforming unlimited opportunity space
into a demarcated domain for organizational search. Still, tight boundary
systems, especially strategic boundaries, may impose risks by preventing
adaption to changing business environments and therefore exclude the
exploration of new opportunities (Simons, 1995b).
2.2.3.3 Diagnostic control systems

The third lever of control, diagnostic control systems, are the “formal in-
formation systems that managers use to monitor organizational outcomes
and correct deviations from preset standards of performance” (Simons,
1995b, p. 59). Therefore, diagnostic control systems are characterized
through the following features: “(1) the ability to measure the outputs of a
process, (2) the existence of predetermined standards against which
actual results can be compared, and (3) the ability to correct deviations
from standards” (Simons, 1995b, p. 59). From these features, it is evident
that diagnostic control systems represent cybernetic feedback systems
that are ubiquitous and represent the basics of traditional management
control (Simons, 1995b).
Consequently, a certain degree of process knowledge, measurability of
61
variables, and interference by organizational participants is required to
be able to control a process with diagnostic control systems (Simons,
1995b). It is not surprising that most conceptualizations of control sys-
tems in literature recognize the importance of monitoring results and
therefore use different labels such as output control (Ouchi, 1977), per-
formance control (Mintzberg, 1979), and results control (Merchant,
1985b) with similar meaning. As these systems also trigger target ad-
justments subject to feedback loops in order to remain stable in changing
contexts and implement intended strategy, diagnostic control systems are
61
According to Lawler & Rhode (1976, p. 148; see also Cammann & Nadler, 1976), diag-
nostic control measures should be independently verifiable (i.e., objective), capturing all
relevant actions (i.e., inclusive), and reflecting the efforts of individuals being measured
(i.e., responsive).
62
mostly regarded as single-loop learning systems (Argyris & Schön,
1978; Simons, 1995b).
Output variables which are usually controlled by diagnostic control sys-
tems are critical performance variables that have an influence if intended
strategies are implemented successfully (Simons, 1995b). A well-known
instrument for identifying and analyzing critical performance variables is
Kaplan and Norton’s concept of the balanced scorecard, which suggests
using diagnostic measures in regard to financial as well as non-financial
63
perspectives simultaneously to reach business goals (Kaplan & Norton,
1992). These critical performance variables are not overseen constantly
by the management, but rather attention is focused on three steps: (1)
setting and negotiating goals, (2) receiving updates and exception re-
ports, and (3) following up on significant exceptions (Simons, 1995b, p.
70-71). Therefore, diagnostic control systems allow management-by-
exception leaving constant activities to staff experts and enable effective
allocation of management attention by triggering managerial corrective
action in case of identified variances (Simons, 1995b).
Simons (1995b) argues that another key function of diagnostic control
systems is linking accomplishment of preset goals with extrinsic rewards
to increase the motivation of organizational participants. In doing so, spe-
cial attention must be given to designing these systems carefully, in order
to avoid dysfunctional behavior such as engaging in actions that influence
64
the measure but do not further organizational goal achievement or
building slack into targets (Simons, 1995b).
62
Argyris & Schön note that single-loop learning describes “a single feed-back loop which
connects detected outcomes of action to organizational strategies and assumptions
which are modified so as to keep organizational performance within the range set by or-
ganizational norms. The norms themselves […] remain unchanged” (Argyris & Schön,
1978, p. 18-19).
63
Kaplan & Norton (1992) introduce the financial, customer, internal business, and innova-
tion and learning perspective to track implementation of business strategy.
64
This so-called gaming the system means that individuals maximize rewards without
considering effects on organizational goals. For example, a customer service operation
of a credit card company which measures and rewards the number of calls per day could
tempt to minimize talk time per call and thus lead to dissatisfied customers and less
deals (Simons, 1995b, p. 82).
It is important to note that diagnostic control systems are not defined by

their technical design features, but how senior managers use these sys-
tems (Simons, 2000, p. 226). For instance, budgets (Abernethy &
Brownell, 1999) and balanced scorecards (Tuomela, 2005) have been
found to be used diagnostically and interactively in different contexts.
2.2.3.4 Interactive control systems

The fourth lever of control, interactive control systems, are “formal infor-
mation systems managers use to involve themselves regularly and per-
sonally in the decision activities of subordinates” (Simons, 1995b, p. 95).
These systems focus on controlling strategic uncertainties to facilitate
opportunity-seeking and allow emergence of new strategies. According to
Simons, strategic uncertainties are the “uncertainties and contingencies
that could threaten or invalidate the current strategy of the business” (Si-
mons, 1995b, p. 94) and are uniquely determined by senior manage-
ment’s perception based on implementation of intended strategy. There-
fore, creative innovation as well as stimulation of search and learning are
key aspects for interactive control systems in order to adapt to changing
environments and to enable strategic renewal (Simons, 1995b).
In contrast to diagnostic control systems which relate to single-loop learn-
ing, interactive control systems stimulate organizational learning and
foster bottom-up emergence of strategic change (Simons, 1995b). In-
stead of keeping a process in predefined bounds, these systems chal-
lenge the assumptions on which the current business strategy is built
65
upon and therefore constitute double-loop learning (Argyris & Schön,
1978; Simons, 1995b). Therefore, to be effective, main features of inter-
active control systems are active and frequent dialogues taking place
throughout the organization to foster straightforward information sharing
and gathering (Simons, 1995b). Simons uses four descriptions to charac-
terize interactive control systems:
65
Argyris & Schön note that double-loop learning describes “a double feedback loop which
connects the detection of error not only to strategies and assumptions for effective per-
formance but to the very norms which define effective performance” (Argyris & Schön,
1978, p. 22).
1. “Information generated by the system is an important and recurring

agenda addressed by the highest levels of management.
2. The interactive control system demands frequent and regular attention
from operating managers at all levels of the organization.
3. Data generated by the system are interpreted and discussed in face-
to-face meetings of superiors, subordinates, and peers.
4. The system is a catalyst for the continual challenge and debate of
underlying data, assumptions, and action plans.” (Simons, 1995b, p.
97)
Furthermore, it is essential that involvement of senior managers in inter-

active control systems should be empowering and thus foster dialogues
and positive information-sharing environments through non-invasive in-
volvement (Bisbe et al., 2007; Simons, 1995a). This feature was particu-
larly stressed by Bisbe et al. in identifying non-invasive, facilitating and
66
inspirational involvement as one of five properties of interactive control
systems in order to provide a guideline for conceptual specification of the
research construct (Bisbe et al., 2007, p. 795-798). Moreover, Abernethy
et al. find that “top management with a consideration leadership style will
use the planning and control system as an interactive communication
device to informally reveal their preferences to subordinates and to obtain
input from subordinates” (Abernethy et al., 2010, p. 12).
As interactive control systems demand a high degree of attention of sen-
ior managers and are thus time-consuming and costly, it is crucial to de-
cide which control systems to be used interactively (Simons, 1995b).
Therefore, Simons defined five conditions for control systems for potential
interactive use:
66
Other properties are identified as ‘intensive use by top management’, ‘intensive use by
operating managers’, ‘face-to-face challenge and debate’, and ‘focus on strategic uncer-
tainties’ (Bisbe et al., 2007, p. 795-798).
1 “To be used interactively, the control system must require the refore-
casting of future states based on revised current information.
2 To be used interactively, the information contained in a control system
must be simple to understand.
3 To be used interactively, a control system must be used not only by
senior managers but also by managers at multiple levels of the organ-
ization.
4 To be used interactively, a control system must trigger revised action
plans.
5 To be used interactively, a control system must collect and generate
information that relates to the effects of strategic uncertainties on the
strategy of the business.” (Simons, 1995b, p. 108-109)
Finally, as was argued above, diagnostic and interactive control systems

are not defined by their technical design features, but by how senior
managers use these systems (Simons, 2000, p. 226). Therefore, contrary
to diagnostic use of controls, an interactive use of the same information
can lead to a revision of plans, as the desired results may no longer be
achievable (Otley, 2003, p. 317).
2.2.3.5 Interrelationship of the levers of control

Simons (1995b, 2000) argues that dynamic tension between learning and
control is a prerequisite for effective companies and is created by the
combination and interplay of positive and negative forces of all four levers
of control. Therefore, no single application of one lever of control is rele-
vant for controlling business strategy, but rather the complementary
adoption of opposing systems and distribution of management attention
among controls (Simons, 1990, 1991, 1994, 1995b). On the one hand,
beliefs systems and interactive control systems represent positive sys-
tems that expand opportunity space, foster creativity and facilitate the
emergence of new strategies. On the other hand, boundary systems and
diagnostic control systems represent negative systems that delimit the
domain of opportunity-seeking and monitor appropriate behavior and
implementation of intended strategies (Simons, 1995b; Simons, 2000).
In this context, Simons relates beliefs systems to strategy as perspective,

providing an overarching perspective to all activities explaining the firm’s
response to opportunities considering the company’s history and culture.
Interactive control systems refer to strategy as patterns in action which
implicates the importance of emergent strategies and organizational
learning. Furthermore, boundary systems are attributed as strategy as
position which considers that firms choose different ways to compete and
stake out territory by focusing organizational attention to undesired risks
to control their chosen strategy. Finally, diagnostic control systems relate
to strategy as plan as the coordination and monitoring of the implementa-
tion of intended strategies and the transformation into realized strategies
is focused. Eventually, successful implementation of strategy requires
consideration of all aspects of the levers of control to transform combina-
tions of intended and emergent strategies to successful realized strate-
67
gies (Simons, 1995b; Simons, 2000).
67
Mintzberg (1978) distinguishes various types of strategy, i.e. intended strategies, emer-
gent strategies, and realized strategies, as well as deliberate and unrealized strategies.
Intended strategies are “(a) explicit, (b) developed consciously and purposefully, and (c)
made in advance of the specific decisions to which it applies” (Mintzberg, 1978, p. 935).
They represent a plan. Realized strategies, on the other hand, are defined as “pattern[s]
in a stream of decisions” (Mintzberg, 1978, p. 935) and refer to the decisional behavior of
an organization which manifests in a consistent sequence of decisions. Finally, emergent
strategies refer to “realized strategies that were never intended […] because no strategy
was intended at the outset or […] those that were got displaced along the way”
(Mintzberg, 1978, p. 945).
Beliefs Systems
Boundary Systems
Target
Intended Realized
Process Outputs
Strategy Strategy
Business Strategic
Strategy Uncertainties
Unrealized
Strategy
Debate & Interactive

Dialogue Control
Systems
Emergent Strategy
Figure 13: Relationship between levers of control and realized strategies

(Source: Simons, 2000, p. 300; adapted from Simons, 1995b, p. 154)
As shown in Figure 13, all four control systems work together to frame
the strategic domain and provide an effective control environment. The
dynamic tension between the levers of control implies that “effective or-
ganizations must achieve simultaneously high degrees of learning and
high degrees of control” (Simons, 1995b, p. 158). This is supported by
Widener who found the control systems in the LOC framework to be in-
terdependent and complementary (Widener, 2007). Similarly, having
conducted within-case analyses and cross-case comparisons, Bruining et
al. concluded that the control systems in the LOC framework do not re-
68
place but rather complement each other (Bruining et al., 2004).
2.2.3.6 Criticism of the LOC framework

Simons’ LOC framework (Simons, 1995b) has been widely used as theo-
retical normative groundwork in case study (e.g., Bruining et al., 2004;
Collier, 2005; Eldridge et al., 2014; Granlund & Taipaleenmäki, 2005;
Marginson, 2002; Mundy, 2010; Tuomela, 2005), quantitative empirical
(e.g., Abernethy & Brownell, 1999; Arjalies & Mundy, 2013; Bedford,
2015; Bisbe & Otley, 2004; Henri, 2006a; Widener, 2007), and conceptu-
al (e.g., Ferreira & Otley, 2009; Gond et al., 2012; Tessier & Otley,
69
2012a) MC research. Compared to previous studies, the LOC frame-
work turned out to be useful for control systems to be categorized (Otley,
2012) and focusses on a much wider set of controls (Otley, 2016). Never-
theless, extensive research on the LOC framework has identified several
strengths and weaknesses that have been clearly laid out by Ferreira &
Otley (2009, p. 266).
In regard to strengths, a special feature of the LOC framework is the
combination of levers of control which focus on the design of MCS, i.e.
beliefs systems and boundary systems, and control levers which focus on
the use of MCS, i.e. diagnostic control systems and interactive control
systems. Simons refers to the former as design attributes of MCS and to
the latter as attention patterns of feedback and measurement systems
70
(Simons, 1995b, p. 180). In this respect, the aspect of specific uses of
control systems in general and the novel concept of interactive control
systems in particular has earned a lot of attention (e.g., Bisbe et al.,
68
More specifically, Bruining et al. found evidence that control systems that stimulate
opportunity-seeking and learning extend and are in balance with traditional control sys-
tems (i.e., diagnostic control systems) (Bruining et al., 2004).
69
Tessier & Otley reported almost 790 citations in literature in 2011 (Tessier & Otley,
2012a, p. 172).
70
Simons identified the beliefs systems, boundary systems, and feedback and perfor-
mance measurement systems as design attributes of MCS. Consequently, while diag-
nostic and interactive control systems must be designed as well, they represent attention
patterns of the design of the feedback and measurement systems (Simons, 1995b, p.
180).
2007; Bisbe & Malagueno, 2009; Naranjo-Gil & Hartmann, 2007). Fur-
thermore, a strong strategic focus and the resulting implications for con-
trol systems, as well as remarks on balances between positive and nega-
tive controls have been regarded as useful (Ferreira & Otley, 2009, p.
266) and have “contributed to a broadening of the role of MCS” (Berry et
al., 2009, p. 6). Similarly, Otley concludes that the “value of Simons’ work
is that it sets out a more complete picture of the whole gamut of a wide
range of possible controls, and the particular mix that has been chosen
by an organization” (Otley, 2003, p. 317).
In terms of weaknesses, it is argued that the LOC framework lacks con-
71
sideration of socio-ideological, i.e. informal controls which were found to
72
be an important aspect in control systems (Collier, 2005). In addition,
Simons’ conceptualization of MCS strongly focuses on the top level of
management (Simons, 1994) which constitutes a limitation in application
of the framework as the operation of control systems in levels of lower
hierarchies is not considered (Ferreira & Otley, 2009). Furthermore, im-
portant concepts of the LOC framework are criticized of having a diffuse
73
(e.g., core values) or ambiguous (e.g., interactive control systems )
meaning leading to operationalization issues due to subjective interpreta-
tion (Bisbe et al., 2007; Ferreira & Otley, 2009). Finally, it is debatable if
Simons’ framework is applicable to universal settings since beliefs and
boundary systems usually refer to the whole organization but are beyond
the domain of control of divisions or subsidiaries (Ferreira & Otley, 2009,
p. 266).
71
Although Collier argues that beliefs systems implicitly comprise, at least to some extent,
informal controls (Collier, 2005), Simons explicitly excludes informal control processes
according to his definition for MCS (see Section 2.1.2) (Simons, 1995b, p. 5).
72
In his 10-year longitudinal field study, Collier found that informal controls such as sociali-
zation, group norms, and culture tend to be even more important than formal controls
(Collier, 2005).
73
Bisbe et al. argue that interactive control systems is an ambiguous construct in the
research of management accounting and control systems and call for precise conceptual
specification by production of specified meaning and specification of the epistemic rela-
tionship (Bisbe et al., 2007; see Section 4.3.1). Ferreira & Otley, on the other hand,
demonstrate that interactive controls comprise of two distinct components, i.e. interactive
use of controls and strategic validity controls (Ferreira & Otley, 2009, p. 266; see also
Footnote 92).
2.3 Contingency-based studies in management control

Research on design and efficiency of MCS which has applied a contin-
gency perspective used a number of independent and dependent varia-
bles to study its relationships (Otley, 2016). Fisher (1995) argues that
“understanding interactions between multiple contingent and control fac-
tors may be essential in determining the effectiveness of control system
design” (Fisher, 1995, p. 24) and introduces a classification of contingent
control studies by the level of complexity of analysis as shown in the fig-
ure below (Fisher, 1995):
Contingent Factor
LEVEL 1
Outcome Variable
is not addressed
Control System Mechanism
Contingent Factor
LEVEL 2
Outcome Variable(s)
Control System Mechanism
Contingent Factor
LEVEL 3
Outcome Variable(s)
Control System Mechanisms i
(i = 1 to n)
Contingent Factor j
(j = 1 to m) LEVEL 4
Outcome Variable(s)
Control System Mechanisms i
(i = 1 to n)
Figure 14: Levels of contingent control analysis

(Source: adapted from Fisher, 1995, p. 35)
2.3. Contingency-based studies in management control 71
At the first level of analysis complexity “one contingent factor is correlated

with one control mechanism” (Fisher, 1995, p. 34). Therefore, while the
presence of a contingency factor is related to a specific control mecha-
nism, the effect on firm performance is not examined in this type of stud-
ies (e.g., Macintosh & Daft, 1987; Merchant, 1985a; Simons, 1990). This
aspect is integrated in the second level of analysis which “examines the
joint effect of a contingent factor and a control mechanism on an outcome
variable” (Fisher, 1995, p. 34) which is typically firm performance (e.g.,
Fisher, 1994; Govindarajan, 1984; Simons, 1987). In addition, at the third
level of analysis complexity “the joint linkage between multiple control
mechanisms, a contingent factor, and a firm outcome is examined” (Fish-
er, 1995, p. 34). In contrast to the two preceding levels, these studies
incorporate the idea of control mechanisms being a system rather than
independent, which implies complementary aspects to control system
design (Fisher, 1995). For example, Govindarajan (1988) examined the
relationship between three control system variables, i.e. budget evalua-
tion style, decentralization, and locus of control, and Porter’s (1980) ty-
pology of competitive advantage and found that an alignment resulted in
an increased performance. Finally, the fourth level of analysis “acknowl-
edges that control systems must be tailored to multiple contingent fac-
tors” (Fisher, 1995, p. 34) and therefore the effect of the fit of multiple
independent variables on several dependent variables is examined (e.g.,
Fisher & Govindarajan, 1993; Gresov, 1989). While research has been
sparse in this area, Otley (2016) asserts that there is a growing trend in
recent studies in paying attention to an increased number of variables
and their interrelationships.
In the following subchapters the literature on contingency-based studies
of control systems will be discussed in order to determine some of the
driving forces in the emergence of MCS. Firstly, the concept of ‘fit’ and its
different forms is introduced, as this constitutes an essential feature of
contingent control theory. Following, contingency variables which have
shown to affect the design and use of MCS are presented along with
empirical evidence regarding the relationships. In this respect, special
emphasis is put on the relationship between MCS and uncertainty, as
that is the major underlying issue of this study. Finally, selected state-of-
the-art contingency-based studies of MCS are discussed in order to pro-

vide a review of conceptual and methodological proceedings in empirical
analyses which proved to be influential for this dissertation.
2.3.1 The concept of fit in contingent control theory

In contingent control theory, it is argued that “the design and use of con-
trol systems is contingent upon the context of the organizational setting in
which these controls operate” (Fisher, 1998, p. 48). Therefore, for organi-
zational controls to be effective, they must ‘fit’ their context (e.g., Don-
aldson, 2001; Otley, 1980; see Section 2.1.4.4). Accordingly, the concept
of ‘fit’ is regarded as the “heart of contingency theory” (Donaldson, 2001,
p. 181) being the central theoretical concept aligning (1) MCS character-
istics, (2) organizational performance, and (3) contingency factors that
influence the link between the first two (Chenhall & Chapman, 2006, p.
35). Consequently, a basic premise of contingency research is that “a
better match between the control system to the contingency variable is
hypothesized to result in increased organizational (individual) perfor-
mance” (Fisher, 1998, p. 48).
There are various notions of contingency fit present in MCS research
(e.g., Gerdin & Greve, 2004) which have not always been addressed
explicitly in contingency-based studies (Gerdin & Greve, 2008; Hartmann
& Moers, 1999). Still, the nature of ‘fit’ has serious theoretical and meth-
odological implications (Drazin & Van de Ven, 1985, p. 515), resulting in
the necessity to differentiate between the various specifications (Burkert
et al., 2014; Gerdin & Greve, 2008; Hartmann & Moers, 1999, 2003) that
have been named differently across literature (e.g., Donaldson, 2001;
Drazin & Van de Ven, 1985; Gerdin & Greve, 2004). For one, theory de-
velopment is affected by a lack of definition, as the type of contingency fit
examined is decisive in modeling the relationship between variables, i.e.
independent or dependent variables (Chenhall, 2003; Chenhall & Chap-
man, 2006; Donaldson, 2001; Fisher, 1995, 1998). Furthermore, the type
of contingency fit determines the use of appropriate statistical techniques
for testing defined contingency hypotheses (Gerdin & Greve, 2008; Hart-
mann & Moers, 1999, 2003).
In their reviewing of the concept of ‘fit’ in contingency research on MCS,

Chenhall & Chapman (2006) differentiate between (1) selection, (2) inter-
action, and (3) systems forms of fit, a taxonomy which traces back to
contributions by Drazin & Van de Ven (1985).
Firstly, selection fit studies (e.g., Davila, 2000; Macintosh & Daft, 1987;
Merchant, 1981; Simons, 1987) aim at examining the relationship of con-
textual factors to characterizations of MCS without considering the effects
on organizational performance (Chenhall & Chapman, 2006). Therefore,
it is assumed that “firms operate in situations of equilibrium. As such,
researchers will observe only organisations that have taken optimal
choices to ensure that MCS suit the context of the organisation” (Chen-
hall & Chapman, 2006, p. 38). This equilibrium assumption has been
justified with evolutionary processes such as survival of the fittest as “fit is
the result of a natural selection process that ensures that only the best-
performing organizations survive to be observed at any point in time”
(Gerdin & Greve, 2004, p. 307). Another view stresses the role of mana-
gerial selection, taking into account that organizations are forced to adapt
to their environment while macro-levels usually impose practices and
prescriptions and thus determine characteristics on the micro-level (Dra-
74
zin & Van de Ven, 1985, p. 516-517). Similarly, Donaldson denotes
selection fit as managerial choice, arguing that this term “helps better
recognize that almost all organizations are shaped to some degree by the
decisions their managers make, without natural selection having neces-
sarily played a part” (Donaldson, 2001, p. 196). Finally, in terms of statis-
tical methods, correlation analysis and multivariate tests such as regres-
sion analysis are conducted to examine the extent to which MCS is relat-
ed to organizational context (Chenhall & Chapman, 2006, p. 38; Drazin &
Van de Ven, 1985, p. 515).
The second type of contingency fit, interaction fit, incorporates the aspect
of organizational performance and aims at exploring “whether different
combinations of MCS and context have different performance outcomes”
(Chenhall & Chapman, 2006, p. 39). The primary assumption in interac-
74
Drazin & Van de Ven exemplarily mention government legislative bodies that regulate
industries, industries that have constraining codes for businesses, and organizations that
have policies affecting divisions and departments (Drazin & Van de Ven, 1985, p. 517).
tion fit studies (e.g., Abernethy & Lillis, 1995; Brownell, 1982a; Go-
vindarajan & Gupta, 1985; Ittner et al., 2002) is that organizations move
towards optimal combinations but these adaptions in fact constitute a
dynamic process as context and structure change over time (Chenhall &
Chapman, 2006). For example, Chenhall & Chapman (2006) argue that if
a company changes its strategy, the MCS must be adjusted in order to
reflect the new situation, which takes some time to accomplish. There-
fore, through moving in and out of equilibrium, poor performance can be
expected if there is a current misfit between MCS and context (Chenhall
& Chapman, 2006). The following figure shows an exemplary interaction
fit between environmental heterogeneity and structural complexity and
the corresponding effect on performance:
Complex
ORGANIZATIONAL STRUCTURE
High performance
Simple
Low performance
Homogeneous Heterogeneous
ORGANIZATIONAL ENVIRONMENT
Figure 15: Interaction fit

(Source: Drazin & Van de Ven, 1985, p. 518)
As Drazin & Van de Ven point out, the “focus here is not so much on
understanding the congruence between context and structure as in the
selection approach, but rather on explaining variations in organizational
performance from the interaction of organizational structure and context”
(Drazin & Van de Ven, 1985, p. 517). Furthermore, they introduce differ-
ent types of interaction fit and stress its implication on operationalization
issues and application of statistical methods (Drazin & Van de Ven, 1985,
p. 518-519; see also Schoonhoven, 1981). Drazin & Van de Ven explain
mixed results in various interaction fit studies, among others, with meth-
odological issues due to a lack of appropriate operationalization of inter-
action fit for which different approaches exist, i.e. the deviation-score
approach and the multiplicative interaction approach (Drazin & Van de
Ven, 1985). When considering deviation-score approaches, the “impact
of deviations in structure from an ideal context-structure model, in which
fit is defined as adherence to a linear relationship between dimensions of
context and structure” (Drazin & Van de Ven, 1985, p. 519) is analyzed,
multiplicative interaction approaches usually “limit the form of the interac-
tion only to acceleration and deceleration effects, which researchers have
not specifically hypothesized in their concept of fit” (Drazin & Van de Ven,
1985, p. 519). Similarly, Donaldson divided this type of contingency fit
into matching and multiplicative interaction fit (Donaldson, 2001). While
the latter has been widely used in respective contingency studies, re-
search in MCS literature applying concepts of matching fit is rare (Chen-
hall & Chapman, 2006). In matching fit approaches, “optimal combina-
tions between aspects of a contextual variable and particular dimensions
of an MCS” (Chenhall & Chapman, 2006, p. 40) are assumed to exist.
More precisely, there is a unique state of fit regarding each level of con-
textual variable and level of MCS variable which leads to maximal per-
formance or, if there is a deviation in either direction, to an according
deficiency in output (Chenhall & Chapman, 2006). As the performance
outcome on any point of the fit line is the same, Donaldson used the term
‘isoperformance’ to describe this kind of relationship (Donaldson, 2001).
Furthermore, the idea of matching fit can model and test conceptualiza-
tions of curvilinear relationships between MCS design and context
(Chenhall & Chapman, 2006). For example, Chenhall & Chapman state
that it can be argued that, while conditions of environmental uncertainty
demand more organic forms of control systems for reasons of flexibility, it
is possible that high levels of uncertainty create a need for more mecha-
nistic controls to ensure survivability of the organization (Chenhall &
Chapman, 2006, 40-41; for organic and mechanistic controls see Section
2.2.1).
Multiplicative interaction fit, on the other hand, presumes that “higher
(lower) values of context require higher (lower) values of MCS to achieve
higher (lower) performance” (Chenhall & Chapman, 2006, p. 45). For
example, multiplicative interaction fit models tested whether more flexibil-
ity in budget use led to better performance in case of high environmental
uncertainty as compared to less flexibility in budget use (Chenhall &
Chapman, 2006). While in monotonic multiplicative interaction relation-
ships more (less) of an MCS variable leads to higher (lower) performance
given any level of context variable (though the improvement might be
relative), in non-monotonic relationships the effect of an interaction on
performance might be positive for higher levels of an independent varia-
ble but negative at lower levels (Chenhall & Chapman, 2006; Luft &
Shields, 2003). Although such approaches are theoretically less precise
in general, multiplicative interaction fit models are used in most studies of
MCS contingency studies (Chenhall & Chapman, 2006). In terms of sta-
tistical methods, Euclidean distance is used for matching fit models and
multiple regression analysis is used for multiplicative interaction fit mod-
els to test propositions in regard to MCS design and organizational con-
text (Chenhall & Chapman, 2006).
Finally, the systems fit approach (e.g., Chenhall & Langfield-Smith, 1998;
Gerdin, 2005; Govindarajan, 1988; Selto et al., 1995) as a third type of fit
presumes that “the understanding of context-structure performance rela-
tionships can only advance by addressing simultaneously the many con-
tingencies, structural alternatives, and performance criteria that must be
considered holistically to understand organization design” (Drazin & Van
de Ven, 1985, p. 519). The following figure conceptually shows the sys-
tems fit approach with several states of configurations leading to high
performance:
Contours of Decreasing Performance

ORGANIZATIONAL STRUCTURE – DIMENSION 2
High
IT A
B
IT = Ideal Type
A = Highest Performing Organization
Low
B = Moderately Performing Organization

C = Lowest Performing Organization
Low High
ORGANIZATIONAL STRUCTURE - DIMENSION 1
Figure 16: Systems fit

(Source: Drazin & Van de Ven, 1985, p. 522)
In contrast to selection and interaction fit approaches, organizations are

not seen as “decomposable into elements that can be examined inde-
pendently” (Drazin & Van de Ven, 1985, p. 519) which would indicate that
the organizational systems cannot be understood simply by studying
various elements independently (Drazin & Van de Ven, 1985). As the
effects of multiple contingencies on aspects of MCS are difficult to pre-
dict, this complexity leads to the view of change being a process of quan-
tum leaps rather than a gradual development of realignment (Chenhall &
Chapman, 2006). Accordingly, it is argued that the internal consistency of
the gestalt of the organization, i.e. the composition of structural variables,
is positively related to organizational performance (Child, 1975, 1977;
Khandwalla, 1973). In order to analyze patterns of consistency, the adop-
tion of multivariate analysis is required to study dimensions of structure,
context, and performance (Gerdin & Greve, 2004; 2008). Thus, it is ar-
gued that Euclidean distance and cluster analysis (Chenhall & Chapman,
2006) as well as profile deviation analysis (Gerdin & Greve, 2004), are
the main statistical methods to testing systems fit approaches.
Another classificatory framework for mapping different forms of contin-
gency fit in literature is provided by Gerdin & Greve (2004). The frame-
work, shown in the figure below, exhibits a hierarchical structure and
comprises four levels representing conflicting paradigms at the top level
and dichotomous differentiation of modeling or measuring at the lower
levels.
Forms of Fit
Cartesian Configuration
Congruence Contingency Congruence Contingency
Moderation Mediation Moderation Mediation
Strength Form Strength Form
Sub-group Moderatedd Path Sub-group Moderated Path Cluster Profile

correlation n analysis, correlation
regression regression analysis analysis deviation
analysis analysis bivariate analysis analysis analysis
correlation
analysis
MAS is the dependent Performance is the dependent

variable variable
Figure 17: Gerdin & Greve’s classificatory framework for different forms of contingency fit
(Source: Gerdin & Greve, 2004, p. 304)
At the top level of Gerdin & Greve’s (2004) classificatory framework, the
distinction between a Cartesian approach and a Configuration approach
is presented. The Cartesian approach is characterized by reductionism
and advocated by traditionalists of a structural contingency theory argu-
ing that “fit between context and structure is a continuum that allows fre-
quent, small movements by organizations from one state of fit to another”

(Gerdin & Greve, 2004, p. 304) while proponents of the Configuration
approach take a holistic view and presume that “there are only a few
states of fit between context and structure, with organizations having to
make ‘‘quantum jumps’’ from one state of fit to another” (Gerdin & Greve,
2004, p. 304; see also Meyer, Tsui & Hinings, 1993). Therefore, the for-
mer approach focuses on single contextual factors affecting single struc-
tural attributes and as these factors are continuous variables and thus
many points of fit exist, the structure of an organization is adapted con-
tinually in order to respond to incremental changes of context. The Con-
figuration approach, on the other hand, postulates that many contextual
and structural variables must be explored and analyzed simultaneously to
identify consistent context-structure combinations. Gerdin & Greve stress
that both schools of thought may yield different results when applied to
the same empirical data and thus represent competing rather than com-
plementary approaches to fit (Gerdin & Greve, 2004).
At the next level of the classificatory framework, a distinction between a
Congruence approach and a Contingency approach is conducted. Ac-
cording to Gerdin & Greve (2004), in a Congruence approach it is as-
sumed that only the best-performing organizations survive and thus the
nature of context-structure relationships can be explored without consid-
ering a potential impact to performance. In contrast, following a Contin-
gency approach, it is assumed that organizations feature different con-
text-structure combinations resulting in varying degrees of fit and that
higher degrees of fit are therefore associated with superior performance.
As with the differentiation between Cartesian approaches and Configura-
tion approaches and their competing schools of thought, the Congruence
and Contingency approaches “may be regarded as two irreconcilable
ideas about fit” (Gerdin & Greve, 2004, p. 307) representing different
75
forms of fit without reason for coinciding results (Gerdin & Greve, 2004).
75
Gerdin & Greve point out that “fit conceptualized as Congruence implies that there is
little room for alternative solutions. Accordingly, we should not expect to find a Contin-
gency form of fit since it requires that less effective designs also exist (if not, it would be
impossible to show that deviations from the ideal design are related to lower perfor-
mance)” (Gerdin & Greve, 2004, p. 309).
The third level of the classificatory framework further subdivides the Car-
tesian-type relationships and differentiates in types of fit following a Mod-
eration approach and following a Mediation approach (Gerdin & Greve,
2004; Luft & Shields, 2003; Shields & Shields, 1998). In moderation
models, it is assumed that “the impact of an independent variable on the
dependent variable is contingent on the level of a third variable, the so-
called moderator” (Gerdin & Greve, 2004, p. 309) and that the moderator
has ‘‘nonsignificant, bivariate relationships with both the independent and
dependent variables’’ (Shields & Shields, 1998, p. 51), theoretically not
being significantly related to either of them. A mediation model, on the
other hand, “specifies the existence of a significant intervening mecha-
nism between an independent variable and the dependent variable”
(Gerdin & Greve, 2004, p. 305; see also Venkatraman, 1989) and thus fit
exists if the impact of one variable (e.g., strategy) on another variable
(e.g., performance) operates through a third one (e.g., MCS) (Gerdin &
Greve, 2004).
Finally, theoretical meanings of fit can be represented in terms of the
strength and form of the relationships between variables. The strength of
a relationship between variables using a moderation model is reflected if,
for example, the predictive ability of a variable such as MCS design on
performance differs across different strategies. In such a case, the corre-
lation between MCS design and organizational performance may be
higher among organizations following a specific type of strategy com-
pared to others. On the other hand, the form of a relationship between
variables is reflected, for example, if the impact of MCS design on per-
formance differs across different strategies (Gerdin & Greve, 2004). That
is, the reliance on specific MCS design has a significantly more positive
effect, i.e. a significantly higher slope when modeling the relationship, on
performance among organizations following a specific type of strategy
compared to others. Gerdin & Greve conclude that “the strength and form
types of moderation fit may yield consistent results […], but there is no
reason to expect that they should” (Gerdin & Greve, 2004, p. 312).
To summarize, it is apparent that variations in the use of vocabulary to
describe different types of fit have led to a lack of clarity and ongoing
debates on this topic (e.g., Gerdin & Greve, 2004). As Chenhall & Chap-
man point out, the use of same words especially in relation to different
forms of fit have caused confusion in this area (Chenhall & Chapman,
2006, p. 37). However, as Drazin & Van de Ven point out, the “definition
of fit that is adopted is central to the development of the theory, to the
collection of data, and to the statistical analysis of the proposition” (Drazin
& Van de Ven, 1985, p. 515).
2.3.2 Drivers of the emergence of MCS

Although Otley (1980) states that the “contingent variables are consid-
ered to be outside of the control of the organization” (Otley, 1980, p. 422),
he recognizes that there are external and internal variables into which
76
independent variables can be grouped (Otley, 2016). In his more recent
review, Otley (2016) points out that the “most commonly examined exter-
nal variables include technology, market competition or hostility, envi-
ronmental uncertainty and national culture” (Otley, 2016, p. 48) while, on
the other hand, the “major internal variables are organizational size,
structure, strategy, compensation systems, information systems, psycho-
logical variables (e.g., tolerance for ambiguity), employees’ participation
in the control systems, market position, product life-cycle stage, and sys-
tems change” (Otley, 2016, p. 48). Fisher (1995, 1998) identifies major
categories of contingent control variables which are addressed in prior
MC studies, i.e. uncertainty, competitive strategy and mission, technolo-
gy, firm and industry variables, and knowledge and observability factors.
Similarly, in his extensive review of contingency-based research in the
field of MCS, Chenhall (2003, 2007) identifies the most essential contex-
tual variables studied to explain the design and effectiveness of MCS to
be the external environment, concepts of generic and contemporary
technology, organizational structure, size, strategy, and national culture.
An overview of different contingency variables that were shown to affect
design and use of MCS will now be presented below. However, it is im-
76
Nevertheless, Otley points out that there is still a debate on “whether an internal variable
which can be affected by the firm itself should be treated as a contingent variable or as a
dependent variable, most notably concerning organizational structure and strategy” (Ot-
ley, 2016, p. 48).
portant to note that most empirical tests conducted in these studies are
tests of association and not causality. While sometimes referred to as
‘drivers’ affecting the emergence of MCS, Davila accurately points out in
regard to his own contributions that the “use of this term is related to the
evolutionary perspective and the causal association that these models
adopt” (Davila, 2005, p. 226) and thus results should be interpreted with
caution. While there is a multitude of contextual variables mentioned in
literature which are supposed to influence MCS, this section focuses on
the relationships between MCS and uncertainty, strategy, organizational
size, company age, and ownership structure as essential factors applied
in this empirical study.
2.3.2.1 MCS and uncertainty

Although research on MC has rather neglected implications from uncer-
tain environments (Otley & Soin, 2014; see Section 2.1.3), the im-
portance and fundamental role of uncertainty as a variable in contingen-
77
cy-based MCS research is widely acknowledged in literature (e.g.,
Brownell & Dunk, 1991; Chapman, 1997; Chenhall, 2003; Hartmann,
2000; Merchant & Otley, 2007; Otley, 2016). What is more, uncertainty is
regarded as the most comprehensive researched environmental varia-
78
ble (Chenhall, 2003) and “has gained by far the widest attention in the
area of management accounting” (Otley, 2016, p. 50) in the original stud-
ies of the contingency theory of organizational structure (e.g., Burns &
Stalker, 1961; Galbraith, 1973).
According to Otley (2016), the reasons for the emphasis of environmental
uncertainty in contingency-based management accounting literature are
77
For example, in their analysis of recent papers in the accounting literature, Abernethy &
Mundy (2014) find consistent evidence that uncertainty significantly determines design
and use of performance measurement and compensation systems, which are part of the
MCS of an organization aiming to align individual and organizational goals (Abernethy &
Mundy, 2014).
78
Chenhall points out that “external environment is a powerful contextual variable that is at
the foundation of contingency-based research” (Chenhall, 2003, p. 137). While uncer-
tainty received most attention in research, there are also other aspects of external envi-
ronment (Chenhall, 2003). A taxonomy for environmental variables has been developed
by Khandwalla (1977) who differentiates between turbulence, hostility, diversity, and
complexity.
threefold. Firstly, early studies in contingency-based research produced

some of the most significant results (e.g., Burns & Stalker, 1961). It was
recognized at an early stage that organizations facing high levels of un-
certainty are in need of “flexible and adaptable systems to manage activi-
ties when unexpected events occur” (Otley, 2016, p. 50). Secondly, the
increase of uncertainty in the past years and decades due to changing
79
environment and intensified competition has led to increased attention
in literature. Finally, the variable perceived environmental uncertainty was
widely and commonly used in research as the measurement could be
easily incorporated into questionnaires and interviews (Otley, 2016). Alt-
hough being a subjective measure, Otley (2016) argues that the percep-
tion of uncertainty was the most relevant aspect of this term, as it directly
affects the behavior of individuals.
In general, uncertainty has been related to a wide spectrum of variables
in MCS research (Chenhall, 2007), including participative budgeting (Go-
vindarajan, 1986), usefulness of information (Chenhall & Morris, 1986;
Chong & Chong, 1997; Gordon & Narayanan, 1984; Gul & Chia, 1994),
performance evaluation styles (Ross, 1995), more sophisticated man-
agement accounting practices (Abdel-Kader & Luther, 2008), and reli-
ance on incentive-based pay (Bloom, 1998). Furthermore, there are a
number of studies which stress the importance of interactive controls in
conditions of increased environmental uncertainty. While Ezzamel argues
that high environmental uncertainty was not only associated with empha-
sis on budgets but also participative interactions between subordinates
and superiors (Ezzamel, 1990), Chapman found these interpersonal ac-
tivities essential to coping with those changing, unpredictable conditions
prevalent in uncertain environments (Chapman, 1998). Finally, it has
been found that the effect of environmental uncertainty on certain aspects
of MCS should be considered in conjunction with characteristics of indi-
viduals (e.g., Fisher, 1996).
To summarize, it can be argued that “a consistent stream of research
over the past 20 yr has confirmed that uncertainty has been associated
79
For a discussion of the issue of increasing uncertainty during recent years see Section
2.1.3.
with a need for more open, externally focused, non-financial styles of

MCS” (Chenhall, 2007, p. 173) and thus that “uncertainty is associated
80
with a more flexible style of control” (Otley, 2016, p. 50). Therefore, in
regards to uncertainty and the external environment Chenhall derived the
following propositions from previous findings:
“The more uncertain the external environment, the more open and exter-
nally focused the MCS.
The more hostile and turbulent the external environment, the greater the
reliance on formal controls and emphasis on traditional budgets.
Where MCS focused on tight financial controls are used, in uncertain
external environments, they will be used together with an emphasis on
flexible, interpersonal interactions.” (Chenhall, 2007, p. 173)
Furthermore, there are various notions of uncertainty in literature (e.g.,

Chenhall, 2003). Simons (2000) identified strategic uncertainties and
strategic risks as important environmental variables for the design and
81
use of MCS. Strategic uncertainties are defined as “the emerging
threats and opportunities that could invalidate the assumptions upon
which the current business strategy is based” (Simons, 2000, p. 215) and
comprise changes in competitive dynamics or internal competences (Si-
mons, 2000). Strategic risks, on the other hand, refer to “an unexpected
event or set of conditions that significantly reduces the ability of manag-
ers to implement their intended business strategy” (Simons, 2000, p. 255)
and stem from both operations and external factors (Simons, 2000). Wid-
ener (2007) found evidence that strategic uncertainties and strategic risks
both drive the role of control systems, i.e. they have been shown to be
80
Interestingly, another aspect of the environment, environmental hostility, has been asso-
ciated with strong reliance on formal controls (Chenhall, 2007; Otley, 2016), e.g., strict
emphasis on meeting budgets (Otley, 1978). As uncertainty and hostility often occur
simultaneously but produce different impacts for MCS design and use, the question of
how this tension should be managed is still open (Chenhall, 2007; Otley, 2016).
81
Note that there is a fundamental difference between uncertainty and risk (Knight, 1929;
see Section 2.1.3). Nevertheless, there are various interferences in literature, e.g.,
Kaplan & Mikes’ (2012) categorization of different types of risks which comprise uncon-
trollable, i.e. uncertain, events as one facet of the conceptualization.
positively associated with the emphasis organizations place on beliefs

82
systems and diagnostic control systems (Widener, 2007). In addition,
Bisbe & Otley (2004), Simons (1991), and Abernethy & Brownell (1999)
examine the relationship between uncertainty and interactive control sys-
tems and show that positive associations result in increased perfor-
mance.
Finally, it is evident that the measurement of environmental constructs is
of particular significance when interpreting studies. For example, Gordon
& Narayanan (1984) measured uncertainty by assessing the intensity of
competition, elements of change, and the unpredictability and dynamics
of the external environment. Chenhall & Morris (1986), on the other hand,
incorporate implications for internal decisions into their measure of uncer-
tainty, considering the level of information on environmental factors, the
ability to assign probabilities and the knowledge of outcome of decisions.
Furthermore, in their review of MCS research aiming at examining the
role of environmental uncertainty, Tymon et al. (1998) argue that the per-
ceptions of top managers are essential for sound measures. Consequent-
ly, applying a valid and reliable measure for uncertainty is crucial for
comparing results and for building a coherent body of knowledge on the
effects of uncertainty on MCS design and use (Chenhall, 2007). Howev-
er, Merchant & Otley stress that “there has been relatively little progress
either in specifying what the appropriate responses to uncertainty should
be or in outlining the appropriate design for MCS operating in different
conditions” (Merchant & Otley, 2007).
2.3.2.2 MCS and strategy

One of the major themes in contingency-based MCS literature is the
strategy of an organization, which has been shown to significantly affect
control system design (e.g., Archer & Otley, 1991; Chenhall & Langfield-
Smith, 1998; Roberts, 1990; for reviews see Chenhall, 2007; Kober et al.,
82
Widener (2007) differentiates between operational uncertainties, competitive uncertain-
ties, and technological uncertainties on the one hand and operations risk and competi-
tive risk on the other hand. In her study, she found that one facet of strategic uncertainty,
i.e. competitive uncertainty, is also associated with interactive control systems (Widener,
2007).
2007; Langfield-Smith, 1997, 2007). While strategy as a contingency

variable is not an element of context but rather the means for managers
to influence the internal and external environment of an organization
(Chenhall, 2007), since early contributions in the 1980s it has been pro-
posed that the matching of MCS and strategy leads to increased organi-
zational performance (e.g., Govindarajan, 1988; Govindarajan & Gupta,
1985) and thus that MCS needs to be tailored to strategy in order to gain
a competitive advantage (Dent, 1990; Simons, 1987, 1990). Neverthe-
less, Otley argues that “contingency work on the impact of strategy on
MCS is […] fragmented and it is difficult to find cumulative contributions”
(Otley, 2016, p. 51). The reason for these ambiguous findings is mainly “a
reliance on simple generic strategy characterizations that may fail to cap-
ture the complexity of real organizational strategies” (Otley, 2016, p. 51).
Additionally, findings are widely dependent on usage of respective cate-
gorizations of strategy (Otley, 2016), with the main frameworks devel-
oped by Porter (1980, 1985), Miles & Snow (1978), Gupta & Govindara-
jan (1984), and Miller & Friesen (1982). Porter (1980, 1985) argued that
competitive advantage can be gained by cost leadership or differentia-
83
tion, Miles & Snow (1978) described the four organizational types: de-
fenders, prospectors, analyzers, and reactors; Gupta & Govindarajan
(1984) developed an approach based on the life cycle of an organization
represented as the sequences: build, hold, harvest, and divest; and Miller
& Friesen (1982) drafted an entrepreneurial-conservative typology. As
argued by Langfield-Smith (2007), from a wider perspective, the roles of
control systems in organizations differ from either being attributed to de-
fender-like strategies and prospector-like strategies. Porter, for example,
related a focus on cost leadership to highly structured organizations
(1980), while Miles & Snow (1978) argued that very detailed and rather
tight control systems prevail for defenders. On the other hand, focus on
differentiation strategies has been connected less with formal control
systems and rather more with those control systems which foster creativi-
ty and innovation (Porter, 1980), a strategy which was also suggested for
83
In addition, Porter (1980) also introduced a third generic strategy, i.e. strategy of focus,
which describes organizations focusing on specific segments of a market which is poorly
served but which has special needs.
prospectors where flexible structures and processes were necessary in

order to rapidly respond to environmental change (Miles & Snow, 1978).
Furthermore, several relationships between aspects of control systems
and aspects of strategy were found across empirical studies. For exam-
ple, Khandwalla (1972) examined the association between competition
and control systems and found that more intense competition leads to a
greater emphasis on formal control systems. Chenhall & Morris (1993)
found tight controls to be connected to conservative strategies. In addi-
tion, Govindarajan (1988) found low-cost strategies to be associated with
an emphasis on budgetary goals, and vice versa for differentiation strate-
gies. Similarly, Van der Stede (2001) and Chenhall et al. (2011) related
product differentiation strategies to less rigid budgetary control and or-
ganic innovative culture of MCS, respectively. Furthermore, Abernethy &
Brownell (1999) found more prospector-type strategies to be associated
with an interactive use of budgetary controls and an emphasis on more
organic styles of control.
In sum, after reviewing the findings in literature Chenhall (2007) derived,
among others, the following proposition in regards to strategy and MCS:
“Strategies characterized by conservatism, defender orientations and
cost leadership are more associated with formal, traditional MCS focused
on cost control, specific operating goals and budgets and rigid budget
controls, than entrepreneurial, build and product differentiation strategies”
(Chenhall, 2007, p. 185).
Finally, Chenhall (2007) addresses the critical issue of the measurement

of strategy, which hinders comparisons across different studies and often
results in “mixing up elements of the environment with organizational
attributes” (Chenhall, 2007, p. 186). Thus, it is strongly recommended to
use validated strategy measures from literature (Chenhall, 2007).
2.3.2.3 MCS and size

Organizational size has been identified from an early stage as being a
major contingency in organizational contingency studies (e.g., Child,
1973, 1975) and it is not surprising that early studies “found a high de-
gree of association between the size of organizations and the extent to
which they exhibit particular structural characteristics” (Child, 1975, p.
19). Chenhall argues that size decreases task uncertainty as large organ-
izations have more power in controlling their operating environment
(Chenhall, 2007), but on the other hand, increased information quantity
demands decentralization of extended hierarchical structures and thus an
intensified and tightened institution of formal controls such as rules and
documentation (Child & Mansfield, 1972). Moreover, organizational size
has been found to be related to greater use of sophisticated controls
(Khandwalla, 1972) and to more intensive use of formal administrative
controls (Bruns & Waterhouse, 1975; Merchant, 1981).
In addition, Simons (2000) argues that as firms grow and mature, the
levers of control (Simons, 1995b) should change and evolve over time
(see also Greiner, 1972, 1998). While formal control systems are not
necessary at the beginning of the organizational life cycle for entrepre-
neurial firms (Davila, 2005), this changes for firms in a stage of rapid
growth (Simons, 2000). In large and complex firms, managers should
focus on strategic uncertainties and implementation of strategy and thus
“make one or more control systems interactive […] [to] signal where de-
bate and learning should occur” (Simons, 2000, p. 311). More generally,
Davila concludes that empirical findings suggest that there is a positive
association between size and MCS adoption (Davila, 2005) and argues
that the “relevance of size is linked to the increasing costs of governance
associated with an informal approach to management” (Davila, 2005, p.

84
226).
Interestingly, Chenhall points out that “[f]ew MCS studies have explicitly
considered size as a contextual variable” (Chenhall, 2007, p. 183) and
that “opportunities for contingency-based MCS research are likely to be
found in the area of small- and medium- sized business” (Chenhall, 2007,
p. 183). Most commonly, organizational size has been measured as
number of employees (Chenhall, 2007) which has been found to be cor-
related with net assets (Pugh et al., 1968, 1969) and proved to be easier
comparable between organizations than, for example, financial
measures.
2.3.2.4 MCS and age

Similarly, the age of a company has also been argued to drive the emer-
gence of MCS since early contingency-based studies and indicates which
type of control is predominantly used (e.g., Davila, 2005; Greiner, 1972,
1998). Therefore, a more intensive use of MCS has not only been found
among larger but also among older firms (Bruns & Waterhouse, 1975;
Davila, 2005; Davila & Foster, 2007; Merchant, 1981). In literature, age
has been “associated with the likelihood of survival, where older firms are
more likely to survive than their younger counterparts” (Davila, 2005, p.
227; see also Freeman et al., 1983; Singh et al., 1986). According to
Davila (2005), age is related to learning which requires “experience, ex-
perimentation, and interaction with other firms that can only be acquired
over time” (Davila, 2005, p. 227) and accrues from experience. Conse-
quently, learning is formalized by codifying routines which facilitates the
process of management.
In addition, considerations such as Simons’ (2000) arguments described
in the section above also apply to the company age to a certain degree.
Thus, it is evident that the variables of organizational size and company
age interact with each other as, for example, smaller companies may find
84 N(N−1)
Davila argues that the number of potential interactions in a company is with N
2
being the number of employees and thus efficiency of informal management rapidly de-
creases and coordination and control costs increases with size, resulting in formalized
control mechanisms in order to regain management efficiency (Davila, 2005, p. 226).
informal control systems to be more effective than formal MCS and thus
the age of the company may not be relevant (Davila, 2005).
2.3.2.5 MCS and ownership

In addition to organizational size and company age being an important
contingency factor affecting the control structure of a firm, the ownership
structure as a form of governance mechanism is regarded as influential
as well (Baker et al., 2002; Cromie et al., 1995; Daily & Dollinger, 1992;
Davila, 2005; Davila & Foster, 2007; Fama & Jensen, 1983; King &
Clarkson, 2015; Mintzberg & Waters, 1982; Speckbacher & Wentges,
2011). According to Greiner (1998), organizations become more formally
structured when the founding manager is replaced and a professional
CEO installed. Similarly, Davila argues that “the replacement of the
founder has been identified as a critical event in moving from an informal
organization to an organization that formalizes its processes” (Davila,
2005, p. 228).
Therefore, professionally-managed firms have been found to rely on in-
ternal control procedures (Daily & Dollinger, 1992), formal performance
measures (Daily & Dollinger, 1992; Speckbacher & Wentges, 2011), and
formal reporting procedures (Cromie et al., 1995) to a greater extent than
owner-managed firms. In general, it is argued that the entrepreneurial
mode, i.e. a CEO who is also owner and founder of a company, is related
to the implementation of visions and strategies of comparably informal
structures (Mintzberg & Waters, 1982).
2.3.3 Contingency-based performance analysis of MCS – state-of-the-art

According to Chenhall (2007), as studying performance would be inap-
propriate for firms whose context and MCS reflect optimal solutions, i.e.
the assumption of survival-of-the-fittest conditions, the proposition of dis-
equilibrium conditions is a premise for such analyses and it is suggested
“for contingency-based studies to first establish adoption and use of
MCS, then to examine how they are used to enhance decision quality
and finally investigate links with organizational performance” (Chenhall,
2007, p. 171). As a matter of fact, a multitude of studies have explicitly
examined how combinations of MCS and context are related to increased

organizational performance, with Abernethy & Brownell’s (1999) study
being one of the first which empirically applied parts of Simons’ (1995b)
levers of control framework and examined the role of budgets in organi-
zations facing strategic change. In general, the most common dependent
variables used in contingency-based MCS research are “performance,
performance measures, budgeting behaviour, management control sys-
tem design and its use, effectiveness, job satisfaction, change in practic-
es, and product innovation” (Otley, 2016, p. 48). In general, the outcomes
of MCS can be categorized into three issues, i.e. use or usefulness of
MCS, behavioral outcomes, and organizational outcomes (Chenhall,
2003).
Chenhall (2003) argues that the implicit assumption of measures of use-
fulness of MCS is that useful control systems provide improved infor-
mation to individuals. Consequently, the quality of decisions is positively
affected, resulting in enhanced organizational performance (Chenhall,
2003). Nevertheless, Chenhall (2003) also admits that “there is no com-
pelling evidence to suggest that such links exist” (Chenhall, 2003, p. 132)
and that the connection between the usefulness of MCS and organiza-
tional performance “may well depend on the appropriateness of the use-
ful MCS to the context of the organization” (Chenhall, 2003, p. 132). Still,
there are a number of research studies which address, among others, the
beneficial nature of MCS (e.g., Chenhall & Langfield-Smith, 1998), satis-
faction with control systems (e.g., Bruns & Waterhouse, 1975), and use-
fulness of information provided (Mia & Chenhall, 1994; Shields, 1995).
On the other hand, behavioral outcomes such as job satisfaction or job-
related tension or stress are regarded to affect efficiency of work as it is
presumed that these aspects influence job satisfaction and thus identifi-
cation with organizational objectives (Chenhall, 2003). For example,
Shields et al. (2000) found that there is a relation between stress and the
nature of MCS and that there are implications for performance. Still, be-
havioral outcomes have not received much attention in contingency-
based MCS research (Chenhall, 2003).
Finally, organizational outcomes are widely used in contingency-based
research with financial performance being the most commonly-used out-
come variable in literature (Otley, 2016). Conversely, non-financial and

85
qualitative performance measurements are widely neglected, despite
86
their importance in practice (Otley, 1999). However, an issue in deter-
mining contingency fit by the criterion variable of financial performance is
that it “is affected by a huge range of factors other than MCS design or
use. Thus a great deal of random noise can be expected” (Otley, 2016, p.
52). Therefore, the predominant methods for measure-ment purposes are
self-assessment processes where “individuals provide an indication of
their performance, or their organizational unit, across a range of potential-
ly important managerial processes […] or goals of the organization”
(Chenhall, 2003, p. 134; see also Govindarajan, 1984). While self-
assessment processes raise validity concerns in literature (Chenhall,
2003), there is evidence that there is a correlation between self-
assessment and objective assessment (e.g., Bommer et al., 1995; Ven-
katraman & Ramajunam, 1987).
While Otley (2016) and Chenhall (2003, 2007) provide extensive reviews
on contingent approaches to management accounting and control and its
findings, a selection of studies are presented below in more detail to pro-
vide an example overview of the respective state-of-the-art literature.
These empirical investigations present a selection of well-recognized
performance analyses of MCS and have proven influential for this study
in regard to the application of (1) a systems approach including a number
of variables within a contingency analysis (Chenhall & Langfield-Smith,
1998), (2) styles of use of control systems according to Simons’ LOC
framework (Henri, 2006a), (3) contingencies of uncertainty and risk within
Simons’ LOC framework (Widener, 2007), and (4) a methodological ap-
87
proach of deriving matching and non-matching MCS (Sandino, 2007).
85
Otley (2016) states that many “of the performance measurements which are highly
valued and of significant impact are non-financial measurements such as production
process measures, defect rates, cycle time and customer service measures; or qualita-
tive measurement, such as customers’ perception, attitude of employees towards jobs,
and product innovation” (Otley, 2016, p. 48).
86
In their study Coase et al. (1992) show that there are a variety of measures used in
practice and that these differences seem to be connected with country-specific prefer-
ences in regard to financial stability (Coase et al., 1992; Otley, 2016).
87
As can be seen from the subsequent brief summaries of the studies, most of them place
an emphasis on the relatedness between MCS and strategy. However, this focus of the
First of all, Chenhall & Langfield-Smith (1998) conducted a study about

how the relationship between strategic priorities and combinations of
management techniques as well as management accounting practices
affects performance. While the firms’ emphasis on product differentiation
and low price strategies according to Porter’s (1980, 1985) conceptual-
ization of generic types of strategy was used to determine strategic priori-
ty, a number of management techniques, for example improving of exist-
ing processes, and a variety of management accounting practices, for
example usage of budgeting systems for planning and control, were as-
sessed for each company. In general, it was hypothesized that higher
performing firms that place strong emphasis on either differentiation
strategies or low cost strategies benefit from specific management tech-
niques and management accounting practices. As part of the research
method, constructs for the variables were defined, and a survey carried
out among Australian manufacturing firms, resulting in 78 responses. As
opposed to selection or interaction approaches of contingency fit (Van de
Ven & Drazin, 1985; see Section 2.3.1), Chenhall & Langfield-Smith’s
empirical investigation aims to “consider the coherence or fit of the whole
system” (Chenhall & Langfield-Smith, 1998, p. 251) and thus takes a
systems approach as they expected that “various combinations of strate-
gies, management techniques and management accounting practices
would combine in mutually supportive ways to enhance organizational
performance” (Chenhall & Langfield-Smith, 1998, p. 251). To examine the
relationships, cluster analysis was used, allowing for all variables to be
included in the analysis and for clusters to be formed based on the em-
phasis on each aspect. Finally, cluster specific fits between strategic pri-
orities, management techniques and management accounting practices
were received and the impact on organizational performance through
comparison of cluster specific average organizational performance
demonstrated. While the results of Chenhall & Langfield-Smith’s (1998)
empirical investigation showed that some relationships between strategic
priorities and combinations of management techniques as well as man-
selected studies is rather coincidental and reflects the prominent role of strategy in con-
tingency-based MCS research.
agement accounting practices are associated with increased organiza-

tional performance as predicted, the results have been mixed. Neverthe-
less, the application of a systems approach by employing cluster analysis
and thus “the potential to include a variety of variables within a contin-
gency analysis” (Chenhall & Langfield-Smith, 1998, p. 258) was demon-
strated and these insights of relating clusters to organizational perfor-
mance also used for this study.
Several years later, Henri (2006a) conducted another study, examining
the relationship between the use of MCS and organizational capabilities
from a resource-based perspective. His empirical work focused on four
capabilities leading to strategic choices, i.e. market orientation, entrepre-
neurship, innovativeness, and organizational learning, as well as on the
diagnostic and interactive use of performance measurement systems
(PMS) building on Simons’ (1995b) work on his levers of control. In addi-
tion, Henri proposed that diagnostic (interactive) use of PMS negatively
(positively) influences capabilities and that a dynamic tension as sug-
gested by Simons (1995b), i.e. joint use of PMS, resulting from a bal-
anced use of PMS has a positive effect as well. Finally, he addressed the
question of the extent to which the use of MCS contributes to organiza-
tional performance. To answer his research questions, Henri chose a
survey approach, collecting data from Canadian manufacturing firms
resulting in 383 data sets. Finally, the specific relationships were exam-
ined using structural equation models which followed the proposed theo-
retical model reflecting the associations between PMS use, capabilities,
and organizational performance. As a result, Henri found evidence for the
proposed relationships between diagnostic and interactive control and
capabilities and found, globally, that dynamic tension has a positive effect
on performance, particularly for firms facing high environmental uncer-
tainty and an organizational culture of flexibility. In general, Henri aimed
to “contribute to the emerging line of research which provides empirical
tests for the model proposed by Simons” (Henri, 2006a, p. 548) and to
expand Simons’ (1995b) model in providing explanations as to why com-
panies combine diagnostic and interactive control and move from the
strategic choice level to the capabilities level. In providing important in-
sights into operationalizing parts of Simons’ (1995b) framework, measur-
ing respective constructs, and introducing application procedures for an

extended approach, Henri’s (2006a) empirical study proved especially
useful for the present study.
Shortly after, Widener (2007) presented her empirical analysis of the
levers of control framework aimed at exploring the relationships between
(1) strategic elements, i.e. strategic uncertainty and strategic risk, (2)
Simons’ (1995b) levers of control, i.e. beliefs systems, boundary systems,
diagnostic control systems, and interactive control systems, (3) costs and
benefits of control systems, and, ultimately, (4) firm performance. In addi-
tion, the environmental variables of strategic uncertainty and strategic risk
have been further divided into specific types, i.e. operating uncertainty,
competitive uncertainty, and technological uncertainty as well as operat-
ing risk, asset impairment risk, and competitive risk. Furthermore, the
relations among control systems have been examined to show interde-
pendency of the levers of control as suggested by Simons (1995b) who
argues that, for an effective control environment, all levers of control have
to work together. A survey instrument was used as the research method
and data from 122 CFOs collected. As it is argued that “the success of
the control framework is contingent on the proper use of all four control
systems” (Widener, 2007, p. 775; see also Simons, 2000), Widener pro-
vides a macro-view of the control framework via a structural equation
model and estimated the system of equations as suggested by the theo-
retical model shown in the following figure:
Strategic Elements Control Systems Costs and Benefits Performance
Beliefs
System
Strategic
Uncertainties Boundary Attention
System
Performance
Diagnostic
Strategic Controls
Risks Learning
Interactive
Controls
Figure 18: Theoretical model of Widener’s (2007) study

(Source: Widener, 2007, p. 758)
Thus, evidence is provided that strategic uncertainties and strategic risks

have an influence on control systems and that organizational learning
and attention are positively associated with firm performance. Further-
more, while emphasis on beliefs systems and diagnostic control systems
enhance organizational learning and facilitate efficient use of manage-
ment attention, interactive control systems consume management atten-
tion. Finally, it was found that the levers of control are multiple inter-
dependent and that relations among control systems are widely comple-
mentary. Thus, as Widener’s (2007) empirical study operationalized Si-
mons’ levers of control framework and demonstrated that the importance
and role of control systems was driven by types of strategic uncertainties
and risks, it too can be seen as essential groundwork for the present
study.
Roughly at the same time, Sandino (2007) studied which MCS was intro-
duced first by firms when investing in controls, and hypothesized that the
choice of initial MCS reflects the firms’ strategy, and that a match be-
tween MCS and strategy would result in superior performance. For char-
acterization of the firm’s strategy, the generic strategies of cost leader-
ship and/or differentiation based on Porter’s (1980, 1985) conceptualiza-
tion were used.
Categories of (non-basic) Initial MCS
Individual control systems

Category/purpose associated to this category
¾ Cost controls
1. Cost MCS
¾ Quality controls
Strategy
Low cost / ¾ Marketing Databases
2. Revenue MCS
differentiation Multinomial ¾ Sales Productivity
Logit
¾ Loss Prevention Controls

¾ Internal Audits, Transaction
Tracking, Checks & Balances
3. Risk MCS
¾ Codes of Conduct
¾ Credit Controls
¾ Policies and Procedures
OLS, and Ordinal FIT = 1 if the category of Initial MCS

chosen is the one predicted by the multi-
Logits regressing FIT nomial logit AND at least 50% of the
Performance on FIT
individual control systems associated with
that category are introduced initially
Performance:
¾ Initial MCS usefulness
¾ Business Performance
Figure 19: Theoretical model of Sandino’s (2007) study

(Source: Sandino, 2007, p. 267)
The theoretical model of Sandino’s (2007) study is presented in the figure

above. An extensive field study was conducted and data collected
through 40 interviews and a survey instrument with 97 respondents. In
addition to Basic MCS, Sandino found evidence for three types of MCS,
i.e. Cost MCS, Revenue MCS, and Risk MCS, which are contingent on
specific purposes such as focusing on enhancing operating efficiencies,
on firm growth and customer responsiveness, and on reducing risks and
protecting integrity, respectively. In order to yield a model of fit, a multi-
nomial logit analysis is conducted which predicts the category of initial
MCS chosen. By using deviations from the model’s predictions, Sandino
found that firms with a better fit between initial MCS and strategy per-
formed better than others in terms of perceived performance, usefulness
of MCS, and actual performance. To summarize, it can be stated that
Sandino’s empirical investigation not only provided evidence on contin-
gency-based MCS design and implications for performance but that it
also presented an interesting approach with regard to the methodology of
modelling and conducting analyses of fit, essentially influencing the ap-
proach of the present study.
2.3.4 Interim conclusion on contingency-based studies in MC

The discussion and review of contingency-based MCS studies revealed a
rich body of literature in this field (e.g., Chenhall, 2003; Chapman, 1997)
which “has been one of the success stories of research in management
accounting and control over the past forty years” (Otley, 2016, p. 55).
While well-recognized classes of contingent variables have been identi-
fied to explain the specific design and use of control systems (see Sec-
tion 2.3.2), research “has also been tantalisingly inconclusive and has
produced little cumulative knowledge” (Otley, 2016, p. 55). This has re-
sulted in a fragmentary and contradictory theory (e.g., Langfield-Smith,
1997) attributed to incongruent definitions of variables (e.g., Bisbe et al.,
2007; Otley, 2016), insufficient data collection processes (Otley, 2016),
serious model underspecifications by focusing on specific aspects of
MCS (Chenhall, 2003), and methodological limitations by not acknowl-
edging the nature of fit addressed (Gerdin & Greve, 2004).
Still, there is an increasing interest in contingency-based research in the

88
field of management accounting and control (Otley, 2016). While prom-
89
ising areas for future work on MC have been identified by Otley (2003),
it seems that two topics have recently received increased attention. First-
ly, the package view of MCS (Otley, 1980) was readdressed and dis-
cussed by Malmi & Brown (2008), who argue that taking a broader pack-
age approach of MCS “may facilitate the development of better theory of
how to design a range of controls to support organisational objectives,
control activities, and drive organisational performance” (Malmi & Brown,
2008, p. 288; see also Bedford et al., 2016; Grabner & Moers, 2013;
Sandelin, 2008; see Section 2.2.1). Bedford el al. (2016) also criticize that
research on MC and strategy “predominately examines MC practices in
isolation” (Bedford et al., 2016, p. 12) and examine MC practices com-
bined as a package and its implications for outcomes under certain stra-
tegic contexts. Furthermore, the notion of uncertainty has experienced
increased attention in MC research (Bredmar, 2015; Otley, 2012, 2014,
2016; Otley & Soin, 2014). In addition, in recent literature it is argued that
the concepts of risk and risk management have moved to being an issue
of management control (e.g., Otley & Soin, 2014; Soin & Collier, 2013;
see Section 2.1.3). Nevertheless, Soin & Collier state that there is “rela-
tively little understanding about the (complex) interrelation between risk,
risk management and management accounting and control practices”
(Soin & Collier, 2013, p. 84).
88
In his extensive review of the literature on the contingency theory of management ac-
counting from 1980 to 2014, Otley (2016) found that the amount of publications on this
topic over the period is steadily increasing.
89
The central themes of Otley’s suggestions of promising areas for future research on MC
are strategy and structure, innovation and diversity, sustainability, power and control,
culture, and more sophisticated research methods (Otley, 2003).
Finally, some interesting and promising approaches have been devel-

oped in literature to facilitate an improved insight into the relationship
between risk, risk management, and MC (e.g., Mikes & Kaplan, 2014,
2015). For example, Kaplan & Mikes (2012) have developed categories
of risk that differentiate according to control models to be applied for risk
mitigation and management. Moreover, it is argued that the types of risks
an organization faces constitute essential contingency factors in the de-
sign of organizational systems (Mikes & Kaplan, 2014, 2015). In sum,
there are some exciting opportunities ahead to further contribute on con-
tingency-based literature in MC.
3 Theory Development and Hypotheses
Drawing on the theoretical and empirical findings of contingency-based

research in management accounting and control outlined above, this
chapter presents further conceptual developments and testable proposi-
tions in order to design a framework for examining the interrelationship
between MCS design and use, risk profile, and organizational perfor-
mance. Although the ubiquitous nature of uncertainty has been given
insufficient attention in MCS research (Otley & Soin, 2014), the notion
that different sources and degrees of controllability of risk types demand
different control models in organizations for these risks to be managed
effectively (Mikes & Kaplan, 2014; see also Göstl & Schwaiger, 2016) has
recently been pursued. Hence, this study hypothesizes that the choice of
MCS design und use reflects the firms’ risk profile, and that firms that
choose MCS design and use better suited to their risk profile perform
better than others. For this purpose, the aim of this chapter is threefold:
Firstly, the choice of Simons’ LOC framework (Simons, 1995b) as the
base MCS framework for this study will be justified for examining the
relationship postulated above. While risk and uncertainty are already
essential contingencies in the original framework (Simons, 1995b,
90
2000), the conceptualization is further developed to put forward a risk-
based MCS framework. In doing so, Simons’ LOC framework is extended
to also analyze the coherence of proposed hypotheses in a risk-based
MCS setting.
Secondly, concrete hypotheses will be developed in order to test the pro-
posed interrelationship between MCS design and use, risk profile, and
organizational performance. The first set of hypotheses, i.e. the design
hypotheses, proposes associations between types of risks and certain
types of control systems. The second set of hypotheses, i.e. the cluster
hypotheses, proposes the existence of packages of MCS, i.e. configura-
tions of MCS that are implemented in practice and which carry an associ-
90
Simons’ LOC framework asserts that strategic risk and strategic uncertainty are key
environmental variables for design and use of MCS (Simons, 2000). What is more, Otley
(2012) recognizes the LOC framework as the first conceptualization incorporating as-
pects of risk and risk management into MCS research (Otley, 2012).

102 3. Theory Development and Hypotheses
ation to the risk profile of an organization. Finally, the last set of hypothe-
ses, i.e. the performance hypotheses, examines the implications for per-
formance through matching risk profile and configuration of MCS.
Thirdly, in order to illustrate the research questions and conceptual rela-
tionships between the key variables, the theoretical model of this study
will be presented. A predictive validity framework (PVF) (Libby et al.,
2002) will be applied as generic framework, later to be promoted from the
conceptual to the operational level in Chapter 4. While following a contin-
gency approach through applying Otley’s (1980) minimum contingency
framework, an overview of the main variables, i.e. explaining variables,
explained variables, other potentially influential variables, and perfor-
mance variables, will be provided.
3.1 Development of a risk-based MCS framework by extension of

the LOC framework
In this study, the interrelationship between MCS design and use, risk
profile, and organizational performance is examined. For this purpose,
the choice of the theoretical foundation for MCS is essential for profound
analysis. Simons’ LOC framework (Simons, 1995b) has been chosen as
the base MCS framework for this analysis for several reasons. Firstly, the
LOC framework has been widely used and has turned out to be useful as
theoretical normative groundwork in case study, quantitative empirical,
and conceptual MC research (e.g., Ferreira & Otley, 2009; Tessier &
Otley, 2012a; see Section 2.2.3). Secondly, Simons’ LOC framework was
the first which explicitly conceptualized risk as a key concept affecting
MCS design and use and thus was a pioneer in incorporating aspects of
risk and risk management (Otley, 2012). More precisely, Simons’ LOC
framework asserts that strategic risk and uncertainty drive the choice and
use of control systems, impacting the organization through efficient use of
management attention and organizational learning (Simons, 2000). Third-
ly, a special feature of the LOC framework is the combination of control
levers which focus on the design of MCS and control levers which focus
on the use of MCS. While the former is referred to as design attributes of
formal controls, the latter is referred to as attention patterns of the feed-
3.1. Development of a risk-based MCS framework by extension of the LOC framework 103
back and measurement systems (Simons, 1995b, p. 180). Therefore, the

style of usage of control systems is incorporated in Simons’ conceptual-
ization and allows for a broader perspective when analyzing the overall
control system (Ferreira & Otley, 2009). Fourthly and finally, there is em-
pirical evidence in literature that different types of risks and uncertainty
are associated with Simons’ LOC framework (Widener, 2007), providing a
solid base for further analyses.
Nevertheless, as the present study proposes that the design and use of
MCS is contingent on the types of risks an organization faces, the extent
to which this approach is conceptually reflected by the base MCS frame-
work must also be evaluated. While the implementation of the business
strategy is centered in the LOC framework (see Figure 12) and the key
concepts risks to be avoided and strategic uncertainties are addressed
through and controlled by implementing boundary systems and interac-
tive control systems, respectively, there is no information as to what ex-
tent risk is systematically integrated into these control systems. More
precisely, while the design and use of the original levers of control may
reflect the types of risks faced by an organization, as proposed in this
study, a risk-based approach of MCS may serve to deepen our under-
standing of the relationships involved and provide further contextual in-
sight.
Furthermore, while researchers have criticized a lack of coherence re-
garding theoretical MCS frameworks and a compartmentalized approach
in empirical MCS research (Chenhall, 2003; Covaleski et al., 2003), it has
also been argued that it is necessary to recognize the interdependency
between different control mechanisms operating simultaneously at the
same organization (Abernethy & Brownell, 1997). Thus, in justifying their
extension of the LOC framework, Ferreira & Otley (2009) conclude that
“research would benefit from a framework that provides a broad view of
the key aspects of a MCS and that allows researchers to obtain an holis-
tic overview in as efficient way as possible” (Ferreira & Otley, 2009, p.
264). Drawing on these recommendations, it is argued that systematically
integrating risk into the MCS is recognized as a key aspect of a MCS and
thus a holistic framework is proposed which extends Simons’ LOC
framework and puts forward a risk-based MCS framework aimed at addi-
tionally incorporating aspects of risk-based dimensions of control sys-

tems. The approach of retaining the elements of the original framework
by extending Simons’ LOC framework was considered appropriate be-
cause the LOC framework features an inherent connection to the concept
of risk, as outlined above.
In addition to analyzing the interrelationship between MCS design and
use, risk profile, and organizational performance using Simons’ LOC
framework as a base MCS framework, the extended risk-based MCS
framework is intended to be used to examine the relationships as well.
Therefore, in a manner similar to Ferreira & Otley’s (2009) ambition to
extend Otley’s (1999) and Simons’ (1995b) frameworks, stating that the
“focus of the framework and its extension is to provide a descriptive tool
that may be used to amass evidence upon which further analysis can be
based” (Ferreira & Otley, 2009, p. 266), the aim of the risk-based MCS
framework can be designated accordingly.
To sum up, the extended MCS framework aims at providing a holistic
view on the dimensions of a risk-based MCS and lays the ground for
further investigations. The extended MCS framework, referred to as risk-
based MCS framework in this study, represents an extension of Simons’
four levers of control by additionally integrating risk-based dimensions of
control systems, resulting in six characteristics for risk-based MCS, i.e.
risk-based formal controls and risk-based use of controls along with the
original levers. The naming of the conceptualization as risk-based MCS
framework aims to reflect the integration of dimensions of risk-based
attributes within the control system. The following figure presents the risk-
based MCS framework and its constituent parts together with the step-by-
step evolution of its development. Each step of development will be ar-
gued and discussed in more detail below:
PANEL 1
attributes
Design Beliefs Boundary
systems systems
Attention
patterns
controls controls
PANEL 2
Formal controls
that frame the strategic domain
attributes
Design
Beliefs Boundary
systems systems
Attention
patterns
controls controls
Use of controls
which determines style of usage
Figure 20: Extending Simons’ LOC framework to develop a risk-based MCS framework
(continued)
PANEL 3
Formall controls
F t l
Design attributes
Beliefs Boundary
systems systems
Attention patterns
controls controls
Use of controls
(continued)
PANEL 4
Risk-based formal controls
Formal controls
Design attributes
Beliefs Boundary
systems systems
Attention patterns
controls controls
Use of controls
Risk-based use of controls
(Source: own illustration)91
91
The presentation of the evolutionary process of developing the extended risk-based
MCS framework in Figure 20 was inspired by Tessier & Otley’s conceptual development
of Simons’ LOC framework (Tessier & Otley, 2012a, p. 183).
The starting point for extending Simons’ LOC framework and putting for-
ward a holistic risk-based MCS framework are the levers of control and
its distinguishing features, i.e. the distinction in design attributes of formal
controls and attention patterns of the feedback and measurement sys-
tems, as illustrated in Panel 1 of Figure 20 above (Simons, 1995b, p.
180). As pointed out by Ferreira & Otley the framework “offers a broad
perspective of the control system by looking at the range of controls em-
ployed and how they are used by companies” (Ferreira & Otley, 2009, p.
92
266). Thus, while the concepts of diagnostic and interactive controls
have been discussed intensively in literature (Ferreira & Otley, 2009;
Tessier & Otley, 2012a) and have been described as ambiguous con-
93
cepts (Bisbe et al., 2007), the intention of Simons’ (1995b, 2000) con-
ceptualization seems clear and serves as a point of origin for further con-
94
siderations. Furthermore, as design attributes and attention patterns
already represent distinct concepts within the LOC framework, it seems
92
Ferreira & Otley (2009) point out that: “Simons conflates the intensive use of information
by managers with the identification of an inadequate strategy“ (Ferreira & Otley, 2009, p.
274). Thus, it is their argument that linking these concepts together creates confusion
and they make the suggestions to divide Simons’ (1995b) concept into interactive use of
controls which addresses the intensity of managers’ use of controls, and strategic validity
controls which monitor the adequacy of the strategy (Ferreira & Otley, 2009). Tessier &
Otley (2012a) follow this approach and relate the interactive use of controls to the first
three components identified by Bisbe et al. (2007; see Footnote 93) and the strategic va-
lidity controls to the component which addresses the focus on strategic uncertainty
(Tessier & Otley, 2012a). Thus, the term interactive controls is applied in their revised
framework and it is pointed out that their said revised framework “does not consider di-
agnostic and interactive controls as control systems in their own right, but rather as a
description of how control systems are used” (Tessier & Otley, 2012a, p. 178). As the ex-
tended risk-based MCS framework in this study builds on this distinctive feature and is
thus aimed in the same direction, the terminology of interactive (diagnostic) controls in-
stead of the original interactive (diagnostic) control systems is adopted here.
93
Bisbe et al. (2007) attempted to provide a distinct definition of interactive control systems
based on Simons‘ (1995b) conceptualization and proposed five components: intensive
use by superiors, intensive use by subordinates, face-to-face communication, focus on
strategic uncertainty, and non-invasive management style.
94
Alternative considerations would have been to choose the distinction in positive and
negative controls as suggested by Simons (1995b) as a starting point for implementing
risk-based dimensions of MCS, i.e. the distinction in beliefs systems and interactive con-
trol systems on the one hand and boundary systems and diagnostic control systems on
the other (see also Section 2.2.3). This approach seemed inappropriate as the risk-
based approach being aimed for should consider risk as being neither good nor bad but
rather defined as the “effect of uncertainty on objectives” (ISO, 2009a, p. 1).
pertinent to also incorporate a third concept, i.e. risk-based dimensions of

MCS, into an extended holistic risk-based MCS framework.
The next step of the evolutionary process is presented in Panel 2 of Fig-
ure 20 and points out the apparent similarities regarding the two distinct
features of the control levers. Firstly, Simons states: “There are two con-
trol levers that guide search activity in organizations: beliefs systems and
boundary systems. Both are variations on formal control systems” (Si-
mons, 1995b, p. 33). Conclusively, Widener summarizes that “beliefs and
boundary systems both inform organizational members about opportuni-
ties to explore, create, and innovate” (Widener, 2007, p. 761). Thus, it is
evident that these levers of control work together (Simons, 1995b; Wid-
ener, 2007) and frame the strategic domain in terms of positive ideals
and proscriptive limits (Simons, 1995b). Secondly, the diagnostic and
interactive controls as attention patterns of the feedback and measure-
ment systems of the MCS focus on the style of usage and, thus, bear
resemblance to one another. As Simons states, it is important to mention
that the “difference between diagnostic and interactive control systems is
not in their technical design features. A diagnostic control system may
look identical to an interactive control system. The distinction between the
two is solely in the way that managers use these systems” (Simons,
2000, p. 226). Furthermore, Widener (2007) and Henri (2006a) found
evidence that there is a particular co-occurrence between these two lev-
ers of control and that effective interactive control systems demand struc-
ture provided by diagnostic control systems (Widener, 2007). As a result,
this study argues that for considering integrating risk into MCS, i.e. apply-
ing a risk-based approach for MCS, each aspect of MCS should be tar-
geted separately, i.e. formal controls comprising beliefs and boundary
systems on the one hand, and the use of controls comprising diagnostic
and interactive controls on the other.
The third step of developing an extended holistic risk-based MCS frame-
work, as shown in Panel 3 of Figure 20, is concerned with identifying the
concepts through which risk is systematically integrated into the formal
controls that frame the strategic domain, and the use of controls which
determines style of usage, respectively. Simons stresses that beliefs and
boundary systems are in many respects “compatible with notions of or-
ganizational culture” (Simons, 1995b, p. 57). In general, organizational

culture can be understood as set of values, rules, and standards that
establish the desirability of the employees’ behavior in organizations
95
(Schall, 1983; Schein, 2004). While beliefs systems “create norms and
serve as cultural ideals” (Simons, 1995b, p. 57), boundary systems “both
create and are created by the culture of an organization” (Simons, 1995b,
p. 57). Furthermore, Power et al. (2013) state that “risk culture is a way of
framing issues of risk and culture in organisations and not a separate
object” (Power et al., 2013, p. 4; see also Palermo et al., 2017). In addi-
tion, Mikes drafts a scenario of beliefs and boundary systems transition-
ing to risk culture (Mikes, 2016), which is developed greatly via the con-
cept of risk appetite (Kaplan & Mikes, 2016). According to Kaplan &
Mikes, a “company’s risk appetite should clarify what risks can be ac-
cepted and left unattended, and what risks need immediate attention and
96
action” (Kaplan & Mikes, 2016, p. 15). Consequently, this study argues
that the establishment of a risk culture, and the concept of risk appetite
together with the corresponding concept of risk limits, plays a critical part
in framing the strategic domain and constitutes a risk-based approach in
terms of the two levers of formal controls. Furthermore, it was argued
above that diagnostic and interactive controls depict the style of usage of
control systems, and that it is assumed that they influence each other.
Although interactive control systems are concerned with focusing atten-
tion on strategic uncertainties (Bisbe et al., 2007; Simons, 1995b), the
usage of a control system does not contain any information about con-
95
Schall (1983) suggests defining organizational culture as “a relatively enduring, interde-
pendent symbolic system of values, beliefs, and assumptions evolving from and imper-
fectly shared by interacting organizational members that allows them to explain, coordi-
nate, and evaluate behavior and to ascribe common meanings to stimuli encountered in
the organizational context; these functions are accomplished through the mediation of
implicit and explicit rules that act as cultural warrants” (Schall, 1983, p. 557). Similarly,
Schein (2004) defines organizational culture as “a pattern of shared basic assumptions
that was learned by a group as it solved its problems of external adaptation and internal
integration, that has worked well enough to be considered valid and, therefore, to be
taught to new members as the correct way to perceive, think, and feel in relation to those
problems” (Schein, 2004, p. 17).
96
Specifically, Kaplan & Mikes (2016) identify a three-part-solution for effective risk man-
agement: agreement about the beliefs systems, formulation of the risk appetite of the
company, and monitoring of risk-taking behavior.
sideration of risks. Thus, applying a risk-based approach should aim to

systematically integrate risk into the two levers which relate to the use of
controls. Therefore, it is argued in this study that the integration of risk
information when using controls is key when considering the risk-based
dimension.
In a final step, the risk-based dimensions of the extended MCS frame-
work are conceptually specified as shown in Panel 4 of Figure 20. Con-
ceptual specification of constructs involves defining the exact meaning of
the construct and determining the nature and direction of the relationship
between the construct and its indicators (Bisbe et al., 2007; see Section
4.3.1). Firstly, the dimension risk-based formal controls of risk-based
MCS is associated with the design attributes of MCS, i.e. the formal con-
trols beliefs and boundary systems, and constitutes an emphasis of a
risk-based approach within these levers. In order to conceptually specify
this construct, it is defined as characteristic of MCS framing the strategic
domain concerning risks, achieved by means of applying an appropriate
risk culture. As the construct risk-based formal controls cannot be ob-
served, indicators are developed as observable variables, representing
signs as to the presence of the construct under study. In dependence on
well-established indicators applied to measure the constructs of beliefs
97
and boundary systems (see Section 4.3.4), the indicators (1) communi-
cation of risk appetite, (2) workforce is aware of risk appetite, (3) commu-
nication of risk limits, and (4) workforce is aware of risk limits are identi-
fied and specified. Secondly, the dimension risk-based use of controls of
risk-based MCS is associated with the attention patterns of MCS, i.e. the
diagnostic and interactive controls, and constitutes an emphasis on a
risk-based approach within these levers. Consequently, in order to con-
ceptually specify the construct, it is defined as characteristic of MCS of
97
In identifying the indicators, the deviation from validated indicators of respective scales
was designed to be kept to a minimum. Thus, the emphasis on values in respect of the
scale for beliefs systems and the emphasis on inappropriate behavior in respect of the
scale for boundary systems (see Section 4.3.4) were replaced by the concepts of risk
appetite and risk limits. In addition, the notion of communication of respective concepts
on the one hand and awareness on the other hand was adopted. Finally, in order to de-
sign a reflective scale with four indicators for the construct risk-based formal controls,
two reflective indicators derived from each construct have been applied.
using controls at the management level considering risks, a method

achieved by means of integrating risk information into the use of controls.
Following the procedure above, the non-observability of the construct
risk-based use of controls leads to the development of observable varia-
bles which are referred to as indicators. In using well-established indica-
tors applied to measure the constructs of diagnostic control systems and
98
interactive control systems (see Section 4.3.4), the indicators identified
and specified here are: (1) correct deviations considering risk information,
(2) review key measures considering risk information, (3) face-to-face
challenge and debate considering risk information, and (4) considering
risk information when getting involved. Finally, both sets of indicators
represent manifestations of the underlying constructs of risk-based formal
controls and risk-based use of controls, respectively, and thus the epis-
temic relationship between the constructs and its indicators implies a
reflective model for operationalization.
As a result, the extension of Simons’ LOC framework is considered to be
a useful conceptualization for holistic empirical research on control pack-
ages regarding design, use, and risk-based dimensions of MCS.
3.2 Development of propositions

In general, this study follows Otley’s assertion that “the presence of un-
certainty can require significant adaptation to both the design and use of
management control systems” (Otley, 2014, p. 91). More specifically,
Kaplan & Mikes’ (2012) proposal of the requirement of different control
models for managing certain types of risks is recognized and serves as
the groundwork for the following development of propositions. Interesting-
ly, in their article introducing the taxonomy of risk types (Kaplan & Mikes,
2012), the authors refer to Simons’ levers of control (Simons, 1995b) for
further information on control models (Kaplan & Mikes, 2012, p. 53). In
98
In identifying the indicators, the deviation from validated indicators of respective scales
was designed to be kept to a minimum. Thus, indicators of the scales for diagnostic con-
trol systems and interactive control systems, respectively, have been amended by the
concept of consideration of risk information (see Section 4.3.4). Finally, in order to de-
sign a reflective scale with four indicators for the construct risk-based use of controls,
two reflective indicators derived from each construct have been applied.
3.2. Development of propositions 113
order to investigate the interrelationship between MCS design and use,

risk profile, and organizational performance, the following discussion
theoretically links Kaplan & Mikes’ (2012) taxonomy of risk types to Si-
mons’ (1995b) levers of control. In addition, the dimensions of the risk-
based MCS framework are also regarded to provide testable propositions
in an extended risk-based setting. Subsequently, the proposed hypothe-
ses are divided into three parts: design hypotheses, cluster hypotheses,
and performance hypotheses, which are discussed below.
3.2.1 Risk profile and (risk-based) MCS design and use

In this section, the associations between types of risks and types of con-
trols are hypothesized. The first sub-section discusses the relation be-
tween preventable risks and (1) each of the levers of control of Simons’
LOC framework, i.e. beliefs systems, boundary systems, diagnostic con-
trol systems, and interactive control systems, and (2) the additional di-
mensions of the risk-based MCS framework, i.e. risk-based formal con-
trols and risk-based use of controls. The second and the final sub-section
focus on the relation between strategy execution risks and external risks,
respectively, as well as the aforementioned controls. As the relationship
of contextual factors to characterizations of MCS without considering the
effects on organizational performance is addressed, it can be argued that
in this section a selection form of fit is applied (Chenhall & Chapman,
2006; see Section 2.3.1).
3.2.1.1 Association between preventable risks and (risk-based) controls

As demonstrated above, preventable risks are internal risks which arise
within the company without generating any strategic benefits (Kaplan &
Mikes, 2012; see Section 2.1.3.2). Therefore, it is crucial for organiza-
tions to know how much risk is hiding internally (Simons, 1999) and to
aim for the mitigation of preventable risks by avoiding them completely in
a cost-efficient manner (Kaplan & Mikes, 2012).
According to Kaplan & Mikes (2012), the “first line of defense against
preventable risk events is to provide guidelines clarifying the company’s
goals and values” (Kaplan & Mikes, 2012, p. 52). This is necessary be-
cause an organization “cannot anticipate every circumstance or conflict of
interest that an employee might encounter” (Kaplan & Mikes, 2012, p.
52). Therefore, a mission statement is crucial to communicate which in-
terests should dominate and take precedence in any situation (Kaplan &
99
Mikes, 2012). A well-crafted mission statement not only inspires the
workforce and clarifies the fundamental purpose of an organization (Si-
mons, 1995b), but contributes in “guiding people’s behaviors and deci-
sions toward desired norms” (Kaplan & Mikes, 2012, p. 51). Furthermore,
for a mission statement to be effective, it needs to be communicated to
and understood by all employees and articulate the values of an organi-
zation towards all its relevant stakeholders, such as customers, suppliers,
employees, communities, and shareholders (Kaplan & Mikes, 2012).
These core values that are linked to business strategy are the key feature
of beliefs systems which aim to provide inspiration and organizational
direction (Simons, 1995b).
In addition to guiding behavior through inspirational beliefs systems, for-
mal statements of organizations also “help employees avoid violating the
company’s standards and putting its reputation and assets at risk”
(Kaplan & Mikes, 2012, p. 52). Therefore, Kaplan & Mikes (2012) also
indicate a rules-based compliance approach for identifying and managing
preventable risks. For this purpose, boundary systems such as corporate
codes of business conduct “prescribe behaviors relating to conflicts of
interest, antitrust issues, trade secrets and confidential information, brib-
ery, discrimination, and harassment” (Kaplan & Mikes, 2012, p. 53). In
her study, Widener (2007) argues that organizations “use both the beliefs
and boundary systems to manage risk since they help ensure the align-
ment of employee behavior, which minimizes the possibility that the or-
ganization can be harmed” (Widener, 2007, p. 763) and found operations
99
Simons (1995b, p. 35) and Kaplan & Mikes (2012, p. 52) both quote Johnson & John-
son’s credo for an example of a well-crafted mission statement which begins with the fol-
lowing sentence: “We believe our first responsibility is to the doctors, nurses and pa-
tients, to mothers and fathers and all others who use our products and services”.
100
risks to be associated with the emphasis placed on beliefs systems
(Widener, 2007).
To sum up, Kaplan & Mikes (2012) propose an integrated culture-and-
compliance model as a control model for preventable risks and suggest
the following activities: “Develop mission statement; values and belief
systems; rules and boundary systems; standard operating procedures;
internal controls and internal audit” (Kaplan & Mikes, 2012, p. 55). Thus,
the following hypotheses are proposed:
H1a: Firms facing preventable risks to a greater extent will focus on

beliefs systems more intensively than firms facing preventable
risks to a lower extent.
H1b: Firms facing preventable risks to a greater extent will focus on
boundary systems more intensively than firms facing preventable
In regards to attention patterns of the feedback and measurement sys-

tems of MCS, Kaplan & Mikes (2012) argue that preventable risks are
best managed through monitoring operational processes resulting in ac-
tive prevention or initiation of immediate and appropriate remedial actions
101
(Simons, 2000). Monitoring and correcting deviations from preset
standards are key features of feedback systems, i.e. diagnostic control
systems, which are applied to implement procedures to ensure safety
and quality, as well as to standardize and assess operations and pro-
cesses (Simons, 2000; Widener, 2007).
In addition, diagnostic use of controls is described as a negative force
that creates constraints and ensures compliance with orders (Henri,
2006a; Simons, 1995b). Henri (2006a) states that features of diagnostic
style of use are tight control of operations, highly structured channels of
100
Widener (2007) uses Simons’ (2000) definition of operations risk which is very similar to
Kaplan & Mikes’ (2012) conceptualization of preventable risks. While Widener proposes
that operations risks are associated with beliefs and boundary systems of an organiza-
tions, for the latter significant relationships could not be demonstrated (Widener, 2007).
101
The process of taking action just in case there is a deviation from preset standards is
called management by exception and is a key feature of diagnostic control systems (Si-
mons, 2000).
communication, and restricted flows of information. As Kaplan & Mikes’

(2012) identified the rules-based compliance model as an appropriate
control model for managing preventable risks, the following hypothesis is
proposed:
H1c: Firms facing preventable risks to a greater extent will focus on

diagnostic control systems more intensively than firms facing pre-
ventable risks to a lower extent.
After discussing the design attributes and attention patterns of MCS, the
association between preventable risks and risk-based dimensions of
MCS is argued. Kaplan (2014) proposes that “[c]lear and frequently
communicated Beliefs and Boundary Systems” (Kaplan, 2014, p. 5) play
essential roles in managing preventable risks and that reliance on formal
controls is thus indicated in such circumstances (Kaplan & Mikes, 2012).
Additionally, it is also expected that risk-based formal controls provide an
effective control model for management of preventable risks with regards
to the risk-based dimensions of the extended risk-based MCS framework.
Thus, the following hypothesis is proposed:
H1d: Firms facing preventable risks to a greater extent will focus on risk-
based formal controls more intensively than firms facing preventa-
ble risks to a lower extent.
3.2.1.2 Association between strategy execution risks and (risk-based)

controls
In contrast to preventable risks, strategy execution risks are risks explicit-
ly taken for superior strategic return (Kaplan & Mikes, 2012; see Section
2.1.3.2). Therefore, Kaplan & Mikes (2012) argue that the objective of risk
mitigation is not avoidance, as these risks are not inherently undesirable,
but is rather the reduction of their likelihood and impact in a cost-effective
way.
Consequently, a rules-based control model is not appropriate for manag-

ing strategy execution risks, but comprises a system which is in fact “de-
signed to reduce the probability that the assumed risks actually material-
ize and to improve the company’s ability to manage or contain the risk
events should they occur” (Kaplan & Mikes, 2012, p. 51). Therefore, such
systems for managing strategy execution risks aim at enabling organiza-
tions to take on higher-risk, higher-reward ventures than their competitors
in order to capture potential gains (Kaplan & Mikes, 2012). As was shown
above (see Section 2.2.3.1), Simons’ (1995b, 2000) beliefs systems fos-
ter an organization-wide search for creating value and “provide momen-
tum and guidance to opportunity-seeking behaviors” (Simons, 1995b, p.
178). In addition, beliefs systems are important for communicating the
vision and core values of a firm and therefore for facilitating the execution
of strategy and strategic change (Marginson, 2002; Simons, 1994). What
is more, Marginson (2002) proposes in his explorative study that the “use
of beliefs systems affect a company’s strategic climate” (Marginson,
2002, p. 1025) and influences which initiative and ideas are championed
by managers (Marginson, 2002). Consequently, the following hypothesis
is proposed:
H2a: Firms facing strategy execution risks to a greater extent will focus
on beliefs systems more intensively than firms facing strategy exe-
cution risks to a lower extent.
Furthermore, Kaplan & Mikes (2012) stress that “interactive discussions

about risks to strategic objectives” (Kaplan & Mikes, 2012, p. 55) are
essential for controlling strategy execution risks. The interactive use of
controls is described as a positive force that focuses attention and forces
dialogue throughout the organization (Henri, 2006a; Simons, 1995b). As
a result, interactive control systems are used ‘‘to communicate where to
look’’ (Simons, 1995b, p. 93) and ‘‘to collectively make sense of changing
circumstances’’ (Simons, 1995b, p. 218). Therefore, in providing focus
and regular attention to strategic uncertainties, processes are applied
“that encourage managers to openly discuss risks and find cost-effective
ways to reduce the likelihood of risk events or mitigate their consequenc-
es” (Kaplan & Mikes, 2012, p. 55). For example, while Simons (1991)
provided evidence for the association of the use of interactive controls
and product introduction as well as technology risks, Bisbe & Otley
(2004) found evidence that interactive control systems enhance the effect
102
of innovation risks on firm performance. In addition, Abernethy &
Brownell (1999) studied the effect of interactive use of budgets in times of
strategic change and found a positive effect on performance.
With regards to the relation between interactive and diagnostic control
systems, Simons points out that “the information and learning generated
by interactive systems can be embedded in the strategies and goals that
are monitored by diagnostic control systems” (Simons, 2000, p. 303).
Similarly, Chenhall & Morris (1995) argue that structure is necessary for
interactive control systems to be effective. In her study, Widener (2007)
argues that “firms will use both an interactive and diagnostic system, and
the more top managers rely on the interactive control system, the more
they will rely on the diagnostic control system“ (Widener, 2007, p. 762). In
addition, she claims that: “the diagnostic system provides the structure
that enables the interactive system to be effective” (Widener, 2007, p.
782). This conclusion is also consistent with Henri’s (2006a) argument
that “the dynamic tension generated by the joint effect of diagnostic and
interactive use” (Henri, 2006a, p. 548) ensures positive effects of interac-
tive use. Therefore, it is argued that, for interactive control systems to be
effective, diagnostic control systems must already be in place. Thus, the
following hypotheses are proposed:
H2b: Firms facing strategy execution risks to a greater extent will focus
on diagnostic control systems more intensively than firms facing
strategy execution risks to a lower extent.
102
Bisbe & Otley (2004) define product innovation by referring “to the development and
launching of products which are in some respect unique or distinctive from existing prod-
ucts” (Bisbe & Otley, 2004, p. 711). These risks are connected to R&D activities (Aber-
nethy & Brownell, 1997; Bisbe & Otley, 2004) which have been argued to being typical
strategy execution risks (see Section 2.1.3.2).
H2c: Firms facing strategy execution risks to a greater extent will focus
on interactive control systems more intensively than firms facing
Finally, as strategy execution risks are expected to be associated with

formal control systems, i.e. beliefs systems, and diagnostic and interac-
tive control systems, it is hypothesized that, regarding the risk-based
dimensions of the risk-based MCS framework, risk-based formal controls
and risk-based use of controls provide an effective control model for
management of strategy execution risks as well. This can be formally
expressed as:
H2d: Firms facing strategy execution risks to a greater extent will focus
on risk-based formal controls more intensively than firms facing
H2e: Firms facing strategy execution risks to a greater extent will focus
on risk-based use of controls more intensively than firms facing
3.2.1.3 Association between external risks and (risk-based) controls

As the third category in Kaplan & Mikes’ taxonomy of risk types, external
risks are risks that “arise from events outside the company and are be-
yond its influence or control” (Kaplan & Mikes, 2012, p. 51; see Section
2.1.3.2). Therefore, the management of these risks comprises the identi-
fication of potential risk events and the cost-effective mitigation of their
impact should they occur (Kaplan & Mikes, 2012).
Similar to the approach of managing strategy execution risks, Kaplan &
Mikes argue that external risks “require systems aimed at generating
discussion and debate” (Kaplan & Mikes, 2012, p. 51). As the probability
of occurrence of most external risk events is very low and their emer-
gence largely outside the organization’s control, external risk events can-
not be easily identified in conventional strategy processes (Kaplan &
Mikes, 2012). Thus, it is of key importance to envision plausible future
disaster scenarios, a practice which can be achieved through several
analytical and interactive approaches. In general, interactivity leads to a

process of confrontation potentially able to prepare managers for black
103
swans (Taleb, 2007). Therefore, the control model for external risks is
interactive envisionment using experience, intuition, and imagination to
identify the non-controllable external events that could cause the strategy
to fail (Kaplan & Mikes, 2012).
This approach of an interactive control model for managing external risks
is in line with empirical findings in literature in regards to environmental
uncertainty, argued to be a very similar conceptualization (see Section
2.3.2.1). Empirical research shows that interactive control systems are
effective in firms facing various types of risks and uncertainty, including
competitive, market, and technological risk and environmental uncertainty
(Bisbe & Otley, 2004; Widener, 2007). Chenhall summarized these find-
ings in his extensive review of contingency-based MCS research and
proposed that increased uncertainty in external environments leads to
more open and externally focused MCS with emphasis on flexible, inter-
personal interactions (Chenhall, 2007). Furthermore, as reasoned above,
diagnostic control systems are essential for interactive control systems to
be effective (Chenhall & Morris, 1995; Henri, 2006a; Widener, 2007).
Thus, the following hypotheses are proposed:
H3a: Firms facing external risks to a greater extent will focus on diag-
nostic control systems more intensively than firms facing external
H3b: Firms facing external risks to a greater extent will focus on interac-
tive control systems more intensively than firms facing external
103
Taleb (2007) uses the term black swan as a synonym for a rare event that comes at a
surprise and has a major impact. Taleb provides an analogy to explain the black swan
problem: “Reality is far more vicious than Russian roulette. First, it delivers the fatal bul-
let rather infrequently, like a revolver that would have hundreds, even thousands of
chambers instead of six. After a few dozen tries, one forgets about the existence of a
bullet, under a numbing false sense of security” (Taleb, 2007, p. 28).
Finally, as a relationship between external risks and diagnostic and inter-

active control systems is proposed, a risk-based use of controls can also
be expected to be associated with external risks in regards to the risk-
based dimensions of the extended risk-based MCS framework. This can
be formally expressed as:
H3c: Firms facing external risks to a greater extent will focus on risk-
based use of controls more intensively than firms facing external
3.2.2 Risk profile and packages of (risk-based) MCS

Since Otley (1980) first introduced the package view of MCS, the concept
of interrelated control systems has been regularly addressed in research
104
(Otley, 2016; see also Section 2.2.1). Nevertheless, Malmi & Brown
(2008) criticize MCS literature for not sufficiently examining this aspect in
theoretical or empirical research and for ignoring the links between vari-
ous MCS and considering the single practices under discussion as being
unrelated to one another. Thus, they argue that “while studies have
looked at control systems individually and at times in combination, the
challenge is to understand how all the systems in an MCS package oper-
ate as an inter-related whole” (Malmi & Brown, 2008, p. 288). Conse-
quently, “MCS as a package may facilitate the development of better
theory of how to design a range of controls to support organisational ob-
jectives, control activities, and drive organisational performance” (Malmi
& Brown, 2008, p. 288). Moreover, Otley (1999) argues that for research
studies a “more holistic approach is clearly appropriate, with the unit of
analysis being the organization” (Otley, 1999, p. 377). Hence, it is rather
suggested that the control systems are analyzed in their totality, since
different firms may use specific configurations.
Simons’ (1995b) notion that all four levers of control work together and
create dynamic tension in order to provide an effective control environ-
ment is widely supported in empirical MCS research (Bruining et al.,
2004; Henri, 2006a; Widener, 2007). For example, Widener (2007) exam-
104
See Malmi & Brown (2008) for a review of the relevant literature.
ined Simons’ levers of control and found all four LOC to be interdepend-
ent and complementary. In addition, in line with Simons’ (1995b, 2000)
argument she found that the “result suggests that managers must con-
sider all four control systems when designing their control system” (Wid-
ener, 2007, p. 782) in order to increase effectiveness and thus organiza-
tional performance.
In this study, a contribution to the literature of studying MCS as a pack-
age and adopting a more comprehensive and integrated approach will be
made by examining the association between different types of control
systems to derive those MC practices, i.e. configurations of MCS, which
are put in place. Therefore, this study aims to investigate whether control
systems are not only relevant independently but particularly when ana-
lyzed simultaneously as a package. Based on Simons’ (1995b) theoreti-
cal conceptualization and the results of Widener (2007), it is expected
that the levers of control be found to be complementary and interdepend-
ent rather than substitutes for one another. Similarly, in regards to the
extended risk-based MCS framework, it is expected that all control sys-
tems and risk-based control systems also be found to be complementary
and interdependent rather than substitutes. However, in an explorative
sense, there will be no ex ante assumptions what these relationships look
like. This can be formally expressed as:
H4a: There are different configurations of MCS (=packages) which are

put in place in practice.
Furthermore, based on the extended risk-based MCS framework concep-

tually developed in Section 3.1, types of risk-based MCS are explored
and the following proposition examined:
H4b: There are different configurations of risk-based MCS (=packages)

which are put in place in practice.
Furthermore, as conceptually proposed by Mikes & Kaplan (2014) and as

generally argued in this contingency-based study, it is hypothesized that
types of risks differ in terms of their fit to certain configurations of MCS.
Thus, in addition to exploring how MC practices form a package of inter-

dependent systems, it is also examined how these MC practices vary
across different exposures to risk types. Accordingly, the following hy-
pothesis is proposed:
H5a: The types of risks an organization faces have a significant influ-

ence on MCS configuration membership.
Again, this relationship is not only tested for the base MCS framework,
i.e. Simons’ LOC framework, but also for the risk-based MCS framework.
In a form similar to H5a, the following proposition is examined:
H5b: The types of risks an organization faces have a significant influ-

ence on risk-based MCS configuration membership.
3.2.3 Superior performance through matching risk profile and (risk-

based) MCS
The third set of hypotheses is related to the performance implications of
the choice of certain configurations of MCS. As a basic premise of con-
tingent control theory (see Section 2.3.1), a “better match between the
control system to the contingency variable is hypothesized to result in
increased organizational (individual) performance” (Fisher, 1998, p. 48).
While evidence has been found in empirical MCS research that certain
combinations of strategies and MCS lead to superior performance (e.g.,
Chenhall & Langfield-Smith, 1998; Govindarajan & Gupta, 1985; Simons,
1987), this relationship is not yet acknowledged in regards to certain
combinations of types of risks and MCS. Therefore, it is argued that com-
petitive advantage can be gained through matching combinations of (risk-
based) MCS design and use with the types of risks faced by an organiza-
tion. In addition, I assume that firms which have a competitive advantage
have a higher organizational performance than their competitors (Porter,
1985). Thus, the following hypothesis is proposed:
H6a: Firms with a better fit between their MCS and their risk profile ex-
perience a superior perceived firm performance.
In addition, the usefulness of MCS is also recognized as MCS outcome in

MCS literature and is argued to affect the quality of information, the quali-
ty of decisions and, ultimately, organizational performance (Chenhall,
2003; see Section 2.3.3). To analyze the effects of a match between
MCS and risk profile on a second aspect of organizational outcome, the
following hypothesis is formally expressed:
perience a greater perceived usefulness of its MCS.
Furthermore, as the validity of self-assessment of organizational out-

comes may be an issue (Chenhall, 2007), the relation regarding an actual
performance measure is also examined. Accordingly, the following hy-
pothesis is proposed:
perience a higher level of EBIT.
Finally, performance implications through matching configurations of

MCS and risk profiles are not only tested for the base MCS framework,
i.e. Simons’ LOC framework, but also for the risk-based MCS framework.
In line with H6a, H7a, and H8a, the following propositions are examined:
H6b: Firms with a better fit between their risk-based MCS and their risk
profile experience a superior perceived firm performance.
profile experience a greater perceived usefulness of its MCS.
profile experience a higher level of EBIT.
As the context-structure performance relationship is advanced by ad-

dressing simultaneously multiple contingencies, i.e. types of risks, and
structural alternative, i.e. configurations of MCS, it can be argued that in

this section a systems form of fit is applied (Chenhall & Chapman, 2006;
see also Section 2.3.1).
3.2.4 Overview of hypotheses

An overview of the hypotheses is presented in the table below:
Association between preventable risks and (risk-based) controls
Firms facing preventable risks to a greater extent will focus on …
H1a: beliefs systems
H1b: boundary systems
H1c: diagnostic control systems
H1d: risk-based formal controls
… more intensively than firms facing preventable risks to a lower extent.
Association between strategy execution risks and (risk-based) controls

Firms facing strategy execution risks to a greater extent will focus on …
hypotheses
Design
H2a: beliefs systems

H2b: diagnostic control systems
H2c: interactive control systems
H2d: risk-based formal controls
H2e: risk-based use of controls
… more intensively than firms facing strategy execution risks to a lower extent.
Association between external risks and (risk-based) controls

Firms facing external risks to a greater extent will focus on …
H3a: diagnostic control systems
H3b: interactive control systems
H3c: risk-based use of controls
… more intensively than firms facing external risks to a lower extent.
Table 1: Overview of hypotheses (continued)

Association between risk profile and packages of (risk-based) MCS

There are different configurations of …
H4a: MCS (=packages)
hypotheses
H4b: risk-based MCS (=packages)

Cluster
… which are put in place in practice.
The types of risks an organization faces have a significant influence on …

H5a: MCS configuration membership.
H5b: risk-based MCS configuration membership.
Superior performance through matching risk profile and (risk-based) MCS

Firms with a better fit between their MCS and their risk profile experience a …
H6a: superior perceived firm performance.
Performance
H7a: greater perceived usefulness of its MCS.

hypotheses
H8a: higher level of EBIT.
Firms with a better fit between their risk-based MCS and their risk profile experi-
ence a …
H6b: superior perceived firm performance.
H7b: greater perceived usefulness of its risk-based MCS.
H8b: higher level of EBIT.
Table 1: Overview of hypotheses
3.3 Theoretical model of this study

To summarize, the theoretical model of this study is presented in the
figure below and the framework illustrated for examining the interrelation-
ship between MCS design and use, risk profile, and organizational per-
formance. It further specifies the research design illustrated in Figure 1
and is based on the predictive validity framework (PVF) which provides a
description of the process by which the research questions are specified,
operationalized, and tested (Libby et al., 2002). The theoretical model of
this study comprises the conceptual level of the PVF and is amended in
Chapter 4 by the operational level through engaging in an operationaliza-
tion process (Bisbe et al., 2007; see Figure 32).
3.3. Theoretical model of this study 127
In reference to the conceptual level of the PVF illustrated in Figure 21,

the underlying theory of the proposed relationships is depicted in Link 1
and Link 2 and the contents and arguments of these links are further
developed in this chapter. In general, this study hypothesizes that the
choice of MCS design und use reflects the firms’ risk profile, and that
firms which choose MCS design and use better suited to their risk profile
perform better than others. Specifically, Link 1 displays the relation be-
tween types of risks an organization faces as explanatory variables and
certain types of control systems as explained variables. Link 2 displays
the relation between a proper match between MCS and risk profile (ex-
planatory variable) on the one hand and organizational performance (ex-
plained variable) on the other hand. In addition, a conceptual specifica-
tion of the construct MCS design and use is further developed in putting
forward a risk-based MCS framework and thus providing an alternative
framework by extending Simons’ LOC framework. Finally, the key varia-
bles in this study are presented and other potentially influential variables
introduced which have been shown in literature to affect MCS design and
use, i.e. strategy (e.g., Langfield-Smith, 2007), organizational size (e.g.,
Chenhall, 2003), company age (e.g., Davila, 2005), and ownership struc-
ture (e.g., King & Clarkson, 2015).
128
Source: own illustration)

Explanatory variables Explained variables Other potentially
influential variables
RQ1:
Risk profile Simons’ MCS framework Strategy
Design and use of MCS
Preventable risks Beliefs systems Size
Strategy execution risks Link 1 Boundary systems Link 3 Age
External risks Diagnostic control systems Ownership
FIT Interactive control systems
Figure 21: Theoretical model of this study

Kaplan & Mikes (2012) Link 2 Simons (1995b) Porter (1980)
Risk-based MCS framework +
RQ3: Performance analysis Risk-based use of controls
of MCS
RQ2:
Packages
Performance
MCS_categoryym of MCS
Firm performance
Usefulness of MCS rbMCS_categoryn
Conceptual level of the PVF (Libby et al., 2002)

Otley‘s (1980) minimum necessary contingency framework
3. Theory Development and Hypotheses
4 Methods
Management accounting research can be defined as “the process of us-

ing rigorous methods to explain and/or to predict (1) how changes to an
existing management accounting system will affect management actions,
motivations, and organizational functioning, and (2) how internal and
external organizational forces will affect management accounting system
design and change” (Foster & Young, 1997, p. 64). This chapter will pre-
sent the methods and research framework of this study in examining
those research questions addressing the second part of the above-cited
105
definition. In general, a quantitative empirical approach has been cho-
sen to explore the hypotheses stated in the previous chapter. The follow-
ing subchapters will aim at explaining and justifying the choices and pro-
cesses regarding data set, data collection, variable measurement, and
data analysis.
4.1 Data set

In order to conduct an empirical study to explore the hypotheses, medi-
um-sized companies in the mechanical engineering industry in Austria
and Germany were chosen as the target population. According to the
Bureau van Dijk database, the initial sample comprises 2311 compa-
106
nies. However, a lack of data reduced the number of usable firms in
107
the final sample to 2189. This approach in selecting the target popula-
105
Empirical studies in management accounting rely on data, including field studies, case
studies, field experiments, laboratory experiments, and surveys, but excluding mathe-
matical modeling and computer simulations (Birnberg et al., 1990, p. 33).
106
The initial sample was drawn from the Bureau van Dijk database “Orbis” on April 11th
2016. According to the database, the last update for this data was performed on April 8 th
2016. In a first step, all available companies in Austria and Germany were selected,
which resulted in a number of 4,278,573 potential firms. As a next step, the temporary
sample was restricted to companies with a primary NACE Rev.2 Code of C28, which
comprises companies in the field of mechanical engineering and led to a temporary
sample of 32,927 firms. As a final restriction, the search proceeded for medium-sized
companies with a number of employees between 50 and 250, which resulted in the final
initial sample of 2311 companies.
107
From the initial sample of 2311 companies, a number of 122 firms or 5.3% had to be
removed for the following reasons: (1) 57 firms or 2.5% due to duplicate listings, (2) 49

130 4. Methods
tion has been chosen to enable the use of a sample of rather homogene-
ous firms to control for certain aspects.
Firstly, cultural and institutional aspects have been shown to have a great
influence on the design of MCS (e.g., Abernethy & Chua, 1996; Birnberg
& Snodgrass, 1988; Chow et al., 1996; Hofstede, 1993; Morden, 1995;
Van der Stede, 2003). To control for this aspect, companies located in
Austria or Germany were chosen for the target population as they repre-
sent a satisfactory number of companies expected to operate within simi-
lar cultural contexts.
Secondly, to make the control system comparable, I decided to study a
single industry, as the research on risk-based control systems is still a
rather novel concept in literature (Otley, 2012), and it is expected that
both the design and use of MCS (Messner, 2016; Van der Stede, 2016)
and the risk profile (Kaplan & Mikes, 2012) can vary significantly between
different industries. Furthermore, the mechanical engineering industry
was chosen because of the importance and structure of the industry. In
Austria and Germany, the mechanical engineering industry represents
one of the largest industries in terms of companies and employees (e.g.,
VDMA, 2017).
Finally, it was decided to analyze medium-sized companies as this study
is following a single respondent approach surveying one person in a
company. At a certain organizational size, it is considered problematic to
assume that one manager has all necessary information regarding organ-
izational aspects and practices, while on the other hand, the sample firms
had to be large enough to ensure that a formal MCS was in place and
that all examined variables apply (Bouwens & Abernethy, 2000; Davila,
2005). In addition, it was recognized that the “role of MCS in smaller or
medium-sized entities has received little attention in the contingency-
based MCS literature” (Chenhall, 2007, p. 183). As a result, companies of
108
between 50 and 250 employees were selected in order to increase the
validity of this survey.
firms or 2.1% due to bankruptcy or winding up of business activities, and (3) 16 firms or
0.7% due to missing data.
108
The European Commission (2003) defines medium-sized enterprises as enterprises
which employ fewer than 250 persons with an annual turnover not exceeding EUR 50
4.2. Data collection 131
4.2 Data collection

To be able to test the predictions mentioned above, data has been col-
lected for the companies in the final sample. As widely used in manage-
ment accounting and control systems research (Birnberg et al., 1990;
Merchant & Otley, 2007; Otley, 2016; Van der Stede et al., 2005), a
cross-sectional survey instrument constitutes the primary research meth-
109
od for this study. Surveys can be defined as employing “a standardized
approach in order to collect information from sampling units to make in-
ferences about the population” (Birnberg et al., 1990, p. 35). Van der
Stede et al. (2005) find that, in the period between 1982 and 2001, the
mail survey approach has been used by 30% of all published empirical
110
management accounting research. Thus, surveys together with exper-
iments and analytical studies are the three dominant research methods in
management accounting research (Hesford et al., 2007). While the ad-
vantage of using a survey instrument is grounded in being able to com-
monly reach a high number of respondents to a broad range of questions,
on the other hand the survey method is usually costly and time-
consuming (Dillman et al., 2014). To summarize, while certain methods
are undoubtedly more appropriate for certain questions in MCS research
than others (Otley, 1999), the survey method has the potential to provide
large sample evidence, enable the quantification of constructs lacking in
archival data, and measure beliefs and perceptions on different issues
(Van der Stede et al., 2005) and is therefore suited to significantly con-
tribute to the research field (Van der Stede et al., 2005). However, there
are several implications for using survey research regarding validity
measures of the research design (Birnberg et al., 1990; Libby et al.,
2002). The issues of internal and external validity are addressed and
measures taken to increase the validity of the research design are pre-
sented in more detail below. In the following section, the conduction and
million and/or an annual balance sheet total not exceeding EUR 43 million, but with a
minimum of 50 employees and exceeding annual turnover and/or annual balance sheet
total of EUR 10 million.
109
For extensive reviews of the survey method in control systems research, see Van der
Stede et al. (2006) and Young (1996).
110
From these studies 98% are cross-sectional (Van der Stede et al., 2005).
132 4. Methods
validation of the survey instrument is discussed and additional data

stemming from databases introduced.
4.2.1 Internal and external validity

The internal and external validity of the research design is determined by
the validity of the links in the predictive validity framework (PVF) (Libby et
al., 2002; see Figure 22). Internal validity “refers to the degree to which
variation in the dependent variable can be attributed to variation in the
independent variable” (Libby et al., 2002, p. 800). Therefore, a study is
considered to be internally valid if “conclusions can be drawn from a set
of observations with little ambiguity” (Birnberg et al., 1990, p. 39) and no
other variables instead cause the dependent variable to change (Libby et
al., 2002). For this purpose, a testing of control variables should be con-
sidered for alternative explanations for changes in the dependent varia-
ble. In general, the internal validity of the research design in survey re-
search can only reach a medium level since causal relationships are
more difficult to establish compared to experiments (e.g., Luft, 2016)
where manipulations of variable sequences are easier to conduct (Birn-
berg et al., 1990, p. 41).
External validity, on the other hand, is the “degree to which results can be
generalized beyond the specific tasks, measurement methods, and par-
ticipants employed in the study” (Libby et al., 2002, p. 794). While some
researchers stress the importance of external validity, arguing that the
intention of theories is to predict phenomena, others point out that the
universalistic approach and the falsifiability of a theory is sufficient for
testing it (Birnberg et al., 1990; Calder et al., 1982). However, external
validity in survey research is directly affected by the sampling strategy
111
and the development of the constructs. Therefore, while artificial set-
tings in experiments commonly limit generalizability, surveys usually lead
to higher external validity as results may be generalized to a population
(Birnberg et al., 1990).
111
For discussion of the terms ‘construct’ and ‘construct validity’ see Section 4.3.2.
Link 1
Conceptual A B
Link 2 Link 3
Operational C D
Link 4
Link 5
Controls
Figure 22: Predictive validity framework

(Source: Bisbe et al., 2007, p. 795)
In order to increase internal and external validity of the research design,

special attention is paid in this study to (1) careful theory development
(Link 1 in the PVF of Figure 22; see Section 3.2), (2) sound conceptual
specification of constructs (Box A and Box B in the PVF of Figure 22; see
Sections 2.1.3.2, 2.2.3, and 3.1), (3) literature-based operationalization of
constructs into operational variables (Link 2 and Link 3 in the PVF of Fig-
ure 22; see Section 4.3), (4) definition of data set, process of data collec-
tion, and obtaining of relatively high response rate (Box C and Box D in
the PVF of Figure 22; see Sections 4.1 and 4.2), (5) selection and con-
sideration of control variables in order to control for alternative explana-
tions for changes of dependent variables (Box E in the PVF of Figure 22;
see Section 3.3), and (6) proper execution of statistical methods (Link 4
and Link 5 in the PVF of Figure 22; see Section 4.4). In addition, potential
weaknesses and limitations of the study are stressed and any generaliza-
tions of results are made with caution (see below).
134 4. Methods
4.2.2 Survey
Data was collected through a structured online questionnaire sent to the
CEOs of the 2189 companies in the final sample. The CEO was chosen
as informant as the position is considered to ensure a holistic perspective
as well as profound knowledge regarding the risk profile, MCS design
and use, and business strategy of the firm. The CEO thereby serves as a
proxy for the whole organization. The personalized email addresses of
the CEOs were hand-collected by scanning the homepages and search-
ing online sources in order to increase response rate. The questionnaire
included 52 items and consisted almost exclusively of closed questions
112
with use of a seven-point-Likert scale. The survey could be carried out
in German or English and took approximately 15 minutes to complete.
In general, items from previous research were used whenever possible.
Where necessary, new constructs have been carefully developed follow-
ing the guidelines from Bisbe et al. (2007) regarding conceptual specifica-
tion. Furthermore, the translation process from the English language, in
which the questionnaire was originally developed, to the German lan-
guage was monitored by two independent language experts to ensure
113
conformity. After completion, the questionnaire was pre-tested in two
steps by three academics and three practitioners, which resulted in minor
changes in terms of wording, layout, and structure of the questionnaire.
Additionally, interviews were conducted with two managing directors to
increase understandability of the survey. Finally, guidelines on survey
114
research presented by Dillman et al. (2014) were widely followed. In
112
For a complete presentation of survey constructs and items please refer to the Appendix.
113
Dillman et al. (2014) suggest several methods to test web-based questionnaires, i.e.
conducting expert reviews, cognitive interviews, experimental evaluations, and pilot stud-
ies. These procedures of quality control aim to ensure technical functionality as well as
obtain feedback in regard to wording, question order, visual design, and navigation. As a
consequence, the optimization of clarity and understandability and the avoidance of am-
biguity particularly increases face validity of the survey instrument (Dillman et al., 2014).
114
In addition to methods of testing questionnaires (see footnote above), guidelines for
designing surveys were also followed carefully, e.g., creating interesting welcome and
closing screens, deciding what number of questions should be presented simultaneously
and how they should be arranged, using a consistent layout and visually emphasizing
essential information, and allowing the respondents to back up in the survey or stop the
survey in order to finish it at a later time (Dillman et al., 2014).
115
doing so, special attention was paid to question order, aiming at mini-
mizing measurement errors due to question order effects and motivating
respondents to complete the questionnaire (Dillman et al., 2014).
The survey was started in September 2016 and lasted until November
2016. As a first contact, the target persons for this survey were sent a
th
postal letter on September 19 explaining the project and its goals, the
necessity of addressing the CEOs directly and informing of the upcoming
online questionnaire via email in the following days. One week later, on
th
September 26 , an email was sent with a personalized link for accessing
116
the online questionnaire and referring to the postal letter. As an incen-
tive to respond, an executive summary of the findings was offered. In the
following weeks, four reminder emails were sent to the non-respondents
th
before closing the questionnaire on November 18 . This process was
inspired by Dillman et al. (2014) and resulted in a total of 362 responses
117
received and a response rate of 16.5% , which is comparable to the 10-
25% range reported in similar studies (e.g., Baines & Langfield-Smith,
2003; Henri, 2006a; Widener, 2007).
According to Visser et al. (2000), there are four distinct sources which
add up to the total survey error, i.e. coverage error, sampling error, non-
response error, and measurement error. While coverage error may arise
in the case of not covering the whole population, sampling error occurs
through random differences between sample and population (Visser et
al., 2000). Because of the approach of this investigation, both effects
should be of no concern for this study.
To ensure validity of results, non-response bias was examined by inves-
tigating sample characteristics and comparing respondents to non-
115
To avoid question order effects Dillman et al. (2014) recommend, among others, to
group related questions covering similar topics, to carefully choose the first question
which should be easy to answer and arouse interest, and to place sensitive questions at
the end of the survey (Dillman et al., 2014). Also, to reduce effects from respondents
guessing the relationships being studied, the dependent variables have been placed ear-
lier in the study than the independent variables in order to minimize common method bi-
as (Podsakoff et al., 2003).
116
The online questionnaire was conducted using the web-based tool 2ask
(www.2ask.com).
117
The response rate is calculated as the number of usable returned questionnaires divided
by the number of companies in the final sample, i.e. 362/2189 = 16.54%.
136 4. Methods
respondents in terms of size and location (Armstrong & Overton, 1977).

To test for differences between two means, independent-samples t-tests
were conducted. An independent-samples t-test is used when one in-
tends to test differences between two means and “there are two experi-
mental conditions and different participants were assigned to each condi-
tion” (Field, 2013, p. 364). The t-statistic is derived by dividing the calcu-
lated difference between the overall means of the two samples by the
118
resulting weighted average variance (Field, 2013, p. 368):
𝑋1 − 𝑋2
𝑡=
𝑠2 𝑠2
√ 𝑝+ 𝑝
𝑛1 𝑛2
Equation 1: t-statistic
The value of t is then compared against the maximum value one would
expect if the null hypothesis which hypothesizes that the samples have
119
been drawn from the same population was true. The results of the
independent-samples t-test show no statistically significant differences
120
between non-respondents (n = 1827) and respondents (n = 362) for
121
the financial measures annual turnover and total assets as proxies for
the size of the organizations (see Table 2). Furthermore, to examine
whether the location of respondents and non-respondents statistically
differ from each other, a chi-square test is conducted. Pearson’s chi-
square test is used to examine if there is a relationship between two cat-
egorical variables through comparing observed to expected frequencies
118
𝑋1 − 𝑋2 is the difference between the overall means of the two sample, 𝑠𝑝2 the pooled
variance estimate which is the weighted average variance in which each variance is mul-
tiplied by its degrees of freedom and then divided by the sum of the two degrees of free-
dom, and 𝑛𝑖 the corresponding sample size. In fact, the equation tests the null hypothe-
sis μ1 = μ2 (Field, 2013, p. 365-368).
119
Critical values of the t-distribution can be found in statistical literature, e.g., Field (2013,
p. 893).
120
The group of non-respondents comprise the 2189 firms in the final sample minus the 362
respondents.
121
These measures were obtained from The Bureau van Dijk database “Orbis” (see Section
4.2.3).
in each category and by checking the statistic against the chi-square

distribution (Field, 2013). The results of the chi-square test show that
2
relationship between location and response is highly significant (X (1) =
27.79, p < .001), indicating that the odds of firms to respond to the survey
was about 2.5 times higher if located in Austria than if located in Germa-
122, 123
ny.
Additionally, in order to control for early-late-response bias, all constructs
and variables of the survey instrument were compared for differences
124
between early-respondents (n = 73) and late respondents (n = 73) .
Again, in comparing the means of the survey constructs and control vari-
ables through an independent-samples t-test no statistically significant
differences between early-respondents and late-respondents have been
found. The only construct which shows a tendency for significance re-
garding their mean difference is external risks. On average, early-
respondents (μ = 4.80, SE = 0.10) are facing lower external risks than
late-respondents (μ = 5.04, SE = 0.09). Nevertheless, as this difference is
not significant on a 95% confidence interval (t (144) = -1.801, p = .074)
and together with its isolated effect this is not believed to be a serious
problem for generalization of results. Furthermore, to test if there is a
relationship between early or late response and location or ownership of
the company, a chi-square test is conducted as described above. As a
2
result, both location (X (1) = 0.60, p = .439) as well as ownership
122
The odds ratio that a firm located in Austria responded to the survey is calculated by the
number of respondents located in Austria divided by the number of non-respondents lo-
cated in Austria: oddsAUTresponse = 52 / 124 = 0.42. Similarly, the odds ratio that a firm lo-
cated in Germany responded to the survey is calculated by the number of respondents
located in Germany divided by the number of non-respondents located in Germany:
oddsGERresponse = 310 / 1825 = 0.17. Consequently, the odds ratio that a firm responded to
the survey if located in Austria than if located in Germany is calculated by dividing the
odds of response of an Austrian firm by the odds of response of a German firm: odds ra-
tio = 0.42 / 0.17 = 2.47.
123
The author suspects that the fact that the survey was presented as a project of an Aus-
trian university played a role in this outcome.
124
While there are different definitions for early-respondents and late-respondents in litera-
ture, this study follows the procedure conducted, for example, by Chenhall & Langfield-
Smith (1998) and Bedford et al. (2016) and attributes the first 20% of the responders as
early-respondents and the last 20% of the responders as late-respondents, respectively.
Therefore, both groups of respondents comprise of 73 firms, which is a rounded figure of
362*0.2 = 72.4.
138 4. Methods
2
(X (1) = 0.03, p = .868) showed no significant difference between early
and late respondents. Overall, the results, presented in Table 2 below,
support the absence of significant non-response and early-late-response
bias.
Panel A: Respondents Respondents Non-respondents t-test p-value

vs. non-respondents (n = 362) (n = 1.827)
Sample characteristics
Annual turnover (in millions)a 29.14 31.12 -0.65 .518
Total assets (in millions)b 18.79 19.33 -0.26 .799
Panel B: Early respondents Early respondents Late respondents t-test p-value

vs. late respondents (n = 73) (n = 73)
Survey constructs and
variables
Preventable risks 6.06 6.06 -0.03 .974
Strategy execution risks 4.95 4.86 0.41 .683
External risks 4.80 5.04 -1.80 .074
Beliefs systems 4.96 4.91 0.32 .752
Boundary systems 4.80 4.77 0.14. .888
Diagnostic control systems 5.39 5.47 -0.37 .711
Interactive control systems 4.60 4.65 -0.23 .816
Risk-based formal controls 4.68 4.86 -0.99 .323
Risk-based use of controls 4.90 5.03 -0.67 .507
Low cost strategy 5.74 5.93 -1.21 .229
Differentiation strategy 5.62 5.68 -0.33 .739
Perceived firm performance 4.53 4.55 -0.09 .930
Perceived MCS usefulness 4.50 4.26 1.09 .277
Size 5.03 5.16 -0.75 .456
Age 3.82 3.72 0.70 .484
a
For annual turnover, data was available for 134 respondents and 667 non-respondents.
b
For total assets, data was available for 314 respondents and 1596 non-respondents.
For measurement of survey constructs and variables please refer to Section 4.3.
Table 2: Non-response bias
Overall, non-response error is not expected to be a threat to validity, as

no systematic differences between respondents and non-respondents as
well as between early and late respondents have been found, with the
exception of the location of responding firms. While this effect disappears
in regard to early and late respondents, generalizations of results related

to location of firms should be made with caution.
Furthermore, the common-method bias as a specific measurement error
has been examined as all constructs have been measured using the sur-
vey instrument and thus stem from the same source (Podsakoff et al.,
2003). This causes bias if the variance “is attributable to the measure-
ment method rather than to the constructs the measures represent”
(Podsakoff et al., 2003, p. 879), leading to erroneous conclusions drawn
from the data measured. To address these concerns, suggestions by
Dillman et al. (2014) were followed when developing the survey items as
described above. Additionally, Harman’s single-factor test was conducted
on the 48 survey questions which were used to operationalize the con-
structs. Harman’s single-factor test assumes that substantial common
method variance is indicated if “either (a) a single factor will emerge from
the factor analysis or (b) one general factor will account for the majority of
the covariance among the measures” (Podsakoff et al., 2003). The re-
sults of factor analysis indicate that the unrotated matrix shows 11 factors
with eigenvalues greater than 1 and the first factor explaining 27.9 % of
the total variance, which is well below the threshold of 50% (Podsakoff et
125
al., 2003, p. 889; Podsakoff & Organ, 1986, p. 536). Overall, the ab-
sence of significant single-source bias is supported by these results.
4.2.3 Database
In order to gain additional financial data for the companies which re-
sponded to the survey, the Bureau van Dijk database was used as a
source to collect further information. As mentioned above, the measures
annual turnover and total assets have been recorded for the firms in the
final sample to compare for differences between respondents and non-
respondents. In addition, in order to gain data for actual firm performance
and to be able to examine hypotheses H8a and H8b, the financial meas-
125
However, it is pointed out that the Harman’s single-factor test is in fact appealing but
goes along with several limitations. Most importantly, the “likelihood of finding more than
one factor increases as the number of variables increases. Thus, the single-factor test
becomes increasingly less conservative as the total number of variables increases”
(Podsakoff & Organ, 1986).
140 4. Methods
ure EBIT (earnings before interest and taxes) was collected for the re-
sponding firms.
The following table provides an overview of the figures recorded as well
126
as respective availability:
Descriptive statistics for data

from database
Min Mean Median Max Std. dev.
Financial measures
Annual turnover (in millions)a 3.95 30.79 23.01 559.18 32.42
Total assets (in millions)b 1.11 19.24 12.25 690.87 34.24
EBIT (in millions)c -32.94 1.52 1.12 32.02 4.34
EBIT_trimmed (in millions)d -0.48 1.46 1.12 4.74 1.24
a
For annual turnover, data was available for 801 firms from the final sample of 2189 firms.
b
For total assets, data was available for 1910 firms from the final sample of 2189 firms.
c
For EBIT, data was available for 162 firms from the total of 362 respondents.
d
EBIT_trimmed was calculated by eliminating the 16 highest and lowest scores from EBIT,
resulting in data for 130 firms.
Table 3: Descriptive statistics for financial measures from database
As the measure EBIT showed extreme scores resulting in a high value for
standard deviation, a percentage-based rule was applied (Field, 2013)
and the 10% of highest and lowest scores deleted in order to achieve a
trimmed measure for EBIT, i.e. EBIT_trimmed. As a result, outliers from
the measure EBIT were eliminated to reduce the impact of potential bias.
4.3 Variable measurement

Most of the variables in this dissertation are so-called constructs which
are “conceptual term[s] used to describe a phenomenon of theoretical
interest” (Bisbe et al., 2007, p. 791; see also Babbie, 2010; Edwards &
Bagozzi, 2000). This section aims at justifying sound conceptual specifi-
cation and operationalization of the research constructs crucial in theory-
based quantitative research to avoid erroneous conclusions regarding the
relationship between constructs due to conceptual misspecification prob-
126
Additional financial data was obtained from the Bureau van Dijk database ‘Orbis’ on April
11th 2016. According to the database, the last update for this data was performed on
April 8th 2016. However, the Bureau van Dijk database ‘Orbis’ does not contain a com-
plete dataset for all companies listed in the database.
4.3. Variable measurement 141
lems (Bisbe et al., 2007). Firstly, theoretical aspects of conceptual speci-

fication and epistemic relationships in constructs, as well as concepts of
construct validity and reliability, are addressed. Subsequently, conceptual
specification of each survey construct is presented and it is demonstrated
how the information collected was transformed into variables to be used
for analysis. Finally, an overview of the control variables used in this
study, a summary of the constructs, and descriptive statistics conclude
this section.
4.3.1 Conceptual specification and epistemic relationships in constructs

While there has been considerable progress and effort to clarify relation-
ships between MCS constructs and other constructs of interest in litera-
ture (e.g., Chenhall, 2003; Fisher, 1995; Gerdin & Greve, 2004; Lang-
field-Smith, 1997; Luft & Shields, 2003), as well as to apply appropriate
testing methods to construct relationships (e.g., Hartmann & Moers,
1999; Luft & Shields, 2003), theoretical aspects of conceptual specifica-
tion of MCS constructs has found less attention (Bisbe et al., 2007) and
has only begun to be addressed rather recently (e.g., Bisbe et al., 2007;
Van der Stede, 2001).
In reference to the predictive validity framework (PVF) described above
(see Section 4.2.1) constructs are identified and specified on the concep-
tual level by theory and subsequently transformed to the operational level
by translating these constructs into operational variables (Bisbe et al.,
2007; Libby et al., 2002). Consequently, in a generic PVF as shown in
Figure 22 above, conceptual specification of constructs addresses Box A
and Box B at the conceptual level. However, through operationalizing
variables, the basis for Link 2 and Link 3 in Figure 22 is constituted and
the gap between conceptual and operational level is bridged (Bisbe et al.,
2007).
The conceptual specification of constructs in social research is “the pro-
cess whereby fuzzy and imprecise notions of constructs are made more
specific and precise” (Bisbe et al., 2007, p. 790) and thus a specific and
agreed-upon meaning is achieved (Babbie, 2010; Bisbe et al., 2007).
According to Bisbe et al. (2007), the term ‘construct’ can be understood
142 4. Methods
as “a theoretical creation that can be defined in conceptual terms but

cannot be observed and therefore is anchored to observable reality by
means of indicators” (Bisbe et al., 2007, p. 790; see also Babbie, 2010;
127
Edwards & Bagozzi, 2000).
As an initial step, the conceptual specification of constructs therefore
involves defining the exact meaning of a construct by identifying observ-
able variables which are referred to as indicators or theoretical proper-
128
ties. These indicators represent signs of the presence of the construct
being studied by referring to either observable manifestations or observ-
able constitutive facets through which its domain is explicitly established
(Bisbe et al., 2007; Segars, 1997). In case the manifestations or constitu-
tive facets are non-observable, these indicators are called dimensions,
which are sub-constructs of higher-order constructs and consequently
referred to as lower-order constructs (Bisbe et al., 2007; Edwards, 2001;
Law et al., 1998). Therefore, defining the exact meaning in the process of
conceptual specification of multidimensional constructs requires both the
description of dimensions and its indicators (Bisbe et al., 2007).
Furthermore, part of the conceptual specification requires determining the
nature and direction of relationships of constructs and its indicators or, in
the case of multidimensional constructs, its dimensions and indicators. As
sound conceptual specification is crucial to avoid ambiguity in the pro-
129
cess of operationalization of constructs, it is imperative that justifica-
tions of the type of relationships are not derived ex post from empirics but
127
Babbie (2010) notes that there are three classes of things that scientists can measure.
While the class of the direct observables addresses things we can observe, such as the
color of an apple, and the class of indirect observables demands more subtle observa-
tions such as studying a history book, the third class of observables consists of con-
structs, which can neither be observed directly nor indirectly (e.g., intelligence quotient)
(Babbie, 2010, p. 133).
128
In addition, constructs can either be identified from practice or derived from theory (Bisbe
et al., 2007; Luft & Shields, 2003). While, in the case of a practice-based construct, an
intense, in-depth review of the practice and of the particular literature is required in order
to specify the domain of the construct, theory-based constructs are defined through a
thorough review of the relevant social science theories which describe the meaning of
the construct (Bisbe et al., 2007; Luft & Shields, 2003; Segars, 1997).
129
In regard to conceptual specification, special concern is focused on content validity of
constructs, which refers to “how much the measures of an operational variable cover the
range of meanings included within a construct (Bisbe et al., 2007, p. 793; see also Bab-
bie, 2010, and Section 4.3.2 for further information).
ex ante on conceptual grounds (Bisbe et al., 2007; Jarvis et al., 2003).

Generally, indicators (or dimensions) can either represent manifestations
of an underlying concept or constitutive facets which describe the con-
struct (Bisbe et al., 2007). These conceptually-defined relationships be-
tween constructs, dimensions, and indicators are referred to as epistemic
relationships, for which two alternative types of models are generally
distinguished (Bisbe et al., 2007; Edwards & Bagozzi, 2000).
Reflective models imply that “an underlying construct is reflected or mani-
fested by a series of indicators. […] Consequently, under a reflective
model, indicators are essentially interchangeable and removing specific
reflective indicators does not alter the conceptual domain of the construct
and does not cause dire consequences in terms of conceptual misspeci-
fication” (Bisbe et al., 2007, p. 800). As the indicators are reflections or
manifestations of an underlying construct, the direction of causality flows
to the indicators. As a consequence, indicators are expected to covary
and “should all have the same antecedents and consequences and share
the same nomological net” (Bisbe et al., 2007, p. 800; see also Edwards
& Bagozzi, 2000; Jarvis et al., 2003). In general, reflective models can be
generalized to latent models or reflective second-order models to repre-
sent relationships between dimensions and multidimensional constructs
(Bisbe et al., 2007). Constructs are defined as multidimensional when
they refer to “several distinct but related dimensions that can be connect-
ed parsimoniously and meaningfully into one single holistic concept”
(Bisbe et al., 2007, p. 803). All essential considerations in regard to re-
flective models and its indicators also apply to latent multidimensional
models and its lower-order dimensions as shown in Figure 23 (Bisbe et
al., 2007).
144 4. Methods
Construct ƞ1 Multidimensional
Construct ξ1
λ11 λ21 λ31 Ƴ11 Ƴ21 Ƴ3
Indicator Y1 Indicator Y2 Indicator Y3 Construct ƞ1 Construct ƞ2 Construct ƞ3

(Dimension) (Dimension) (Dimension)
ɛ ɛ ɛ
1 2 3 S1 S2 S3
Reflective model Latent model
Figure 23: Reflective and latent models

(Source: Bisbe et al., 2007, p. 802 and p. 804)
On the contrary, formative models apply if “a construct is formed or in-

duced by indicators that describe its inherent constitutive facets […]. [Es-
sentially,] indicators are not necessarily interchangeable. Rather, leaving
out constitutive facets of the constructs may provoke severe conceptual
misspecification problems” (Bisbe et al., 2007, p. 800; see also Diaman-
topoulos & Winklhofer, 2001). Consequently, observable indicators are
not necessarily expected to covary and do not inevitably share the same
antecedents and consequences (Bisbe et al., 2007). Furthermore, as the
jointly determined indicators define the conceptual meaning of the con-
struct, these indicators are not a result of an underlying construct and the
direction of causality thus flows to the construct (Bisbe et al., 2007). Simi-
larly to reflective and latent models, formative models can be generalized
to emergent models or formative second-order models in a multidimen-
sional setting (Bisbe et al., 2007). In essence, the relationships between
constructs and its indicators in a formative model are similar to the rela-
tionships between a multidimensional construct and its lower-order di-
mensions in an emergent model as shown in Figure 24 (Bisbe et al.,
130
2007).
130
See Bisbe et al. (2007), Jarvis et al. (2003), and Law et al. (1998) for detailed guidelines
regarding which models apply in specific situations.
ζ1 ζ1
Multidimensional
Construct ƞ1 Construct ƞ1
Ƴ11 Ƴ12 Ƴ13

Ƴ11 Ƴ12 Ƴ13
Construct ξ1 Construct ξ2 Construct
nstruct
t t ξ3
Indicator X1 Indicator X2 Indicator
icator X3
(Dimension)) (Dimension) (Dimension)
φ21 φ32
φ31
Formative model Emergent model
Figure 24: Formative and emergent models

(Source: Bisbe et al., 2007, p. 802 and p. 804)
In regard to the operationalization of variables which is represented

through Link 2 and Link 3 in the PVF in Figure 22 above, emergent multi-
dimensional constructs can be operationalized either through an aggre-
gate approach or a profile approach. In the case of an aggregate ap-
proach, operational variables are aggregated and “the multidimensional
construct is formed as an algebraic composite of its dimensions” (Bisbe
et al., 2007, p. 805). On the other hand, in the profile approach, the oper-
ational variables are profiled and “researchers operationally define vari-
ous levels of their dimensions, identify combinations of these levels of the
dimensions and interpret the construct by profiling these combinations of
levels (Bisbe et al., 2007, p. 805; see also Law et al., 1998).
In general, differentiation between reflective and formative models, or
latent and emergent models in a multidimensional setting, is crucial for
the definition and measurement of operational variables indicated in the
PVF through Box C and Box D in Figure 22 above. In case of justification
for viewing indicators as manifestations of reflective constructs (or di-
mensions of higher-order latent constructs in multidimensional settings
respectively), misspecification problems do not necessarily occur where
there is an incomplete set of indicators (or dimension) selected and con-
146 4. Methods
131
tent validity is therefore not necessarily undermined. In regard to form-
ative models (or higher-order emergent models in multidimensional set-
tings respectively), an incomplete set of indicators (or dimensions) would
lead to serious misspecifications problems as the full census of constitu-
tive indicators (or dimensions) is required. Consequently, content validity
would be undermined since the domain of the construct would not be
completely covered (Bisbe et al., 2007).
In addition, as the construct does not explain the variances-covariances
of the operational variables in formative models, “traditional reliability
evaluation tools based on internal consistency […] and others derived
from Classical Test Theory […] are meaningless, illogical and inappropri-
ate” (Bisbe et al., 2007, p. 803). Therefore, important statistical methods
such as factor analysis and Cronbach’s alpha “work on the implicit basis
on reflective models” (Bisbe et al., 2007, p. 806). Consequently, an ade-
quate specification of the epistemic relationship is a precondition in order
to avoid inappropriate conclusions about construct relationships (Bisbe et
al., 2007; Edwards & Bagozzi, 2000; Jarvis et al., 2003).
4.3.2 Construct validity and reliability

The term construct validity refers to “the degree to which inferences can
legitimately be made from the operationalizations in the study to the theo-
retical constructs on which those operationalizations are based” (Bisbe et
al., 2007, p. 793; see also Cronbach & Meehl, 1955). On the other hand,
reliability can be understood as “the degree of stability of repeated obser-
vations of the same phenomenon, as inter-judges agreement or as inter-
nal consistency of measures of the same unidimensional construct (Bisbe
et al., 2007, p. 802; see also Babbie, 2010). Therefore, “[w]hile validity
[…] relates to what should be measured, reliability refers to the quality
and consistent accuracy of the measurement method” (Bisbe et al., 2007,
p. 802). To establish and ensure validity and reliability of the survey con-
structs, several measures have been assessed and undertaken.
According to Bisbe et al. (2007), the first type of construct validity refers
to “whether the operationalization has a good correspondence with the
131
For further discussion of content validity, please refer to Section 4.3.2.
conceptual definition of the construct” (Bisbe et al., 2007, p. 793). This

aspect is covered by content validity and face validity and refers to the
extent to which the operationalization of the construct towards operational
variables captures the conceptual domain and range of meanings of the
construct (Babbie, 2010; Bisbe et al., 2007). In this study, content validity
and face validity is assessed through (1) use of existing and validated
scales whenever possible, (2) thorough literature review to define exact
meanings and domains, (3) the process of careful conceptual specifica-
tion of constructs and determining of epistemic relationships between
construct and indicators, (4) pre-testing of the questionnaire with aca-
demics and practitioners in two steps, (5) interviews with managing direc-
tors and review of questions which resulted in minor changes in terms of
wording, layout, and structure, and (6) ex-post review of range of re-
sponses.
Furthermore, the second type of construct validity refers to “criterion-
related validity types that empirically examine on the basis of measured
scores whether the operationalization behaves and performs according to
theory” (Bisbe et al., 2007, p. 793). This category of construct validity is
particularly covered by convergent and discriminant validity, which refers
to the degree to which measures are correlated if from the same concept
or diverged if theoretically supposed to do, respectively (Bisbe et al.,
2007). In this study, convergent validity and discriminant validity is as-
132
sessed through (1) factor analyses which support unidimensionality
and disclose relations between items and constructs, (2) multiple ques-
tion loadings in excess of 0.30, (3) lack of significant cross-loadings, and
(4) examining the multi-trait matrix to analyze intercorrelations of con-
structs and compare internal reliability and inter-item reliability (Campbell
& Fiske, 1959).
As an instrument must also be reliable to be valid, a reliability of survey
constructs is necessary, assessing the ability to measure the same value
under the same conditions (Field, 2013). Naturally, one could test the
same group twice, examining whether similar scores are produced at
132
Factor analysis is a technique to identify clusters of variables through reducing a set of
variables into smaller sets of dimensions (Field, 2013).
148 4. Methods
133
different points in time in order to test reliability (Field, 2013). An im-
portant foundation of reliability is traditional measurement error theory
which considers internal consistency and relative absence of systematic
errors in measurement (Bisbe et al., 2007). In this study, the reliability of
constructs was assessed through (1) use of well-established constructs
with various items whenever possible and (2) calculation of Cronbach’s α,
i.e. internal consistency of the scales (Field, 2013).
As the most common measure for reliability (Field, 2013), Cronbach’s α
(Cronbach, 1951) is calculated by multiplying the number of items
squared with the average covariance between items and dividing it by the
sum of all the item variances and item covariances (Field, 2013, p. 708):
𝑁 2 𝑐𝑜𝑣
𝛼= 2
∑ 𝑠𝑖𝑡𝑒𝑚 + ∑ 𝑐𝑜𝑣𝑖𝑡𝑒𝑚
Equation 2: Cronbach’s α
These values are apparent in the variance-covariance matrix of all items

and result in the measure Cronbach’s α which varies between 0 and 1
with a usual cut-off point of .7 (Field, 2013).
Finally, the final scores for each construct measure of each respondent
are calculated by averaging the responses on a seven-point Likert scale
134
to the survey items:
∑𝑛1 𝑖𝑡𝑒𝑚𝑖𝑛
𝐶𝑂𝑁𝑆𝑇𝑅𝑈𝐶𝑇𝑖 =
𝑛
Equation 3: Final score of construct measures
th
In this equation, CONSTRUCTi is the measure for the i construct varia-
th th
ble, itemin is the response value to the n item of the i construct variable,
th
and n the number of items of the i construct variable.
133
This kind of test, which is often unfeasible due to practical reasons is also called test-
retest reliability (Field, 2013, p. 13).
134
For an overview of the final items for construct measurement see Table 10, and for an
overview of all survey items see Appendix.
4.3.3 Risk profile

According to Kaplan & Mikes (2012), the risk profile of an organization is
composed of three types of risks, i.e. preventable risks, strategy execu-
tion risks, and external risks. As these categories of risks are distinct but
related dimensions of a single holistic concept, Kaplan & Mikes’ (2012)
risk profile can conceptually be specified as a multi-dimensional con-
135
struct. While the exact meaning and the conceptual domain of the mul-
tidimensional construct is described in Section 2.1.3.2, these three di-
mensions are defining and constitutive facets of Kaplan & Mikes’ (2012)
risk profile and therefore constitute the epistemic relationship of an emer-
136
gent multidimensional construct as shown in Figure 25 below.
Firstly, preventable risks (PREVRISK) are “internal risks, arising from
within the organization, that are controllable and ought to be eliminated or
avoided” (Kaplan & Mikes, 2012, p. 50; see Section 2.1.3.2). The con-
struct PREVRISK is measured using a scale adapted from Widener
137
(2007) and based on Simons (2000) consisting of indicators about the
quality of operations, the safety of operations, and the reliability of opera-
138
tions. Following Widener’s (2007) conceptualization, respondents were
asked to assess to what extent these indicators are critical to achieving
139
the organization’s strategy on a seven-point Likert scale ranging from
135
According to Bisbe et al. (2007) a “construct is defined as multidimensional when it
refers to several distinct but related dimensions that can be connected parsimoniously
and meaningfully into one single holistic concept” (Bisbe et al., 2007, p. 803).
136
In addition, other aspects of emergent multidimensional constructs also exist (see Sec-
tion 4.3.1). Notably, these dimensions are not interchangeable and do not necessarily
covary, dropping a dimension would alter the conceptual domain of the construct, i.e.
Kaplan & Mikes’ (2012) risk profile, and the direction of causality flows from dimensions
to the construct (Bisbe et al., 2007; Jarvis et al., 2003; Law et al., 1998).
137
Widener measures operations risks which result “from a breakdown in core internal
business processes such as manufacturing or processing and impedes the firm’s ability
to implement its strategy” (Widener, 2007, p. 769), the definition of which is similar to
Kaplan & Mikes’ (2012) conceptualization of preventable risks.
138
In the original scale, Widener (2007) measures operations risks using four items, i.e.
indicators about safety, quality, reliability, and efficiency of operations. As the indicator
regarding efficiency of operations was shown to have the weakest loading in Widener’s
(2007) scale, it was dismissed in this study for the reflective construct PREVRISK result-
ing in a Cronbach α of.86 compared to.66 in Widener’s (2007) analysis.
139
This approach is in line with the definition of risk as “effect of uncertainty on objectives”
(ISO, 2009a, p. 1).
150 4. Methods
not at all (1) to to a great extent (7). Responses to these items are aver-
aged to form the final score for the construct (see Equation 3; for an
overview of final measurement items see Table 10). While the exact
meaning and conceptual domain is defined in Section 2.1.3.2,
PREVRISK is conceptually specified as a reflective construct as shown in
Figure 25, as the indicators are manifestations of an underlying construct
(Widener, 2007). As shown in Table 4 below, exploratory factor analysis
reveals the unidimensionality of PREVRISK and demonstrates that all
items chosen ex ante to measure PREVRISK load on one factor with
factor loadings greater than .88 and cross-loadings of less than .22. The
Cronbach’s α for PREVRISK is .86, which is clearly above the threshold
of .7 (Field, 2013) and indicates high reliability for this scale.
Indicators
Dimensions Quality of operations
Preventable Safety of operations

risks
Reflective Reliability of operations

construct
Emergent model Risk appetite
Risk Strategy
execution risks Expected returns
profile
Reflective High-risk investments

Multidimensional
construct construct
Behavior of competitors
External
Behavior of customers
risks
Formative Behavior of suppliers

construct
Emergence of disruptive techno-

logies
Major political or
environmental changes
Figure 25: Conceptual specification of risk profile

(Source: own illustration; indicators with doted lines have been excluded from the final
measurement of constructs)
Secondly, strategy execution risks (STRATRISK) are risks an organiza-

tion “voluntarily accepts […] in order to generate superior returns from its
strategy” (Kaplan & Mikes, 2012, p. 51), for example “risks taken on by
companies through their R&D activities” (Kaplan, 2014, p. 6; see Section
2.1.3.2). To measure STRATRISK a newly developed scale was used
originally comprised of three indicators about risk appetite, expected re-
turns, and high-risk investments which were derived from Kaplan &
Mikes’ (2012) and Kaplan’s (2014) definitions and explanations of
STRATRISK. Consequently, similar to the measurement of PREVRISK
152 4. Methods
based on Widener (2007), respondents were asked to assess to what

extent the conscious acceptance of risks, the achieving of superior re-
turns, and investments with uncertain return, for example research and
development activities, are critical to achieving the organization’s strategy
on a seven-point Likert scale ranging from not at all (1) to to a great ex-
tent (7). Responses to these items are averaged to form the final score
for the construct (see Equation 3; for an overview of final measurement
items see Table 10). While the exact meaning and conceptual domain is
defined in Section 2.1.3.2, STRATRISK is conceptually specified as a
reflective construct, as shown in Figure 26, as the indicators are manifes-
tations of an underlying construct. Nevertheless, although exploratory
factor analyses disclose that STRATRISK is unidimensional and is load-
ing only on one factor, the reliability of the scale was insufficient with a
Cronbach’s α of .54 falling below the recommended cut-off level of 0.70
(Field, 2013). As a consequence, as superior returns are the main char-
acteristic of STRATRISK according to the definition cited above, it was
decided to use the indicator expected returns for operationalization of
STRATRISK and for further analysis.
Finally, external risks (EXTRISK) “which arise from events outside the
company and are beyond its influence or control” (Kaplan & Mikes, 2012,
p. 51; see Section 2.1.3.2) are measured. For this purpose, a scale
adapted from Moers (2006) and based on Govindarajan (1984) and Mer-
chant (1990) was used, incorporating indicators about behavior of com-
petitors, behavior of customers, behavior of suppliers, emergence of dis-
ruptive technologies, and major political or environmental changes. Con-
sequently, similar to the measurement of PREVRIKS based on Widener
(2007) and to the measurement of STRATRISK described above, re-
spondents were asked to assess to what extent these indicators are criti-
cal to achieving the organization’s strategy on a seven-point Likert scale
ranging from not at all (1) to to a great extent (7). Responses to these
items are averaged to form the final score for the construct (see Equation
3; for an overview of final measurement items see Table 10). This scale
was originally constructed to measure environmental uncertainty which is
widely used as proxy in literature (Otley, 2016). In contrast to PREVRISK
and STRATRISK and as shown in Figure 25, EXTRISK is conceptually
specified as a formative construct, since the different indicators which are

well established in literature (e.g., Grabner & Speckbacher, 2016; Moers,
2006) jointly and constitutively determine the conceptual meaning of the
140
construct. As factor analysis and Cronbach’s α “work on the implicit
basis on reflective models” (Bisbe et al., 2007, p. 806), these methods
and measures have not been calculated for this construct. Instead, con-
struct validity and reliability of the formative measurement model for
EXTRISK has been assessed by drawing on insights from previous stud-
ies (Bisbe et al., 2007).
Factors (66.8%)
Preventable Strategy execution
risks risks
Risk profile
Quality of operations .891 .043
Safety of operations .884 -.124
Reliability of operations .885 .087
Risk appetite -.087 .806
Expected returns .214 .487
High-risk investments -.071 .829
Cronbach’s alpha .863 .544
Explained variance of the constructs is reported in parentheses in the top line.
For the ease of presentation, factor loadings > 0.300 are highlighted in bold.
Table 4: Factor analysis of survey constructs – risk profile
Table 4 reports the results of exploratory factor analysis for all relevant
items of the risk profile, i.e. PREVRISK and STRATRISK, but excluding
the items for EXTRISK as the unidimensionality criterion does not apply
for formative constructs (Bisbe et al., 2007). As extraction method a prin-
141
cipal component analysis was conducted on the remaining 6 items with
140
Grabner & Speckbacher (2016) use a slightly adapted scale to measure environmental
uncertainty that is based on Moers (2006). Moreover, Bedford et al. (2016) use a similar
measure termed environmental dynamism adapted from Gordon & Narayanan (1984)
and based on a formative scale.
141
While in literature some authors strictly differentiate between factor analysis and princi-
pal component analysis, this study considers the latter as legitimate extraction method to
conduct a factor analysis (Field, 2013).
154 4. Methods
142
oblique rotation (direct oblimin). All factors with eigenvalue over Kai-
143
ser’s (1960) criterion of 1 have been extracted, resulting in two factors
which explain 66.84% of the variance. As the reliability of factor analysis
depends on sample size (Field, 2013), the Kaiser-Meyer-Olkin measure
144
of sampling adequacy (KMO) has been examined (Kaiser, 1970). For
this factor analysis, the KMO statistic is .71 and all KMO values for indi-
vidual items were greater than .58 which is above the minimum criterion
of .5 (Field, 2013) and indicates the sample adequacy to be appropriate.
4.3.4 MCS design and use

Since this study is based on Simons’ LOC framework (Simons, 1995b),
the extent of the firms’ focus on beliefs systems, boundary systems, di-
agnostic control systems, and interactive control systems is measured.
As these are distinct but related dimensions of a single holistic concept,
Simons’ LOC framework can conceptually be specified as a multidimen-
145
sional construct. While the exact meaning and the conceptual domain
of the multidimensional construct is described in Section 2.2.3, these four
dimensions are defining and constitutive facets of Simons’ LOC frame-
work and therefore constitute the epistemic relationship of an emergent
146
multidimensional construct (see Figure 26 and Figure 27 below).
142
Factor rotation uses various methods to discriminate between factors and effectively
rotate initial axes in order to score variables to be maximally loaded to only one factor
(Field, 2013). Generally there are two types of rotation, i.e. orthogonal rotation and
oblique rotation. While the former method presumes independent factors, with oblique
rotation methods factors are allowed to correlate (Field, 2013). As the factors are ex-
pected to be related and not independent, oblique rotation is chosen, with direct oblimin
to be one method to do so.
143
According to a recommendation by Kaiser (1960) all factors with eigenvalue greater than
1 should be retained as they represent the amount of variation explained by a factor and
a value of 1 is regarded as substantial amount of variation (Field, 2013).
144
The KMO statistic which varies between 0 and 1 reports the ratio of squared correlation
to squared partial correlation between variables with a threshold of .5 for acceptable
sampling adequacy (Field, 2013; Kaiser, 1970). High values close to 1 for the KMO sta-
tistic indicate compact patterns of correlations and expect factors to be distinct and relia-
ble (Field, 2013).
145
For definition of and further information about multidimensional constructs please refer to
Section 4.3.1.
146
In addition, other aspects of emergent multidimensional constructs also exist (see Sec-
tion 4.3.1). Notably, the dimensions are not interchangeable and do not necessarily
Dimensions Indicators
Mission statement communi-

Beliefs cates values
systems
Top managers
Reflective construct communicate values
Emergent model Boundary Workforce is aware of values

systems
Simons‘
Reflective construct Mission statement inspires
MCS
Multidimensional Diagnostic Defines appropriate

construct control systems behavior
Reflective construct Informs about off-limits

behavior
Interactive Communicates risks
control systems to be avoided
Reflective construct Workforce aware of

code of conduct
Figure 26: Conceptual specification of Simons’ MCS – design attributes

In terms of design attributes of MCS, beliefs systems (BELIEF) are con-

trols that inspire and motivate individuals to foster creativity and creation
of value (Simons, 1995b, 2000; see also Section 2.2.3.1). The focus on
BELIEF is measured using a scale published by Widener (2007) consist-
ing of indicators about the presence, communication, and motivational
aspects of mission statements and core values of an organization.
Boundary systems (BOUND), on the other hand, are the controls that
delineate the acceptable domain of activity and which establish limits to
opportunity-seeking and individual creativity (Simons, 1995b, 2000; see
Section 2.2.3.2). Again, in order to measure the construct BOUND, a
covary, dropping a dimension would alter the conceptual domain of the construct, i.e.
Simons’ LOC framework, and direction of causality flows from dimensions to the con-
struct (Bisbe et al., 2007; Jarvis et al., 2003; Law et al., 1998).
156 4. Methods
scale published by Widener (2007) is applied, consisting of indicators

regarding presence, communication, and awareness of code of business
conducts and other systems designed to limit actions and risks that
should be avoided (Widener, 2007). Following Widener’s (2007) concep-
tualization, respondents were asked to assess to what extent these indi-
cators describe the organization on a seven-point Likert scale ranging
from not descriptive (1) to very descriptive (7). Responses to these items
are averaged to form the final score for each construct (see Equation 3;
for an overview of final measurement items see Table 10). While the ex-
act meanings and conceptual domains are defined in Section 2.2.3.1 and
2.2.3.2, BELIEF and BOUND are conceptually specified as reflective
constructs as shown in Figure 26, as the indicators are manifestations of
an underlying construct (Widener, 2007).
As shown in Table 5 below, exploratory factor analysis reveals the unidi-
mensionality of BELIEF and BOUND and that all items chosen ex ante to
measure these constructs load on one factor each with factor loadings
greater than .85 and cross-loadings of less than .24 for both constructs.
The Cronbach’s α for BELIEF and BOUND are .85 and .91, respectively,
which is clearly above the threshold of .7 (Field, 2013) and indicates high
reliability for these scales.
Indicators
Dimensions
Progress towards goals
Beliefs
systems
Monitor results
Reflective construct
Compare outcomes
Boundary
Emergent model systems
Review key measures
Simons‘ Reflective construct
MCS
Interactive use at the
Diagnostic management level
Multidimensional control systems
construct
Reflective construct Face-to-face challenge and debate
Interactive Focus on strategic uncertainties

control systems
Reflective construct Non-invasive, facilitating and

inspirational involvement
Figure 27: Conceptual specification of Simons’ MCS – attention patterns

In regard to attention patterns (see Figure 27 above), diagnostic control

systems (DIAGNOST) are “feedback systems that monitor organizational
outcomes and correct deviations from preset standards of performance”
(Simons, 1995b, p. 179; see Section 2.2.3.3). In contrast, interactive con-
trol systems (INTERACT) are “control systems that managers use to
involve themselves regularly and personally in the decision activities of
subordinates” (Simons, 1995b, p. 180; see Section 2.2.3.4). In line with
previous studies in literature (Henri, 2006a; Widener, 2007) and despite
the fact that several control systems can be used either diagnostically or
interactively, this study focuses on the use of performance measures due
to the special importance of the performance management systems in
organizations (Widener, 2007) and the long stream of literature in this
field of research (Widener, 2007). The construct DIAGNOST is measured
by using a published scale (Henri, 2006a; Ittner & Larcker, 1998; Widen-
er, 2007) which was adapted from Vandenbosch’s (1999) instrument and
158 4. Methods
consists of indicators regarding the use of performance measures to track

progress towards goals, monitor results, compare outcomes to expecta-
tions, and review key measures. To measure the construct INTERACT,
concepts of Simons (1995b, 2000) and Bisbe et al. (2007) were used and
scales from Widener (2007) and Henri (2006a) were adapted, resulting in
indicators about the use of performance measures to foster discussion, to
enable continual challenge and debate, to discuss changes in the busi-
ness environment, and to generate dialogue that encourages the sharing
of information between superiors and subordinates. Following Widener’s
(2007) and Henri’s (2006a) conceptualization, respondents were asked to
assess the extent to which these indicators are used at the management
level on a seven-point Likert scale ranging from not at all (1) to to a great
extent (7). Responses to these items were averaged to form the final
score for each construct (see Equation 3; for an overview of final meas-
urement items see Table 10). While the exact meanings and conceptual
domains are defined in Sections 2.2.3.3 and 2.2.3.4, DIAGNOST and
INTERACT are conceptually specified as reflective constructs as shown
in Figure 27, as the indicators are manifestations of an underlying con-
147
struct (Widener, 2007).
mensionality of DIAGNOST and INTERACT and that all items chosen ex
ante to measure these constructs load on one factor each with factor
loadings greater than .73 and cross-loadings of less than .21 for both
constructs. The Cronbach’s α for DIAGNOST and INTERACT are .94 and
.92, respectively, which is clearly above the threshold of .7 (Field, 2013)
and which indicates a high level of reliability for these scales.
147
Bisbe et al. (2007) argue that an interactive control system “is a higher-order emergent
multidimensional construct formed by a series of defining constitutive dimensions” (Bisbe
et al., 2007, p. 808), i.e. intensive use by top management, intensive use by operating
managers, face-to-face challenge and debate, focus on strategic uncertainties, as well
as non-invasive, facilitating and inspirational involvement (Bisbe et al., 2007, p. 809).
The indicators for the interactive control systems in this study were largely chosen by fol-
lowing the argumentation of Bisbe et al. (2007), and incorporate aspects of other pub-
lished scales (Henri, 2006a; Widener, 2007). Despite the view of Bisbe et al. (2007), the
conceptual specification of the epistemic relationship for interactive control systems as
reflective construct is widely used (e.g., Bisbe & Malagueno, 2009; Henri, 2006a; Wid-
ener, 2007) and resulted in a highly reliable Cronbach’s α of .92 for this study.
Factors (79.5%)
Diagnostic Interactive
Beliefs Boundary
control control
systems systems
systems systems
Design attributes of MCS
Mission statement
.732 .123 .088 .043
communicates values
Top managers
.765 -.019 -.024 -.085
communicate values
Workforce is aware of values .902 -.013 .083 .122
Mission statement inspires .860 -.004 -.102 -.110
Defines appropriate behavior .066 .876 .093 .121
Informs about off-limits behavior -.059 .950 .059 .020
Communicates risks to be avoided .020 .742 -.114 -.233
Workforce aware of code of conduct .060 .896 -.007 .020
Attention patterns of MCS

Progress towards goals -.034 .031 .925 -.030
Monitor results -.002 .020 .962 .026
Compare outcomes .038 .015 .901 -.048
Review key measures .069 -.027 .733 -.172
Interactive use at the
-.018 .005 .110 -.838
management level
Face-to-face challenge and debate -.008 -.026 .209 -.767
Focus on strategic uncertainties .009 .079 -.005 -.889
Non-invasive, facilitating and inspira-
.087 -.004 -.013 -.871
tional involvement
Cronbach’s alpha .852 .907 .944 .923

Table 5: Factor analysis of survey constructs – MCS
Table 5 above reports the results of exploratory factor analysis for all
relevant items of MCS, i.e. BELIEF, BOUND, DIAGNOST, and
INTERACT. As extraction method a principal component analysis was
conducted on the 16 items with oblique rotation (direct oblimin). All fac-
tors with eigenvalue over Kaiser’s (1960) criterion of 1 were extracted,
resulting in four factors which explain 79.46% of the variance. As the
reliability of factor analysis depends on sample size (Field, 2013), the
Kaiser-Meyer-Olkin measure of sampling adequacy (KMO) has been
160 4. Methods
examined (Kaiser, 1970). For this factor analysis, the KMO statistic is .91
and all KMO values for individual items were greater than .86 which is
well above the minimum criterion of .5 (Field, 2013), thus indicating the
sample adequacy to be appropriate.
Furthermore, in an extended risk-based MCS framework setting, two
additional dimensions are specified, considering the extent to which the
148 149
design attributes and attention patterns are risk-based. Therefore,
the risk-based MCS framework comprises six dimensions: beliefs sys-
tems, boundary systems, diagnostic control systems, interactive control
systems, risk-based formal controls, and risk-based use of controls (see
Section 3.1). Similarly to the LOC framework, the risk-based MCS
framework can conceptually be specified as an emergent multidimen-
sional construct, as all six dimensions are defining and constitutive facets
150
(see Figure 28 below).
148
Design attributes refer to the emphasis on beliefs and boundary systems (see also
Section 2.2.3.1 and 2.2.3.2).
149
Attention patterns refer to the use of controls, i.e. diagnostic or interactive use (see also
Section 2.2.3.3 and 2.2.3.4).
150
Similar to Footnote 146, also other aspects of emergent multidimensional constructs
exist (see Section 4.3.1 above).
Dimensions
Beliefs
systems
Indicators
Boundary
systems Communication of risk appetite
Emergent Workforce is aware of risk appetite
model Diagnostic
control
systems
Risk-based Communication of risk limits
MCS
Interactive
Multi- control Workforce is aware of risk limits
dimensional systems
construct Reflective construct
Correct deviations
Risk-based considering risk information
formal
controls Review key measures
Reflective construct considering risk information
Risk-based Face-to-face challenge and debate consid-

use of ering risk information
controls
Reflective construct Considering risk information
when getting involved
Figure 28: Conceptual specification of risk-based MCS

Finally, the risk-based dimensions of the extended risk-based MCS

framework are conceptually specified. Whereas risk-based formal con-
trols (rbFORMALMCS) are used to frame the strategic domain in terms of
risks, i.e. risk culture, risk appetite, and risk limits, the construct risk-
based use of controls (rbUSEMCS) focuses on the intensity of risk con-
siderations when using controls, i.e. the integration of risk information or
risk measures (see Section 3.1). The construct rbFORMALMCS is meas-
ured by using a newly-developed scale inspired by the well-established
scales and indicators of BELIEF and BOUND and incorporating indicators
about communication and awareness of risk appetite and risk limits.
Based on Widener’s (2007) conceptualization of BELIEF and BOUND,
162 4. Methods
respondents were asked to assess the extent to which these indicators

describe the organization on a seven-point Likert scale ranging from not
descriptive (1) to very descriptive (7). Furthermore, the measurement of
the construct rbUSEMCS was conducted through a newly-developed
scale inspired by the well-established scales and indicators of
DIAGNOST and INTERACT and incorporating indicators about consider-
ation of risk information at the management level when using controls
diagnostically or interactively. Following Widener’s (2007) and Henri’s
(2006a) conceptualizations of DIAGNOST and INTERACT, respondents
were asked to assess the extent to which these indicators apply on a
seven-point Likert scale ranging from not at all (1) to to a great extent (7).
Responses to the items were averaged to form the final score for each
construct (see Equation 3; for an overview of final measurement items
see Table 10). While the exact meanings and conceptual domains are
defined in Section 3.1, rbFORMALMCS and rbUSEMCS are conceptually
specified as reflective constructs as shown in Figure 28, as these indica-
tors are manifestations of an underlying construct (Widener, 2007).
mensionality of rbFORMALMCS and rbUSEMCS and that all items cho-
sen ex ante to measure these constructs load on one factor each with
factor loadings greater than .76 and cross-loadings of less than .15 for
both constructs. The Cronbach’s α for rbFORMALMCS and rbUSEMCS
are .87 and .89, respectively, which is clearly above the threshold of .7
(Field, 2013) and indicates high reliability for these scales.
Factors (73.9%)
Risk-based Risk-based
formal controls use of controls
Risk-based dimensions of MCS
Communication of risk appetite .862 -.013
Workforce is aware of risk appetite .890 -.132
Communication of risk limits .782 .143
Workforce is aware of risk limits .776 .145
Correct deviations considering risk information .018 .893
Review key measures considering risk information -.001 .853
Face-to-face challenge and debate
-.066 .921
considering risk inform
Considering risk information when getting involved .108 .764

Table 6: Factor analysis of survey constructs – risk-based dimensions of MCS
As extraction method for the exploratory factor analysis in Table 6 a prin-

cipal component analysis was conducted on the 8 items with oblique
rotation (direct oblimin). All factors with eigenvalue over Kaiser’s (1960)
criterion of 1 were extracted, resulting in two factors which explain
73.86% of the variance. As the reliability of factor analysis depends on
sample size (Field, 2013), the Kaiser-Meyer-Olkin measure of sampling
adequacy (KMO) has been examined (Kaiser, 1970). For this factor anal-
ysis, the KMO statistic is .81 and all KMO values for individual items were
greater than .76 which is well above the minimum criterion of .5 (Field,
2013) and indicates the sample adequacy to be appropriate.
4.3.5 Strategy
According to Porter (1985), competitive strategy is “the search for a fa-
vourable competitive position in an industry” (Porter, 1985, p. 1) leading
to unique competitive advantages which enable profitable and sustaina-
ble positions against the forces that determine industry competition (Dent,
1990; Porter, 1985). While there are several classifications of strategy in
literature (e.g., Dent, 1990), this study follows Porter’s (1980, 1985) con-
164 4. Methods
ceptualization of strategy which proposes two generic strategies for com-

panies to compete effectively: cost leadership and differentiation. While
cost leadership requires the cost of operation to be minimized and targets
efficiency and economics of scale, differentiation aims at creating prod-
ucts or services which are perceived as unique by customers (Porter,
1980, 1985). This typology is regarded as capturing complexity while
maintaining simplicity (Dess & Davis, 1984) and is widely used in respec-
tive literature (e.g., Auzair & Langfield-Smith, 2005; Chenhall & Langfield-
Smith, 1998). Following this view, Porter’s (1980, 1985) conceptualization
of strategy can be conceptually specified as a multidimensional construct,
as cost leadership and differentiation are distinct but related dimensions
151
of a single holistic concept. As these dimensions are defining and con-
stitutive facets of Porter’s (1980, 1985) conceptualization of strategy, they
constitute the epistemic relationship of an emergent multidimensional
152
construct (see Figure 29 below).
151
For a definition of and for further information regarding multidimensional constructs,
please refer to Section 4.3.1.
152
In addition, other aspects of emergent multidimensional constructs are also present (see
Section 4.3.1 above). Notably, the dimensions are not interchangeable and do not nec-
essarily covary, dropping a dimension would alter the conceptual domain of the con-
struct, i.e. Porter’s (1980, 1985) conceptualization of strategy, and the direction of cau-
sality flows from dimensions to the construct (Bisbe et al., 2007; Jarvis et al., 2003; Law
et al., 1998).
Indicators
Dimensions Low cost of services
Cost leadership Cost efficient procedures

strategy
Emergent model
Reflective High asset utilization
construct
Strategy
Introduction of new services or products

Multidimensional
construct Differentiation Uniqueness of services or products
strategy
Reflective Range of services or products offered

construct
Figure 29: Conceptual specification of strategy

In this study, cost leadership (COSTSTRAT) and differentiation

(DIFFSTRAT) are measured using scales adapted from Auzair & Lang-
field-Smith (2005) and based on Chenhall & Langfield-Smith (1998), con-
sisting of indicators regarding the importance of low cost of services, cost
efficient procedures, and high asset utilization, as well as the importance
of the introduction of new services or products, uniqueness of services or
products, and range of services or products offered. In contrast to Por-
ter’s (1980) notion that the generic strategies COSTSTRAT and
DIFFSTRAT are mutually exclusive, it is assumed that these dimensions
may indeed appear in various ways (Hill, 1988; Murray, 1988). Following
the conceptualization of Auzair & Langfield-Smith (2005), respondents
were asked to assess the emphasis on these indicators on a seven-point
Likert scale ranging from not at all (1) to to a great extent (7). Responses
to the items were averaged to form the final score for each construct (see
Equation 3; for an overview of final measurement items see Table 10)
and COSTSTRAT and DIFFSTRAT are conceptually specified as reflec-
tive constructs as shown in Figure 29, as the indicators are manifesta-
tions of underlying constructs (Auzair & Langfield-Smith, 2005).
166 4. Methods

mensionality of COSTSTRAT and DIFFSTRAT and that all items chosen
ex ante to measure these constructs load on one factor each. Neverthe-
less, Cronbach’s α for these scales is .69 and .57, respectively, which is
below the threshold of .7 (Field, 2013) for this measure and indicates
weak reliability for these scales. Consequently, following recommenda-
tions by Field (2013), scales were checked for items which would in-
crease the value of Cronbach’s α if excluded from the scale. As a result,
the items low cost of services for COSTSTRAT and range of services or
products offered for DIFFSTRAT were excluded from the measurement
model, leading to a final value of Cronbach’s α for COSTSTRAT and
153 154
DIFFSTRAT of .71 and .68 , respectively.
Factors (60.3%)
Cost leadership Differentiation
strategy strategy
Strategy
Low cost of service .765 -.090
Cost efficient procedures .870 .010
High asset utilization .733 .118
Introduction of new services or products .188 .733
Uniqueness of services or products .021 .838
Range of services or products offered -.105 .617

Table 7: Factor analysis of survey constructs – strategy
153
Although this value is below the threshold of .7 (Field, 2013) it is above values reported
in similar studies (e.g., Judge et al., 1999).
154
Factor analysis was redone after dismissal of items low cost of services and range of
services or products offered with no significant changes in results and sufficient loadings
and lack of cross-loadings.
Table 7 above reports the results of exploratory factor analysis for all
relevant items of strategy, i.e. COSTSTRAT and DIFFSTRAT. As extrac-
tion method a principal component analysis was conducted on the 6
items with oblique rotation (direct oblimin). All factors with eigenvalue
over Kaiser’s (1960) criterion of 1 have been extracted which resulted in
two factors which explain 60.31% of the variance. As the reliability of
factor analysis depends on sample size (Field, 2013), the Kaiser-Meyer-
Olkin measure of sampling adequacy (KMO) has been examined (Kaiser,
1970). For this factor analysis, the KMO statistic is .62 and all KMO val-
ues for individual items were greater than .58 which is above the mini-
mum criterion of .5 (Field, 2013) and indicates the sample adequacy to
be appropriate.
4.3.6 Performance
As a proxy for organizational performance, two survey constructs are
155
used in this study. First, the perceived firm performance (PERCPERF)
156
is measured using a scale adapted from Henri (2006a) and based on
Govindarajan (1988) and Govindarajan & Fisher (1990), consisting of
indicators regarding sales volume, return on investment, and results of
the organization. Based on Henri’s (2006a) conceptualization, respond-
ents were asked to rate the performance on the indicators of the organi-
zation compared to the strongest competitors in the last three years on a
seven-point Likert scale ranging from not at all satisfactory (1) to out-
standing (7). Responses to the items were averaged to form the final
score for the construct (see Equation 3; for an overview of final meas-
urement items see Table 10). While the construct measures the subjec-
tive firm performance on financial measures, PERCPERF is conceptually
specified as a reflective construct as shown in Figure 30, as the indica-
tors are manifestations of an underlying construct (Henri, 2006a). As
155
In literature, some authors argue that neither objective nor subjective performance
measures are superior for valid and reliable performance assessment (e.g., Dess & Rob-
inson, 1984; Henri, 2006a; Venkatraman & Ramanujam, 1987). In practice, in the con-
text of questionnaires, objective performance measures are often difficult to access.
156
For this study there have been minor changes to the wording of the published construct
by Henri (2006a).
168 4. Methods
shown in Table 8 below, exploratory factor analysis reveals the unidi-

mensionality of PERCPERF and demonstrates that all items chosen ex
ante to measure PERCPERF load on one factor with factor loadings
greater than .74 and cross-loadings of less than .05. The Cronbach’s α
for PERCPERF is .86 which is clearly above the threshold of .7 (Field,
2013) and indicates high reliability for this scale.
Indicators
Sales volume
Perceived firm
Return on investment
performance
Result
Figure 30: Conceptual specification of perceived firm performance

Secondly, the usefulness of MCS (USEFULMCS) is measured using a

157
scale adapted from Sandino (2004, 2007), consisting of indicators
about facilitation of company growth, information about new threats and
opportunities, protection from loss or excessive risk, and the ability to
operate timely and efficiently. Based on Sandino’s (2004, 2007) concep-
tualization, respondents were asked to rate the extent to which they
agreed with indicative statements on a seven-point Likert scale ranging
from strongly disagree (1) to strongly agree (7). The fourth indicator, abil-
ity to operate timely and efficiently, loads on a second factor and is there-
fore dismissed from the final construct measurement. Responses to the
remaining items are averaged to form the final score for the construct
(see Equation 3; for an overview of final measurement items see Table
10). While the construct measures the perceived usefulness of the control
system of the organization, USEFULMCS is conceptually specified as a
reflective construct as shown in Figure 31, as the indicators are manifes-
157
For measuring the reflective construct in the scale published, Sandino (2004, 2007) uses
5 items, which were reduced to 4 in this study due to efficiency reasons.
tations of an underlying construct (Henri, 2006a). As shown in Table 8

below, exploratory factor analysis reveals that the first three items of
USEFULMCS are unidimensional and demonstrates that these items
chosen ex ante to measure USEFULMCS load on one factor with factor
loadings greater than .82 and cross-loadings of less than .02. The
Cronbach’s α for USEFULMCS is .85 which is clearly above the threshold
of .7 (Field, 2013) and indicates high reliability for this scale.
Indicators
Facilitation of company growth
Information to new threats and opportunities

Perceived useful-
ness of MCS
Protection from loss or excessive risk
Ability to operate timely and efficiently
Figure 31: Conceptual specification of perceived usefulness of MCS

Table 8 below reports the results of exploratory factor analysis for all
relevant items of performance, i.e. PERCPERF and USEFULMCS. As
extraction method a principal component analysis was conducted on the
7 items with oblique rotation (direct oblimin). All factors with eigenvalue
over Kaiser’s (1960) criterion of 1 have been extracted which resulted in
three factors which explain 81.35% of the variance. As the reliability of
factor analysis depends on sample size (Field, 2013), the Kaiser-Meyer-
Olkin measure of sampling adequacy (KMO) has been examined (Kaiser,
1970). For this factor analysis, the KMO statistic is .70 and all KMO val-
ues for individual items were greater than .61 except for one item, i.e.
ability to operate timely and efficiently, which was dismissed from the final
158
measurement model. Therefore, in exceeding the minimum criterion of
158
After dismissal of the item ability to operate timely and efficiently, the exploratory factor
analysis was redone and disclosed no significant changes in the results.
170 4. Methods
.5 (Field, 2013) for the remaining items, the sample adequacy is indicated
to be appropriate.
Factors (81.4%)
Perceived
Perceived firm Flexibility
usefulness
performance of MCS
of MCS
Performance
Sales volume .744 .042 -.027
Return on investment .940 -.019 -.001
Result .956 -.024 .017
Facilitation of company growth .093 .822 .080
Information to new threats and opportuni-
-.087 .932 -.060
ties
Protection from loss or excessive risk .014 .879 -.008
Ability to operate timely and efficiently -.016 .002 .997
Cronbach’s alpha .860 .854 -

Table 8: Factor analysis of survey constructs – performance
4.3.7 Control variables

In accordance with previous contingency-based research (e.g., Chap-
man, 1997; Chenhall, 2003), and to improve validity and test robustness
of the model organizational size, company age, and ownership structure
are included as control variables in the research design.
While literature suggests that organizational size and company age may
indicate which types of controls are predominantly used (e.g., Chenhall,
2003; Davila, 2005), it has been argued that ownership structure also
affects the control structure of the firm (e.g., Davila, 2005; King & Clark-
son, 2015). To measure organizational size and company age, this study
uses the number of employees and the founding date, respectively, as
indicators which were requested from respondents in the questionnaire.
Furthermore, the natural logarithm of the number of employees and the
years since founding date were calculated for further analysis to normal-
ize the distributions which is in line with common procedure in literature

(e.g., Henri, 2006a; Libby & Waterhouse, 1996).
In order to measure ownership structure, respondents were asked if the
company was owned by a family up to 25%, between 25,1% and 50%,
between 50,1% and 100%, or not at all. In addition, it was also asked if
the top management consists of members of an owner family partly, ex-
clusively, or not at all. Consequently, a dummy variable was computed
and set to 1 if the company was owned at least to an extent of 25.1% by
a family and the top management consists at least partly of members of
159
an owner family, and set to 0 otherwise.
4.3.8 Summary of constructs

The following table gives an overview of the constructs used in this study.
In addition, a multitrait matrix is presented to provide further evidence that
these variables are distinct constructs. For this purpose, the diagonal of
the matrix in Table 9 shows the Cronbach’s α for each latent construct
which is a reliability measure for internal consistency. The remainder of
the matrix contains bi-variate correlation coefficients between the pairs of
variables. Evidence that the dimensions are distinct is provided if the
correlation coefficients within a column, i.e. the inter-item reliability, are
less than the Cronbach’s α in the diagonal of the matrix, i.e. internal relia-
bility (Churchill, 1979). As a result, for each latent construct, the internal
reliability is higher than the inter-item reliability as the Cronbach’s α ex-
ceeds the correlations in all cases. Therefore, strong empirical support for
discriminant validity is provided.
159
Daily & Dollinger (1992) differentiate in their study in ‘professionally-managed firms’ and
‘family-owned and -managed firms’ and report significant differences across structural,
process, and performance dimensions. Furthermore, the definition of the European
Commission (2009) of family businesses includes, among other aspects, the require-
ment that at least one family member is formally involved in the governance of the firm
and that, at least for listed companies, 25 per cent of the decision-making rights are in
possession of the family. Thus, the operationalization of ownership structure in this study
reflects these aspects.
172
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
PREVRISK (1) .863
STRATRISK (2) .231 ---
EXTRISK (3) .405 .335 ---
BELIEF (4) .352 .228 .252 .852
BOUND (5) .349 .248 .278 .564 .907
Table 9: Multitrait matrix

DIAGNOST (6) .321 .273 .326 .339 .362 .944
INTERACT (7) .268 .188 .349 .400 .350 .689 .923
rbFORMALMCS (8) .272 .208 .259 .657 .597 .319 .421 .867
rbUSEMCS (9) .333 .239 .351 .421 .413 .662 .719 .521 .889
COSTSTRAT (10) .569 .267 .428 .286 .328 .377 .377 .284 .416 .714
DIFFSTRAT (11) .360 .202 .372 .259 .158 .222 .225 .124 .201 .312 .682
PERCPERF (12) .156 .175 .108 .331 .245 .143 .092 .243 .123 .044 .132 .860
USEFULMCS (13) .283 .186 .229 .353 .303 .442 .437 .308 .415 .251 .194 .279 .854
*: p-value significant at <.05, **: p-value significant at <.01, ***: p-value significant at <.001, two-tailed tests.
Correlations with an absolute value of .108 or higher are significant at, at least, p < .05.
4. Methods
4.3.9 Descriptive statistics

In the following table, the minimum and the maximum value for each item
and each construct of all data gathered is displayed, and the statistical
measures mean, median, and standard deviation shown. In sum, the
descriptive statistics presented below reveal that all questions included a
wide range of scores with a minimum of either 1 or 2 and a maximum of 7
and thus encompassing at least a six-point scale.
Descriptive statistics for survey items and constructs

Std.
Min Mean Median Max
dev.
Preventable risks (PREVRISK) 2.00 6.09 6.00 7.00 0.84
Quality of operations 2.00 6.06 6.00 7.00 0.90
Safety of operations 2.00 5.89 6.00 7.00 1.07
Reliability of operations 2.00 6.21 6.00 7.00 0.86
Strategy execution risks (STRATRISK) 1.00 4.85 5.00 7.00 1.25

Expected returns 1.00 4.85 5.00 7.00 1.25
External risks (EXTRISK) 2.60 4.95 5.00 7.00 0.81

Behavior of competitors 1.00 4.34 5.00 7.00 1.49
Behavior of customers 1.00 6.22 6.00 7.00 0.99
Behavior of suppliers 1.00 4.06 4.00 7.00 1.44
Emergence of disruptive technologies 1.00 5.65 6.00 7.00 1.29
Major political or environmental changes 1.00 4.46 5.00 7.00 1.50
Beliefs systems (BELIEF) 1.50 4.96 5.00 7.00 1.04

Mission statement communicates
1.00 5.21 5.00 7.00 1.32
values
Top managers communicate values 1.00 5.22 5.00 7.00 1.20
Workforce is aware of values 2.00 4.98 5.00 7.00 1.14
Mission statement inspires 1.00 4.44 5.00 7.00 1.32
Boundary systems (BOUND) 1.00 4.81 5.00 7.00 1.47

Defines appropriate behavior 1.00 5.01 5.00 7.00 1.63
Informs about off-limits behavior 1.00 5.00 5.00 7.00 1.71
Communicates risks to be avoided 1.00 4.34 5.00 7.00 1.75
Workforce aware of code of conduct 1.00 4.87 5.00 7.00 1.57
Diagnostic control systems (DIAG-

1.00 5.47 5.75 7.00 1.32
NOST)
Progress towards goals 1.00 5.40 6.00 7.00 1.48
Monitor results 1.00 5.65 6.00 7.00 1.38
Compare outcomes 1.00 5.53 6.00 7.00 1.42
Review key measures 1.00 5.29 6.00 7.00 1.44
Table 10: Descriptive statistics for survey items and constructs (continued)
174 4. Methods
Interactive control systems (INTERACT) 1.00 4.70 5.00 7.00 1.35

Interactive use at the management level 1.00 4.72 5.00 7.00 1.54
Face-to-face challenge and debate 1.00 4.77 5.00 7.00 1.55
Focus on strategic uncertainties 1.00 4.70 5.00 7.00 1.46
Non-invasive, facilitating and inspira-
1.00 4.63 5.00 7.00 1.46
tional involvement

1.25 4.74 5.00 7.00 1.15
(rbFORMALMCS)
Communication of risk appetite 1.00 4.90 5.00 7.00 1.29
Workforce is aware of risk appetite 1.00 4.30 4.00 7.00 1.32
Communication of risk limits 1.00 5.09 5.00 7.00 1.42
Workforce is aware of risk limits 1.00 4.68 5.00 7.00 1.41
Risk-based use of controls (rbUSEMCS) 1.00 5.04 5.25 7.00 1.18

Correct deviations considering risk
1.00 5.16 5.00 7.00 1.35
information
Review key measures considering risk
1.00 5.39 6.00 7.00 1.27
information
Face-to-face challenge and debate
1.00 4.88 5.00 7.00 1.47
considering risk inform
Considering risk information when
1.00 4.71 5.00 7.00 1.35
getting involved
Cost leadership strategy (COSTSTRAT) 2.00 5.89 6.00 7.00 0.95

Cost efficient procedures 2.00 6.06 6.00 7.00 1.03
High asset utilization 2.00 5.71 6.00 7.00 1.12
Differentiation strategy (DIFFSTRAT) 1.00 5.68 6.00 7.00 1.09

Introduction of new services or products 1.00 5.22 5.00 7.00 1.36
Uniqueness of services or products 1.00 6.15 6.00 7.00 1.13
Perceived firm performance

1.00 4.56 4.67 7.00 1.24
(PERCPERF)
Sales volume 1.00 4.75 5.00 7.00 1.28
Return on investment 1.00 4.49 5.00 7.00 1.42
Result 1.00 4.45 5.00 7.00 1.48
Perceived usefulness of MCS

1.00 4.36 4.33 7.00 1.33
(USEFULMCS)
Facilitation of company growth 1.00 4.63 5.00 7.00 1.44
Information to new threats and
1.00 4.33 4.00 7.00 1.49
opportunities
Protection from loss or excessive risk 1.00 4.14 4.00 7.00 1.60
Items which were dismissed from the final measurement model are excluded.
Table 10: Descriptive statistics for survey items and constructs

4.4. Data analysis 175
4.4 Data analysis

In this section, the main statistical techniques applied will be discussed.
Firstly, the method of multiple regression models will be introduced, used
to examine the design and performance hypotheses. Furthermore, cluster
analysis and logistic regression models will be presented, applied to test
the cluster hypotheses and, in the case of the latter, the performance
hypotheses also.
4.4.1 Multiple regression analysis

In multiple regression models, the relationship among variables is esti-
mated by fitting a linear model to the data in order to predict values of an
outcome, i.e. the dependent or explained variable, from several predic-
tors, i.e. independent or explanatory variables (Field, 2013). In general,
the linear model can be illustrated accordingly:
𝑌𝑖 = (𝑏0 + 𝑏1 𝑋1𝑖 + 𝑏2 𝑋2𝑖 + ⋯ + 𝑏𝑛 𝑋𝑛𝑖 ) + 𝜀𝑖
Equation 4: Linear regression model
th th
In this model, Yi is the i observation of the outcome variable, Xni is the i
th th
observation of the n predictor variable, bn is the coefficient of the n
predictor variable, b0 is the constant, and εi is the error, i.e. the difference
th
between the predicted and the observed value of the outcome, for the i
observation (Field, 2013). Thus, the model can be described entirely by
the coefficients associated with each predictor and by a constant. These
160
parameters are estimated by minimizing the residual sum of squares,
which is commonly achieved through a mathematical technique called
ordinary least squares (OLS) resulting in a regression model that best fits
the data (Field, 2013).
2
In order to assess the goodness of fit of the model, the measure R is
computed and analyzed, which “represents the percentage of the varia-
160
The residual sum of squares describes the degree of inaccuracy when the best model is
fitted to the data and is calculated by using the differences between the regression mod-
el and observed data (Field, 2013).
176 4. Methods
tion in the outcome that can be explained by the model” (Field, 2013, p.
2
302). The measure R is calculated by dividing the sum of squares for the
model (SSM) by the total sum of squares (SST) (Field, 2013, p. 302):
𝑆𝑆𝑀
𝑅2 =
𝑆𝑆𝑇
Equation 5: Goodness of fit measure R2
The sum of squares for the model describes the improvement in predic-
tion resulting from using the regression model rather than the mean as a
base model which leads to a reduction in inaccuracy of the model by
fitting the regression model to the data. It is calculated by using the dif-
ferences between the mean value of the output and the regression line.
The total sum of squares is the sum of squared differences between ob-
served values and values predicted by the mean which is the most basic
2
model to the data. A higher value for R , which can theoretically reach a
maximum of 1 implying perfect predictability, therefore indicates a greater
explanatory power of the model (Field, 2013).
Another measure of “how much the model has improved the prediction of
the outcome compared to the level of inaccuracy of the model” (Field,
2013, p. 302) is the F-ratio, which is calculated by dividing the mean
161
squares for the model (MSM) by the residual mean squares (MSR):
𝑀𝑆𝑀
𝐹=
𝑀𝑆𝑅
Equation 6: F-ratio
The magnitude of this F-ratio is evaluated by using critical values for the
162
corresponding degrees of freedom of the F-distribution. In addition, the
161
The mean squares for the model are calculated by dividing the model sum of squares by
the degrees of freedom, which is the number of variables in the model. The residual
mean squares are calculated by dividing the residual sum of squares by the degrees of
freedom, which is the number of observations minus the number of parameters being es-
timated (Field, 2013).
162
Critical values of the F-distribution can be found in statistical literature (e.g., Field, 2013,
p. 894).
2
F-statistic can be used to evaluate the significance of R by testing the
2
null hypothesis that R is zero which would imply no improvement in the
sum of squared errors after fitting the model (Field, 2013, p. 303):
(𝑁 − 𝑘 − 1)𝑅2
𝐹=
𝑘(1 − 𝑅2 )
Equation 7: F-statistic for significance testing of R2
In this equation, N is the number of observations and k is the number of

predictors in the model (Field, 2013). Furthermore, in hierarchical models
where the predictors are added stepwise, the improvement of the model
through adding new predictors should be assessed. While the measure
2
R always gets bigger when adding predictors, the significance of the
improvement is essential (Field, 2013, p. 324):
2
(𝑁 − 𝑘𝑛𝑒𝑤 − 1)𝑅𝑐ℎ𝑎𝑛𝑔𝑒
𝐹𝑐ℎ𝑎𝑛𝑔𝑒 = 2 )
𝑘𝑐ℎ𝑎𝑛𝑔𝑒 (1 − 𝑅𝑛𝑒𝑤
Equation 8: Fchange-statistic
In this equation, N is the number of cases, knew is the number of predic-

2 2
tors in the new model, R change is the change in R , kchange is the change in
2 2
the number of predictors, and R new is the R of the newer model (Field,
163
2013).
Another important result of the multiple regression analysis is the signifi-
cant contribution of individual predictors in predicting the outcome, which
is the case if the corresponding coefficient b is different from zero and
thus a unit change in the predictor results in a change of the outcome
variable. To test if the b-value is significantly different from zero, the t-
statistics are applied, testing the null hypothesis that the value of b is
zero. The t-test is calculated by dividing the observed coefficient b by the
standard error with which it is associated and comparing this value to the
value that would be expected according to the degrees of freedom if
163
An alternative measure to compare models is the Akaike information criterion (AIC)
which penalizes the model for having more variables and thus approaches the issue that
the measure R2 always goes up if more predictors are added (Field, 2013).
178 4. Methods
there was no effect and hence the null hypothesis was found to be true
(Field, 2013). In assessing significance, the significance level α is crucial
which “represents the probability the researcher is willing to accept that
the estimated coefficient is classified as different from zero when it actu-
ally is not” (Hair et al., 2014, p. 156). According to Hair et al. (2014) the
typical significance level α is .05, that is the probability, i.e. the p-value,
that the observed value of t would occur if the value of b was, in fact,
zero, and the p-value has to be below this critical value in order to be
significant (Field, 2013; Hair et. al, 2014). Furthermore, in interpreting the
effects of different predictors on the outcome variable the β coefficients –
which are the standardized regression coefficients and thus report the
number of standard deviations the outcome changes as a result of one
standard deviation change in the predictor – are crucial. Therefore, by
allowing for the comparison of different coefficients, the β coefficient pro-
vides insight into the importance of a predictor in the model (Field, 2013).
In order to be able to generalize the findings outside of the sample and
assess the quality of the model itself, several assumptions must be met,
i.e. additivity and linearity, independent errors, homoscedasticity, and
normally distributed errors (Field, 2013; Hair et al., 2014). First of all, the
assumption of additivity and linearity which demands the outcome varia-
ble to be “linearly related to any predictors and, with several predictors,
their combined effect [to be] best described by adding their effect togeth-
er” (Field, 2013, p. 311) is imperative for justifying applying the linear
model. Secondly, the assumption of independent errors implies that for
“any two observations the residual term should be uncorrelated” (Field,
2013, p. 311). This eventuality, which is also referred to as a lack of auto-
correlation, is necessary for confidence intervals and significance tests to
be valid. Furthermore, the assumption of homoscedasticity means that
the variance of the residual term should be constant at each level of the
predictor variables. Finally, the assumption of normally distributed errors
is met if the residuals in the model are random, normally distributed vari-
ables with a mean of zero (Field, 2013; Hair et al., 2014).
Furthermore, there are several other conditions for using multiple regres-
sions models (Field, 2013). First of all, the predictor variables must be
measured at the interval level or categorical with two categories, they
must possess non-zero variance and should be uncorrelated with exter-

nal variables which have not been included in the regression model but
which have an influence on the outcome variable. In addition, the predic-
tor variables must not show perfect multicollinearity, which is the case if
there is a perfect linear relationship between different predictors. An im-
portant measure assessing multicollinearity through expressing the de-
gree to which an independent variable is explained by a set of other in-
dependent variables is the variance inflation factor (VIF) (Hair et al.,
2014, p. 197):
1
𝑉𝐼𝐹 = ∗
1 − 𝑅2
Equation 9: Variance inflation factor (VIF)
2*
In this equation, R is the amount of the independent variable explained
2*
by all remaining predictors and (1-R ) is a measure of tolerance. There-
fore, to examine this relationship, each independent variable is made a
dependent variable, which is regressed against all remaining predictors.
The square root of the VIF measure indicates the degree to which the
164
standard error increases due to multicollinearity.
The outcome variables, on the other hand, should be independent and
must be measured at the interval level, continuously and with no con-
straints on the variability.
4.4.2 Cluster analysis

The primary purpose of cluster analysis is “to group objects based on the
characteristics they possess” (Hair et al., 2014, p. 418). Therefore,
through classification of data, cluster analysis is an exploratory technique
to search for structure among observations based on a multivariate pro-
file (Hair et al., 2014). More specifically, cluster analysis has no statistical
but in fact a mathematical basis and creates clusters which should “ex-
164
For example, if 75% of the variance of an independent variable is explained by other
independent variables, the measure of tolerance is .25, the value of VIF is 4 and the
square root of VIF is 2, indicating that the standard error has been doubled due to multi-
collinearity (Hair et al., 2014).
180 4. Methods
hibit high internal (within-cluster) homogeneity and high external (be-

tween-cluster) heterogeneity” (Hair et al., 2014, p. 418). Among many
possibilities of applications, common roles for cluster analysis are data
reduction and hypothesis generation (Hair et al., 2014). While the first
case aims at classifying a large number of observations into manageable
groups, the latter is concerned with examining previously-stated or devel-
oping newly-proposed hypotheses concerning the nature and structure of
the data. In MCS literature, exploratory theory driven cluster analysis has
been conducted widely (e.g., Chenhall & Langfield-Smith, 1998; Gerdin,
2005) to “identify sets or clusters of organisations that share a common
profile along conceptually distinct variables that captures the complexity
of organisational context” (Chenhall & Chapman, 2006, p. 49) in order to
develop categories of structure and MCS (Chenhall & Chapman, 2006).
In general, the first step in cluster analysis is to measure the degree of
correspondence among objects across characteristics, i.e. similarities
(Hair et al., 2014). Usually these similarities are measured using distanc-
es, for example the Euclidean distance, as the proximity of each point to
others, considering that smaller distances indicate greater similarity and
vice versa. Based on the similarity measure of each observation, the
procedure for forming clusters is conducted in a second step where enti-
ties are portioned into groups. This can be done by using several meth-
165 166
ods, for example hierarchical or nonhierarchical procedures, which
lead to a number of cluster solutions differing in their measure of hetero-
geneity, for example the average of all distances between observations
within clusters. The final cluster solution is selected by examining the
changes in the homogeneity measure and by avoiding large increases
which indicate rather dissimilar cluster composition. Finally, the different
165
Hierarchical procedures “involve a series of n - 1 clustering decisions (where n equals
the number of observations) that combine observations into a hierarchical or a treelike
structure” (Hair et al., 2014, p. 439). While in agglomerative methods each observation
starts as its own cluster and most similar clusters are joined until a single cluster re-
mains, in divisive methods the starting point is a single cluster which is divided until each
observation is a single-member cluster (Hair et al., 2014).
166
Nonhierarchical clustering procedures “assign objects into clusters once the number of
clusters is specified“ (Hair et al., 2014, p. 443) and thus do not involve treelike construc-
tion processes as in hierarchical clustering procedures (Hair et al., 2014).
clusters are profiled by examining the distinguishing characteristics of

each cluster and by identifying substantial differences between clusters. It
is important to note that “decisions on the characteristics to be used, the
methods of combining clusters, and even the interpretation of cluster
solutions” (Hair et al., 2014, p. 425) require substantial researcher
judgement and thus objective support to assist evaluation should be em-
ployed wherever possible (Hair et al., 2014). In general, according to Hair
et al. (2014), strong conceptual support and careful validation of results is
crucial for clusters to be potentially relevant and meaningful as the tech-
nique of cluster analysis will always create clusters regardless of factual
structure in the data (Hair et al., 2014).
Methods for validation of cluster solutions in order to ensure represent-
tativeness and generalizability can be divided into cross-validation methods
and establishing criterion or predictive validity (Hair et al., 2014). Cross-
validation refers to assessing stability of cluster results by the number of
observations assigned to different clusters across cluster solutions. Further-
more, the goodness of fit of the model can be examined by a discriminant
analysis, which assesses if the variables significantly discriminate between
the clusters by building a predictive model to predict cluster membership.
Discriminant analysis “is applicable in situations in which the total sample
can be divided into groups based on a nonmetric dependent variable char-
acterizing several known classes” (Hair et al., 2014, p. 16). By linearly com-
bining two or more independent variables, the discriminant function weights
each independent variable in order to maximize the difference between the
groups defined a priori. The discriminant function can be illustrated accord-
ingly (Hair et al., 2014, p. 233):
𝑍𝑗𝑘 = 𝑎 + 𝑊1 𝑋1𝑘 + 𝑊2 𝑋2𝑘 + ⋯ + 𝑊𝑛 𝑋𝑛𝑘
Equation 10: Discriminant function

182 4. Methods
In this equation, Zjk is the discriminant score of discriminant function j for

object k, a is the intercept, Wi is the discriminant weight for independent
variable i, and Xik is the independent variable i for object k (Hair et al.,
2014).
Criterion or predictive validity, on the other hand, aims to examine differ-
ences on variables not included in the cluster analysis but which possess
strong theoretical support to vary as expected across the clusters (Hair et
al., 2014).
As mentioned above, cluster analysis “is not a statistical inference tech-
nique in which parameters from a sample are assessed as representing a
population. Instead, cluster analysis is a method for quantifying the struc-
tural characteristics of a set of observations. As such, it has strong math-
ematical properties but not statistical foundations” (Hair et al., 2014, p.
436). Therefore, requirements of additivity and linearity, homoscedastici-
ty, and normality which are very important for other multivariate statistical
techniques such as multiple regression analysis (see Section 4.4.1) are
of no importance in cluster analysis. However, according to Hair et al.
(2014) there are two critical issues which must be considered in order to
assess the validity of the analysis, i.e. the representativeness of the sam-
ple and the impact of multicollinearity. First of all, it is crucial to undertake
every effort to ensure that the sample is representative, as the generali-
zability is directly affected by this characteristic. Secondly, as multicollin-
earity affects the analysis by acting as unobserved weighting, process
variables used in cluster analysis have to be examined. If there is sub-
stantial multicollinearity between variables, steps need to be undertaken
to avoid these problems, for example by factoring the variables prior to
clustering and by using factor scores as cluster variables (Hair et al.,
2014).
4.4.3 Logistic regression analysis

The statistical method of logistic regression is used in predicting categori-
cal outcomes from continuous or categorical predictors, i.e. providing a
probability for belonging to a certain category when given other infor-
mation (Field, 2013; Hair et al., 2014). While the linear model cannot be
applied when the outcome variable is categorical, logarithmic regression

overcomes this problem by expressing the multiple linear regression
equation in logarithmic terms and thus transforming the data. According-
ly, the logarithmic regression model can be illustrated as follows:
1
𝑃(𝑌) =
1 + 𝑒 −(𝑏0+𝑏1𝑋1𝑖 +𝑏2 𝑋2𝑖 +⋯+𝑏𝑛 𝑋𝑛𝑖)
Equation 11: Logarithmic regression model
In this model, P(Y) is the probability of Y occurring with values between 0

and 1 indicating how likely it is that a case belongs to a certain category.
While e is the base of natural logarithms, the remaining coefficients form
a linear combination as in multiple regression models (see Section 4.4.1)
and consist of a constant bo, predictor variables Xn, and corresponding
coefficients or weights bn which are estimated from the sample data. In
contrast to using the method of least squares to estimate these parame-
ters as in linear regression analysis, logistic regression “selects coeffi-
cients that make the observed values most likely to have occurred” (Field,
2013, p. 763), a process which is called maximum-likelihood estimation
(Field, 2013).
In order to assess the fit of the model the measure of log-likelihood is
used, which adds together the probabilities associated with predicted and
actual outcomes indicating the extent of unexplained information after
fitting the model (Field, 2013, p. 763):
𝑙𝑜𝑔 − 𝑙𝑖𝑘𝑒𝑙𝑖ℎ𝑜𝑜𝑑 = ∑[𝑌𝑖 𝑙𝑛(𝑃(𝑌𝑖 )) + (1 − 𝑌𝑖 )𝑙𝑛⁡(1 − 𝑃(𝑌𝑖 ))]

𝑖=1
Equation 12: Measure of log-likelihood
th
In this equation, P(Yi) is the probability that Y occurs for the i case, and
th
Yi the actual outcome for the i case. Therefore, the smaller the values of
log-likelihood, the less unexplained observations occur. Closely related to
the log-likelihood measure is the deviance which is referred to -2LL and
has a chi-square distribution (Field, 2013, p. 763):
184 4. Methods
𝐷𝑒𝑣𝑖𝑎𝑛𝑐𝑒 = −2𝐿𝐿 = ⁡ −2 ∗ 𝑙𝑜𝑔 − 𝑙𝑖𝑘𝑒𝑙𝑖ℎ𝑜𝑜𝑑
Equation 13: Deviance
For assessing the predictive power of a logistic regression model, the

deviance for the baseline model is subtracted from the model deviance
resulting in a measure called likelihood-ratio (Field, 2013, p. 763):
𝜒 2 = (−2𝐿𝐿(𝑏𝑎𝑠𝑒𝑙𝑖𝑛𝑒)) − (−2𝐿𝐿(𝑛𝑒𝑤)) = 2𝐿𝐿(𝑛𝑒𝑤) − 2𝐿𝐿(𝑏𝑎𝑠𝑒𝑙𝑖𝑛𝑒)
Equation 14: Likelihood-ratio
While the baseline model only features a constant which displays the
frequency with which the outcome occurred and thus provides the best
prediction only if the outcome is known, the improvement of logistic re-
gression models incorporating predictor variables can be examined hier-
archically by adding these variables and assessing the corresponding
likelihood-ratio which has a chi-square distribution with degrees of free-
dom equaling the difference of the number of parameters of both models.
2
Finally, and in a manner similar to the measure R in linear regressions,
there are some measures in logistic regression analysis which provide
information on the substantive significance of the model and thus of how
2
well the model fits the data. For example, Nagelkerke’s R N reflects “the
amount of variation accounted for by the logistic model” (Hair et al., 2014,
p. 324) and is based on the deviance of the new and base model, as well
as the sample size (Field, 2013, p. 766):
(−2𝐿𝐿(𝑛𝑒𝑤) − (−2𝐿𝐿(𝑏𝑎𝑠𝑒𝑙𝑖𝑛𝑒)))
1 − 𝑒𝑥𝑝⁡( )
2
𝑅𝑁 = 𝑛
−2𝐿𝐿(𝑏𝑎𝑠𝑒𝑙𝑖𝑛𝑒)
1 − 𝑒𝑥𝑝⁡(− )
𝑛
Equation 15: Goodness of fit measure Nagelkerke’s RN2
2
The measure RN varies between 0 and 1 with the latter indicating perfect
outcome predictability and thus perfect model fit (Field, 2013; Hair et al.,
2014).
In addition to evaluating the predictive power of the model, the individual

contribution of predictors is also an important result of the logistic regres-
sion. For this purpose, the normally distributed z-statistic is calculated for
each coefficient b by dividing the value of the regression coefficient by its
associated standard error. Consequently, the z-statistic, which is also
known as the Wald statistic, tests if the coefficient for a predictor is signif-
icantly different from zero and thus whether a variable is a significant
predictor of the outcome. Furthermore, another important measure for
interpreting logistic regression analyses is the odds ratio which is the
[167]
exponential of b and “an indicator of the change in odds resulting from
a unit change in the predictor” (Field, 2013, p. 766-767). As a result, an
odds ratio with a value greater (less) than 1 means that an increase of
the value of the predictor increases (decreases) the odds of the outcome
occurring (Field, 2013).
Finally, in regard to assumptions, Hair et al. point out that logistic regres-
sion analysis “does not require any specific distributional form of the in-
dependent variables and issues such as heteroscedasticity do not come
into play […]. Moreover, logistic regression does not require linear rela-
tionships between the independent variables and the dependent varia-
bles as does multiple regression” (Hair et al., 2014, p. 319). However, in
contrast to the linearity assumption in multiple regression analyses, it is
assumed that the continuous predictors are linearly related to the logit of
the outcome variable, which is examined by assessing whether the inter-
action term between predictor and its log transformation is significant. In
addition, while the cases of data should not be related, the issues of mul-
ticollinearity must be examined as well to avoid biasing effects (Field,
2013).
167
In contrast to the term probability, odds are defined as “the probability of an event occur-
ring divided by the probability of that event not occurring” (Field, 2013, p. 767).
186 4. Methods
4.5 Research framework of this study

To sum up, the research framework of this study for examining the inter-
relationship between MCS design and use, risk profile, and organizational
performance is presented in Figure 32 below. It further specifies the re-
search design illustrated in Figure 1 and completes the theoretical model
comprising the conceptual level of the predictive validity framework (PVF)
shown in Figure 21 by amending the framework by the operational level
(Libby et al., 2002). In reference to the PVF, research moves from the
conceptual to the operational level by engaging in an operationalization
process by which constructs are translated into operational variables
(Bisbe et al., 2007; Libby et al., 2002). Accordingly, the PVF “provides a
useful description of the hypothesis testing process, and focuses our
attention on the key determinants of the internal and external validity”
(Libby et al., 2002, p. 794). Therefore, it is taken into account that “[n]o
theory can be tested directly; rather, a theory is tested by assessing the
relationship between the operational definitions of key concepts in the
theory” (Libby et al., 2002, p. 794), which is conducted by applying statis-
tical methods and assessing Link 8, Link 9, and Link 10 of the research
framework illustrated in Figure 32 (see Section 4.4). For these tests to be
valid, Link 4, Link 5, Link 6, and Link 7 of the research framework must
also be valid (Libby et al., 2002), an outcome which is achieved by sound
conceptual specification of the constructs (see Section 4.3).
Overall, the study’s internal and external validity is determined by the
validity of all ten links depicted in Figure 32:
Explanatory variables Explained variables Other potentially
influential variables
Risk profile RQ1: Design and use of MCS Simons’ MCS framework Strategy
Preventable risks Link 1 Beliefs systems Link 3 Size
Strategy execution risks Boundary systems Age
External risks FIT Diagnostic control systems Ownership
Interactive control systems
Kaplan & Mikes (2012) Link 2 Porter (1980)
Simons (1995b)
RQ3: Performance analysis Risk-based MCS framework +

of MCS Risk-based formal
Conceptual
controls
Performance Risk-based use
se of
Link 4 Firm performance controls RQ2:
Link 7
Usefulness of MCS Packages
of MCS
MCS_categoryrym
4.5. Research framework of this study
Bisbe et al. (2007)

Bisbe et al. (2007)
rbMCS_categoryn
Otley (1980)
O Bisbe et al. (2007) Link 5
Link 6
Mulitple regressions Cluster analyses Items
Link 8
L Link 10
Discriminant analyses L Secondary data
Logistic regressions
Items Items
Auzair &
FIT = 1 Link 9
Widener (2007), Moers (2006) Widener (2007), Henri (2006a) Langfield-Smith (2005)
nal
if actual MCS
Figure 32: Research framework of this study based on the PVF

cluster equals Univariate tests
Bisbe et al. (2007)

predicted one Multiple regressions
Operational
Items
Henri (2006a), Sandino (2004)

187
5 Results
In this chapter the results of the empirical analysis of this study are pre-
sented and discussed. As a consequence, evidence is provided for these
hypotheses which are supported by data. For analysis of data, the statis-
tical software IBM SPSS Statistics Version 24 is used. Subsequently, in
the first section risk profile contingent design and use of MCS will be ex-
amined in order to reveal associations between types of risks and specific
control systems. As a next step, the analysis focuses on risk profile con-
tingent packages of MCS to gain insight into MCS configurations which
are put in place in practice, and how and whether they are influenced by
specific types of risks. Finally, a risk profile contingent performance anal-
ysis is conducted, to shed light on the hypothesized proposition that firms
that have MCS design and use consistent with their risk profile show per-
formance superior to that of firms that have MCS design and use incon-
sistent with their risk profile.
5.1 Risk profile contingent design and use of MCS

First of all, the theoretical model for analyzing the risk profile contingent
design and use of MCS will be introduced and the quantitative techniques
together with their required assumptions presented and discussed. Sub-
sequently, the statistical analysis will be conducted and an overview of
the resulting figures and significant findings provided. Finally, the pro-
posed design hypotheses, i.e. hypotheses H1a - H3c, are discussed and
their support by the data evaluated.
5.1.1 Theoretical model and quantitative techniques

This section will examine the interrelationship between different types of
risks, i.e. preventable risks (PREVRISK), strategy execution risks
(STRATRISK), and external risks (EXTRISK), and different types of con-
trol systems, i.e. beliefs systems (BELIEF), boundary systems (BOUND),
diagnostic control systems (DIAGNOST), and interactive control systems
(INTERACT). Furthermore, the interrelationship between types of risks

190 5. Results
and dimensions of risk-based control systems, i.e. the dimensions of risk-

based formal controls (rbFORMALMCS) and risk-based use of controls
(rbUSEMCS), is tested. The following examinations will each start by
applying Simons’ LOC framework (Simons, 1995b) (Model 1 - 4), and
proceed with the analysis for the risk-based MCS framework (Model 5 -
6). Eventually, additional results on these models will be presented,
which provide further insights into the hypotheses by applying a different
methodology for operationalization of the measure for strategy execution
risks (Model 1A - 6A). The following figure provides an overview of the
theoretical model:
Explanatory Explained
variables variables
Preventable
risks
Modeln
Multiple
Strategy regression
Control Control
execution
systemn variables
risks
‫݉݁ݐݏݕ݈ܵ݋ݎݐ݊݋ܥ‬௡௜ ൌ ܾ௡଴ ൅ ܾ௡ଵ ܵ‫ܧܼܫ‬௜ ൅ ܾ௡ଶ ‫ܧܩܣ‬௜ ൅ ܾ௡ଷ ܱܹܰ௜ ൅ ܾ௡ସ ‫ܶܣܴܱܶܵܶܵܥ‬௜
External
risks ൅ ܾ௡ହ ‫ܶܣܴܶܵܨܨܫܦ‬௜ ൅ ܾ௡଺ ܴܲ‫ܭܵܫܴܸܧ‬௜
൅ ܾ௡଻ ܴܵܶ‫ܭܵܫܴܶܣ‬௜ ൅ ܾ௡଼ ‫ܭܵܫܴܶܺܧ‬௜ ൅ ߝ௡௜
Figure 33: Theoretical model for analyzing risk profile contingent design and use of MCS
In the theoretical model in Figure 33 above, the measures for the levers
of control, i.e. BELIEF, BOUND, DIAGNOST, and INTERACT, each
serve as dependent variables in Model 1 - 4 of the analysis. Furthermore,
in order to examine the risk profile contingent design and use of the risk-
based MCS framework, the measures for the risk-based dimensions, i.e.
rbFORMALMCS and rbUSEMCS, act as dependent variables in Model 5
- 6 of the analysis. The main independent variables in these models are
the risk profile variables, i.e. PREVRISK, STRATRISK, and EXTRISK. To
improve validity of the models, a set of control variables is included. First
5.1. Risk profile contingent design and use of MCS 191
of all, I control for the strategy of the firms by integrating COSTSTRAT

and DIFFSTRAT, as a relationship between MCS and strategy is widely
recognized in literature (e.g., Langfield-Smith, 2007; see Section 2.3.2.2).
Furthermore, I control for organizational size, company age, and owner-
ship structure of the firms by integrating the control variables SIZE, AGE,
and OWN, since previous literature indicates that these characteristics
affect the control structure of the firm (e.g., Chenhall, 2003; Davila, 2005;
see Section 2.3.2.3, 2.3.2.4, and 2.3.2.5). In summary, for each of the six
dimensions of control systems (n = 1, 2, …, 6) a multiple regression anal-
ysis is conducted to examine the influence of the independent variables,
which can be expressed as follows:
𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑆𝑦𝑠𝑡𝑒𝑚𝑛𝑖 = 𝑏𝑛0 + 𝑏𝑛1 𝑆𝐼𝑍𝐸𝑖 + 𝑏𝑛2 𝐴𝐺𝐸𝑖 + 𝑏𝑛3 𝑂𝑊𝑁𝑖 + 𝑏𝑛4 𝐶𝑂𝑆𝑇𝑆𝑇𝑅𝐴𝑇𝑖
+ 𝑏𝑛5 𝐷𝐼𝐹𝐹𝑆𝑇𝑅𝐴𝑇𝑖 + 𝑏𝑛6 𝑃𝑅𝐸𝑉𝑅𝐼𝑆𝐾𝑖 + 𝑏𝑛7 𝑆𝑇𝑅𝐴𝑇𝑅𝐼𝑆𝐾𝑖
+ 𝑏𝑛8 𝐸𝑋𝑇𝑅𝐼𝑆𝐾𝑖 + 𝜀𝑛𝑖
Equation 16: Risk profile contingent design and use of MCS
th
In this equation, ControlSystemni is the i observation of the measure for
th
the n control system, resulting in Model 1 - 6 of the analysis. As a meth-
od for variables to be entered into the models, the hierarchical entry
168
method is chosen, in which the hierarchically predefined sets of varia-
bles are forced step by step into the model. This method requires a deci-
sion on the sequence of entering the predictors into the model, and thus
relies on theoretical reasoning (Field, 2013). According to Field (2013),
known predictors are entered into the model first, in order to assess the
influence of newly tested variables. Therefore, in the first step of each of
the multiple regression analyses, the control variables SIZE, AGE, and
168
Other methods for entering variables into the model of a multiple regression analysis are,
for example, the forced entry method and stepwise methods. The forced entry method
forces all predictors into the model simultaneously, making no decision about the order
of the variables. In stepwise methods, for example forward or backward methods, purely
mathematical criteria decide in which order the predictors are entered into the model
(Field, 2013).
192 5. Results
OWN are introduced into the analyses, as these common structural vari-
ables have proven influential since the beginning of contingency theory
on organizational control systems and MCS (Chenhall, 2003; Davila,
2005). In a second step, the strategy variables COSTSTRAT and
DIFFSTRAT are entered into the models, as research has provided
strong evidence that strategy is related to the design and use of MCS
(Bedford et al., 2016; Langfield-Smith, 2007). Finally, the third and last
step of the analyses adds the risk profile variables PREVRISK,
STRATRISK, and EXTRISK in order to demonstrate the influence and
additional explanatory power of these predictors for MCS design and use.
This procedure takes into account that it is crucial for predictors to be
“based on a sound theoretical rationale or well-conducted past research”
(Field, 2013, p. 321). The significance of the model after each step is
2
assessed by using the F-statistic, which evaluates the significance of R
and thus the overall fit of the model as a whole. In addition, to evaluate if
a step has significantly improved the model, the measure Fchange is com-
2
puted, which assesses the significance of the change in R . Finally, the
significance and the impact of each independent variable is evaluated by
assessing the unstandardized regression coefficients bi and the standard-
ized regression coefficients βi.
In order to verify whether the assumptions of the multiple regression
analyses have been met (see Section 4.4.1), a number of tests were
conducted for each model. First of all, to test for the assumptions of line-
arity and homoscedasticity, the suggestions by Field (2013) are followed
and the plot of standardized residuals against standardized predicted
169
values as well as the partial plots of the residuals of the outcome vari-
170
able and each of the predictors were visually examined. To test the
169
In creating a scatterplot of the values of the residuals against the values of the outcome
it can be visually examined whether there is a systematic relationship between errors
and predictions of the model. Usually, these values are converted to z-scores, to obtain
the standardized values of the errors and the outcome (Field, 2013). If there is no non-
linearity or heteroscedasticity than “this graph should look like a random array of dots, if
the graph funnels out then that is a sign for heteroscedasticity and any curve suggests
non-linearity” (Field, 2013, p. 348).
170
Similar to assessing the plot of standardized residuals against standardized predicted
values (see Footnote 169), in visually examining the partial plots non-linear relationships,
heteroscedasticity, and influential outliers can be detected as well. In these plots, the
171
assumption of normally distributed errors, the histograms and P-P
172
plots were also visually examined. While in general no serious signs for
heteroscedasticity, non-linearity, or non-normality have been found, there
are a few graphs which show ambiguous results. Therefore, results of the
multiple regression analyses are validated by performing bootstrapping
173
analyses, which is a robust method to generate confidence intervals
and significance tests of the model parameters (Field, 2013). Field ex-
plains that the “main benefit of the bootstrap confidence intervals and
significance values is that they do not rely on assumptions of normality or
homoscedasticity” (Field, 2013, p. 352). As a result, all findings in each
model have been confirmed by bootstrapping analyses. Finally, the as-
sumption of independent errors is examined by conducting the Durbin-
Watson test, which tests if adjacent residuals are correlated and thus
tests for autocorrelation (Durbin & Watson, 1951; Field, 2013). The test
statistic can vary between 0 and 4, with a value of 2 indicating that the
residuals are uncorrelated, with values less than 1 and greater than 3
being problematic (Field, 2013). The Durbin-Watson test was computed
for each of the following models, i.e. Model 1 - 6 and Model 1A - 6A, with
a lowest value of 1.769 (Model 1) and a highest value of 1.946 (Model 6),
which means that there is no cause for concern in regard to independent
errors or autocorrelation.
clouds of dots should be evenly spaced around a line indicating homoscedasticity and
linear relationships (Field, 2013).
171
To test for normality of residuals the histograms, i.e. the frequency distributions, should
look like normal distributions, i.e. symmetrical and approximately bell-shaped.
172
The P-P plots (probability-probability plots) show the cumulative probability of a variable
against the cumulative probability of a particular distribution, which is the normal distribu-
tion in this case. When the actual z-score is plotted against the expected z-score, the
graph should ideally fall on the diagonal of the plot, which indicates normal distribution.
In case the line is consistently above or below the diagonal, then the kurtosis of the dis-
tribution deviates from normal distributions. Furthermore, a graph which is S-shaped in-
dicates an issue of skewness (Field, 2013).
173
Bootstrapping analysis estimates the properties of the distribution from the sample data.
In this study, each bootstrapping analysis draws 1000 parameter estimates, which are
calculated from each bootstrap sample. The limits within which 95% of the drawn pa-
rameter estimates fall are used to estimate limits of the 95% confidence interval of the
parameters, which is called a percentile bootstrap confidence interval. Furthermore, the
standard deviations of the parameter estimates can be calculated from the bootstrap
samples and used as standard error of the parameter estimates (Field, 2013).
194 5. Results
As a next step, the conditions for outcome and predictor variables to be

used in multiple regression analyses are assessed (see Section 4.4.1).
First of all, all values for each variable are derived from different firms and
the variables are measured with a seven-point Likert scale (BELIEF,
BOUND, DIAGNOST, INTERACT, rbFORMALMCS, rbUSEMCS,
PREVRISK, STRATRISK, EXTRISK, COSTSTRAT, and DIFFSTRAT),
on a metric scale (SIZE and AGE) or using a categorical dummy variable
(OWN). Furthermore, the data collected for the variables range from a
minimum of 1 to a maximum of 7 with only a few exceptions (see Table
10). While one can never rule out that external variables exist, which are
correlated to predictor variables and have not been included in the re-
gression model, this study aims to improve the validity of the regression
models and to avoid spurious correlation by including several control
variables in the regression analyses. Finally, to avoid bias from multicol-
linearity, the predictor variables must not correlate too highly, i.e. above
.80 or .90 (Field, 2013; Hair et al. 2014), and the variance inflation factor
(VIF) should be computed, which indicates whether a predictor has a
strong linear relationship with others. If the values are each less than 10
and the average VIF is not substantially greater than 1, then multicolline-
arity should be of no concern (Field, 2013). The highest correlation be-
tween two variables used in the following models is .719 between the
construct variables INTERACT and rbUSEMCS. However, as can be
seen in Table 8, most of the correlations are considerably lower. In addi-
tion, the highest VIF of the multiple regression analyses is 1.622 of the
construct variable PREVRISK in Model 1 - 6 and 1.620 of the construct
variable PREVRISK in Model 1A - 6A, respectively. Furthermore, the
average VIF of all independent variables is 1.310 (Model 1 - 6) and 1.298
(Model 1A - 6A), respectively, indicating that multicollinearity is of no con-
cern in these models.
5.1.2 Analysis
The analysis for examining risk profile contingent design and use of MCS
starts with examining the relations for the LOC framework and proceeds
by applying the risk-based MCS framework. Finally, additional results for
both frameworks of MCS are provided.
5.1.2.1 LOC framework

The following table shows the results of the multiple regression analyses
on the design attributes of formal controls of MCS, i.e. the dependent
variables BELIEF and BOUND.
196 5. Results
Multiple regressions
LOC framework
Model 1 Model 2
Explanatory Explained variable: Explained variable:
variables BELIEF BOUND
Step 1:
b β p-value b β p-value
Control variables
Constant 4.295 3.714
SIZE 0.120 .113 .038* 0.260 .173 .001**
AGE 0.012 .010 .851 0.009 .005 .919
OWN 0.008 .004 .943 -0.574 -.195 .000***
Step 2:
+ Strategy profile
Constant 1.991 0,954
SIZE 0.064 .060 .247 0.190 .126 .014*
AGE 0.046 .039 .456 0.035 .021 .682
OWN 0.045 .021 .668 -0.508 -.173 .000***
COSTSTRAT 0.241 .220 .000*** 0.426 .274 .000***
DIFFSTRAT 0.180 .189 .000*** 0.085 .063 .222
Step 3:
+ Risk profile
Constant 0.897 -0.490
SIZE 0.029 .028 .587 0.146 .097 .053+
AGE 0.063 .053 .289 0,059 .035 .481
OWN 0.125 .060 .232 -0.407 -.138 .006**
COSTSTRAT 0.072 .066 .283 0.203 .131 .031*
DIFFSTRAT 0.108 .114 .037* -0.011 -.008 .879
PREVRISK 0.277 .223 .000*** 0.362 .206 .001**
STRATRISK 0.104 .125 .020* 0.112 .095 .071+
EXTRISK 0.076 .059 .311 0.129 .071 .219
Step R2 F Sig. R2 F Sig.

1 .013 1.617 .185 .074 9.473 .000***
2 .120 9.747 .000*** .161 13.626 .000***
3 .175 9.388 .000*** .206 11.421 .000***
n=362
+
p<.1, *p<.05, **p<.01, ***p<.001, two-tailed tests.
Table 11: Multiple regressions on design attributes of MCS

The results of the multiple regression analyses show that Model 1 ex-
plains 17.5% of the variance in the outcome variable BELIEF and is sig-
2 2
nificant after step 2 (R = .120, F = 9.747, p < .001) and step 3 (R = .175,
F = 9.388, p < .001) of the analysis. Furthermore, Model 1 significantly
improved after step 2, i.e. after adding the strategy profile variables
2
COSTSTRAT and DIFFSTRAT (R change = .107, Fchange = 21.662, p <
.001), and significantly improved further after step 3, i.e. after adding the
2
risk profile variables PREVRISK, STRATRISK, and EXTRISK (R change =
.055, Fchange = 7.853, p < .001). After adding all predictors in step 3, the
variables PREVRISK (b = 0.277, t = 3.631, p < .001), STRATRISK (b =
0.104, t = 2.342, p = .020), and DIFFSTRAT (b = 0.108, t = 2.094, p =
.037) are significant predictors of BELIEF. In addition, the variable
PREVRISK (β = .223) shows the greatest impact in predicting the out-
come variable BELIEF, followed by STRATRISK (β = .125) and
DIFFSTRAT (β = .114).
The multiple regression analysis in Model 2 explains 20.6% of the vari-
2
ance in the outcome variable BOUND and is significant after step 1 (R =
2
.074, F = 9.473, p < .001), step 2 (R = .161, F = 13.626, p < .001), and
2
step 3 (R = .206, F = 11.421, p < .001) of the analysis. Specifically, after
step 2, i.e. after adding the strategy profile variables COSTSTRAT and
2
DIFFSTRAT, Model 2 significantly improved (R change = .087, Fchange =
18.469, p < .001), and significantly improved further after step 3, i.e. after
adding the risk profile variables PREVRISK, STRATRISK, and EXTRISK
2
(R change = .045, Fchange = 6.661, p < .001). After adding all predictors in
step 3, the variables PREVRISK (b = 0.362, t = 3.409, p = .001), OWN (b
= -0.407, t = -2.793, p = .006), and COSTSTRAT (b = 0.203, t = 2.165, p
= .031) are significant predictors of BOUND and the variable PREVRISK
(β = .206) shows the highest degree of importance in the model, followed
by OWN (β = -.138) and COSTSTRAT (β = .131).
on the attention patterns of the feedback and measurement systems of
MCS, i.e. the dependent variables DIAGNOST and INTERACT.
198 5. Results
LOC framework
Model 3 Model 4
variables DIAGNOST INTERACT
Step 1:
Control variables
SIZE 0.226 .167 .002** 0.190 .137 .011*
AGE -0.033 -.022 .680 -0.014 -.009 .864
OWN -0.460 -.174 .001** -0.419 -.155 .003**
Step 2:
+ Strategy profile
SIZE 0.148 .110 .029* 0.108 .078 .121
AGE 0.001 .001 .989 0.022 .014 .778
OWN -0.393 -.149 .002** -0.349 -.129 .008**
COSTSTRAT 0.434 .311 .000*** 0.451 .316 .000***
DIFFSTRAT 0.140 .115 .023* 0.150 .120 .018*
Step 3:
+ Risk profile
Constant 0.521 -0.011
SIZE 0.115 .085 .089+ 0.091 .066 .190
AGE 0.015 .010 .840 0.032 .020 .680
OWN -0.280 -.106 .031* -0.263 -.097 .051+
COSTSTRAT 0.289 .207 .001** 0.358 .250 .000***
DIFFSTRAT 0.064 .053 .316 0.086 .069 .194
PREVRISK 0.151 .096 .111 0.016 .010 .870
STRATRISK 0.115 .109 .037* 0.010 .010 .854
EXTRISK 0.182 .111 .051+ 0.305 .182 .002**

1 .061 7.814 .000*** .046 5.691 .001**
2 .190 16.668 .000*** .179 15.545 .000***
3 .221 12.538 .000*** .204 11.320 .000***
n=362
+
Table 12: Multiple regressions on attention patterns of MCS

The multiple regression analyses show that Model 3 explains 22.1% of

the variance in the outcome variable DIAGNOST and is significant after
2 2
step 1 (R = .061, F = 7.814, p < .001), step 2 (R = .190, F = 16.668, p <
2
.001), and step 3 (R = .221, F = 12.538, p < .001) of the analysis. Fur-
thermore, Model 3 significantly improved after step 2, i.e. after adding the
2
strategy profile variables COSTSTRAT and DIFFSTRAT (R change = .128,
Fchange = 28.170, p < .001), and significantly improved further after step 3,
i.e. after adding the risk profile variables PREVRISK, STRATRISK, and
2
EXTRISK (R change = .032, Fchange = 4.771, p = .003). After adding all pre-
dictors in step 3, the variables COSTSTRAT (b = 0.289, t = 3.460, p =
.001), OWN (b = -0.280, t = -2.165, p = .031), and STRATRISK (b =
0.115, t = 2.098, p = .037) are significant predictors of DIAGNOST. Fur-
thermore, the variable COSTSTRAT (β = .207) shows the greatest impact
in predicting the outcome variable DIAGNOST, followed by EXTRISK (β
= .111), which shows a strong tendency for significance (EXTRISK: b =
.182, t = 1.954, p = .051), and STRATRISK (β = .109).
ance in the outcome variable INTERACT and is significant after step 1
2 2
(R = .046, F = 5.691, p = .001), step 2 (R = .179, F = 15.545, p < .001),
2
and step 3 (R = .204, F = 11.320, p < .001) of the analysis. Specifically,
after step 2, i.e. after adding the strategy profile variables COSTSTRAT
2
and DIFFSTRAT, Model 4 significantly improved (R change = .134, Fchange =
2
(R change = .025, Fchange = 3.691, p < .012). After adding all predictors in
step 3, the variables COSTSTRAT (b = 0.358, t = 4.140, p < .001) and
EXTRISK (b = 0.305, t = 3.163, p = .002) are significant predictors of
INTERACT and the variable COSTSTRAT (β = .250) shows the highest
degree of importance in the model, followed by EXTRISK (β = .182).
What is more, the variable OWN shows a high tendency for significance
(b = -0.263, t = -1.958, p = .051).
In summary, it can be asserted that the multiple regressions Model 1 - 4
explain a significant amount of the variance in the outcome variables, i.e.
2
R ranging from 17.5% to 22.1%, and that the inclusion of the risk profile
variables significantly improved each of the models. In addition, several
200 5. Results
risk profile variables show a significant or highly significant association to

dimensions of MCS design and use. Furthermore, each dimension of the
LOC framework is associated with at least one type of risks. Thus, it can
be preliminarily concluded that the risk profile is a contingency factor of
MCS design and use as suggested by Kaplan & Mikes (2012) and Mikes
& Kaplan (2014, 2015).
5.1.2.2 Risk-based MCS framework

After analyzing the interrelationship between types of risks and types of
control systems using the LOC framework, it is continued by examining
the risk profile contingent design and use of MCS applying the risk-based
MCS framework. Therefore, the results of the multiple regression anal-
yses on the two additional risk-based dimensions of the extended risk-
based MCS framework, i.e. the dependent variables rbFORMALMCS and
rbUSEMCS, are shown in Table 13 below.
Risk-based MCS framework
Model 5 Model 6
variables rbFORMALMCS rbUSEMCS
Step 1:
Control variables
SIZE 0.168 .143 .008** 0.214 .178 .001**
AGE 0.009 .007 .903 -0.090 -.067 .206
OWN -0.336 -.146 .005** -0.422 -.179 .001**
Step 2:
+ Strategy profile
Constant 2.173 1.617 .002**
SIZE 0.121 .103 .050+ 0.141 .117 .018*
AGE 0.024 .018 .723 -0.064 -.048 .329
OWN -0.289 -.126 .013* -0.352 -.149 .002**
COSTSTRAT 0.298 .245 .000*** 0.452 .363 .000***
DIFFSTRAT 0.043 .041 .445 0.079 .073 .144
Step 3:
+ Risk profile
SIZE 0.094 .079 .129 0.117 .097 .049*
AGE 0.038 .029 .570 -0.051 -.038 .428
OWN -0.208 -.090 .080+ -0.265 -.113 .020*
COSTSTRAT 0.161 .132 .036* 0.329 .264 .000***
DIFFSTRAT -0.024 -.022 .689 0.012 .011 .832
PREVRISK 0.177 .129 .042* 0.118 .084 .156
STRATRISK 0.072 .077 .155 0.054 .057 .268
EXTRISK 0.150 .105 .080+ 0.211 .145 .010*

1 .045 5.667 .001** .067 8.582 .000***
2 .111 8.895 .000*** .216 19.617 .000***
3 .141 7.228 .000*** .244 14.220 .000***
n=362
+
Table 13: Multiple regressions on risk-based dimensions of MCS

202 5. Results
The multiple regression analyses show that Model 5 explains 14.1% of

the variance in the outcome variable rbFORMALMCS and is significant
2 2
after step 1 (R = .045, F = 5.667, p = .001), step 2 (R = .111, F = 8.895,
2
p < .001), and step 3 (R = .141, F = 7.228, p < .001) of the analysis.
Furthermore, Model 5 significantly improved after step 2, i.e. after adding
2
the strategy profile variables COSTSTRAT and DIFFSTRAT (R change =
.066, Fchange = 13.160, p < .001), and significantly improved further after
step 3, i.e. after adding the risk profile variables PREVRISK,
2
STRATRISK, and EXTRISK (R change = .030, Fchange = 4.068, p = .007).
After adding all predictors in step 3, the variables COSTSTRAT (b =
0.161, t = 2.107, p = .036) and PREVRISK (b = 0.177, t = 2.045, p =
.042) are significant predictors of rbFORMALMCS and both variables
show similar degrees of importance in the model (COSTSTRAT: β =
.132, PREVRISK: β = .129).
ance in the outcome variable rbUSEMCS and is significant after step 1
2 2
(R = .067, F = 8.582, p < .001), step 2 (R = .216, F = 19.617, p < .001),
2
and step 3 (R = .244, F = 14.220, p < .001) of the analysis. Specifically,
after step 2, i.e. after adding the strategy profile variables COSTSTRAT
2
and DIFFSTRAT, Model 6 significantly improved (R change = .149, Fchange =
2
(R change = .028, Fchange = 4.313, p = .005). After adding all predictors in
step 3, the variables COSTSTRAT (b = 0.329, t = 4.479, p < .001),
EXTRISK (b = 0.211, t = 2.580, p = .010), OWN (b = -0.265, t = -2.328, p
= .020), and SIZE (b = 0.117, t = 1.974, p = .049) are significant predic-
tors of rbUSEMCS and the variable COSTSTRAT (β = .264) shows the
greatest impact for predicting the outcome variable rbUSEMCS, followed
by EXTRISK (β = .145) and OWN (β = -.113).
2
To conclude, while Model 6 (R = 24.4%) shows substantially greater
2
explanatory power than Model 5 (R = 14.1%) both models are still highly
significant and significantly improved after adding the risk profile as ex-
planatory variables. Similar to the findings in regard to the LOC frame-
work, the risk profile can be considered as contingency factor of the risk-
based MCS framework, since significant relations could be identified de-

spite controlling for important proven contingencies.
5.1.2.3 Additional results on MCS design and use

To provide further insights into the hypotheses H1a - H3c, additional re-
sults have been produced for each dimension of the LOC framework and
the risk-based MCS framework. In the following multiple regression mod-
els, a different approach for operationalization of the measure for strategy
execution risks is applied, as the construct has been measured with just
one item and reliability of the scale may be weak (see Section 4.3.3).
Specifically, a dummy variable STRATRISK_dummy is calculated which
is set to 0 for firms with low values of STRATRISK, i.e. below median,
and set to 1 for firms with high values of STRATRISK, i.e. median or
above.
1⁡𝑖𝑓⁡𝑆𝑇𝑅𝐴𝑇𝑅𝐼𝑆𝐾𝑖 ≥ 𝑀𝑒𝑑𝑖𝑎𝑛(𝑆𝑇𝑅𝐴𝑇𝑅𝐼𝑆𝐾)
𝑆𝑇𝑅𝐴𝑇𝑅𝐼𝑆𝐾_𝑑𝑢𝑚𝑚𝑦𝑖 = {
0⁡𝑖𝑓⁡𝑆𝑇𝑅𝐴𝑇𝑅𝐼𝑆𝐾𝑖 < 𝑀𝑒𝑑𝑖𝑎𝑛(𝑆𝑇𝑅𝐴𝑇𝑅𝐼𝑆𝐾)
Equation 17: Calculation of dummy variable for STRATRISK
All models follow the same procedures as presented in the previous sec-
tions. However, as step 1 and step 2 are identical to the results reported
in the corresponding models above, they are omitted in the following ta-
bles. For sake of clarity the subsequently presented models are labeled
with the same digit as the corresponding models above but with the suffix
174
A.
The table below shows the additional results of the multiple regression
analyses on the design attributes of formal controls of MCS, i.e. BELIEF
and BOUND.
174
For example, while the original results for beliefs systems are reported in Model 1, the
additional results for beliefs systems are reported in Model 1A.
204 5. Results
LOC framework
Model 1A Model 2A
variables BELIEF BOUND
Step 3:
+ Risk profile
Constant 1.153 -0.254
SIZE 0.039 .037 .468 0.158 .105 .037*
AGE 0.059 .050 .318 0.056 .033 .502
OWN 0.135 .065 .195 -0.415 -.141 .005**
COSTSTRAT 0.072 .065 .286 0.207 .133 .028*
DIFFSTRAT 0.106 .111 .041* -0.010 -.008 .886
PREVRISK 0.281 .227 .000*** 0.367 .209 .001**
STRATRISK_dummy 0.325 .150 .004** 0.246 .080 .116
EXTRISK 0.076 .059 .312 0.138 .076 .185

3 .182 9.834 .000*** .204 11.297 .000***
n=362
*p<.05, **p<.01, ***p<.001, two-tailed tests.
Table 14: Multiple regressions – additional results on design attributes of MCS
The additional results of the multiple regression analyses of Model 1A

and Model 2A on BELIEF and BOUND in Table 14 show that the signifi-
cance of the improvement of the models after each step and the signifi-
cance of the models as a whole remain unchanged. The results on the
significance of the predictors are very similar to the corresponding Model
1 and Model 2 above. However, in Model 1A the degree of significance of
the variable STRATRISK_dummy (b = 0.325, t = 2.910, p = .004) as a
predictor for BELIEF increased compared to the corresponding Model 1
above (STRATRISK: b = 0.104, t = 2.342, p = .020). Furthermore, in
Model 2A the variable SIZE (b = 0.158, t = 2.092, p = .037) is a significant
predictor for BOUND whereas in the corresponding Model 2 above, the
variable showed a strong tendency for significance (SIZE: b = 0.146, t =
1.938, p = .053).
analyses on the attention patterns of the feedback and measurement
systems of MCS, i.e. DIAGNOST and INTERACT.
LOC framework
Model 3A Model 4A
variables DIAGNOST INTERACT
Step 3:
+ Risk profile
SIZE 0.125 .093 .061+ 0.090 .065 .190
AGE 0.011 .007 .881 0.028 .018 .716
OWN -0.274 -.104 .035* -0.219 -.081 .101
COSTSTRAT 0.289 .207 .001** 0.346 .242 .000***
DIFFSTRAT 0.062 .051 .332 0.077 .062 .242
PREVRISK 0.155 .099 .099+ 0.015 .009 .877
STRATRISK_dummy 0.332 .120 .017* 0.275 .097 .055+
EXTRISK 0.184 .112 .048* 0.281 .167 .004**

3 .207 12.753 .000*** .212 11.895 .000***
n=362
+
Table 15: Multiple regressions – additional results on attention patterns of MCS
The additional results of the multiple regression analyses of Model 3A

and Model 4A on DIAGNOST and INTERACT in Table 15 show that the
significance of the improvement of the models after each step and the
significance of the models as a whole remain unchanged. For Model 3A
the results on the significance of the predictors are similar to the corre-
sponding Model 3. However, in Model 3A the variable EXTRISK (b =
0.184, t = 1.988, p = .048) is a significant predictor for DIAGNOST
whereas in Model 3 above the variable showed a strong tendency for
significance (EXTRISK: β = .182, t = 1.954, p = .051). Furthermore, in
Model 4A, the variable STRATRISK_dummy (b = 0.275, t = 1.921, p =
206 5. Results
.055) shows a strong tendency for significance in contrast to Model 4

above (STRATRISK: b = 0.010, t = 0.184, p = .854).
analyses on the risk-based dimensions of the extended risk-based MCS
framework, i.e. rbFORMALMCS and rbUSEMCS.
Model 5A Model 6A
variables rbFORMALMCS rbUSEMCS
Step 3:
+ Risk profile
SIZE 0.099 .084 .103 0.121 .100 .040*
AGE 0.034 .026 .609 -0.055 -.041 .398
OWN -0.184 -.080 .119 -0.245 -.104 .031*
COSTSTRAT 0.156 .128 .041* 0.324 .260 .000***
DIFFSTRAT -0.029 -.027 .620 0.007 .007 .895
PREVRISK 0.179 .130 .038* 0.119 .085 .149
STRATRISK_dummy 0.321 .133 .012* 0.253 .103 .038*
EXTRISK 0.139 .098 .099+ 0.202 .138 .013*

3 .151 7.869 .000*** .250 14.733 .000***
n=362
+
Table 16: Multiple regressions – additional results on risk-based dimensions of MCS
Finally, in line with the results of the previous models, the additional re-
sults of the multiple regression analyses of Model 5A and Model 6A on
rbFORMALMCS and rbUSEMCS in Table 16 show that the significance
of the improvement of the models after each step and the significance of
the models as a whole remain unchanged too. However, in Model 5A the
variable STRATRISK_dummy (b = 0.321, t = 2.540, p = .012) is a signifi-
cant predictor and shows the greatest impact (β = .133) on predicting the
outcome variable rbFORMALMCS in contrast to the results of the corre-
sponding Model 5 above (STRATRISK: b = 0.072, t = 1.424, p = .155). In

addition, also in Model 6A the variable STRATRISK_dummy (b = 0.253, t
= 2.085, p = .038) is a significant predictor in contrast to the correspond-
ing Model 6 above (STRATRISK: b = 0.054, t = 1.109, p = .268). There-
fore, the additional results show that the variable STRATRISK_dummy is
a significant predictor of both risk-based dimensions of the extended risk-
based MCS framework, i.e. the variables rbFORMALMCS and
rbUSEMCS, while the results for the rest of the predictors remain un-
changed.
In summary, it is demonstrated that the multiple regressions Model 1A -
6A confirm all findings in Model 1 - 6 in regard to the predictors with the
exception of strategy execution risks. For that type of risks, all significant
findings showed higher significance in Model 1A - 6A than in Model 1 - 6
(dependent variables BELIEF and DIAGNOST) and associations to the
risk-based dimensions of the extended risk-based MCS framework are
significant in the multiple regressions Model 5A and Model 6A, contrary to
the findings in Model 5 and Model 6 (dependent variables
rbFORMALMCS and rbUSEMCS). In addition, the association between
STRATRISK_dummy and INTERACT shows a strong tendency to being
significant in contrast to the results above.
5.1.3 Discussion of hypotheses

Evidence on the hypotheses H1a - H3c is provided by the multiple re-
gressions in Model 1 - 6 and Model 1A - 6A. The following figure illus-
trates the significant findings for risk profile contingent design and use of
MCS in these models:
208 5. Results
Explanatory Explained Control

variables variables variables
Model 1 / 1A
Beliefs
systems
(BELIEF) Cost leadership
strategy
Model 2 / 2A (COSTSTRAT)
Preventable
.206** Boundary
risks
(PREVRISK) systems
(BOUND) Differentiation
strategy
Model 3 / 3A (DIFFSTRAT)
Diagnostic
Strategy control systems
(DIAGNOST) Organizational
execution risks size
STRATRISK) (SIZE)
Model 4 / 4A
Interactive
control systems
(INTERACT) Company
age
External
Model 5 / 5A (AGE)
risks
(EXTRISK) R
Risk-based
formal controls
(rbFORMALMCS) Ownership
structure
Model 6 / 6A (OWN)
Risk-based
use of controls
(rbUSEMCS)
Solid lines show associations found in Model 1 - 6.

Dotted lines show associations found in the additional analyses in Model 1A - 6A.
For each association the standardized coefficient β and the corresponding significance level are quoted.
a
Association shows high tendency for significance.
*p<.05, **p<.01, ***p<.001, two-tailed tests
Figure 34: Graphical depiction of significant results on risk profile MCS design and use
The first set of hypotheses, i.e. H1a - H1d, predicts associations between
preventable risks and certain types of control systems. Firms facing pre-
ventable risks to a greater extent focus on beliefs systems (p < .001),
boundary systems (p < .01), and risk-based formal controls (p < .05)
more intensively than firms facing preventable risks to a lower extent,
which provides support for H1a, H1b, and H1d. On the other hand, H1c is
not supported, since diagnostic control systems are not associated with
preventable risks. These findings are consistent with Kaplan & Mikes’
(2012) argument that for controlling preventable risks, an integrated cul-
ture-and-compliance model is most effective. Furthermore, these results
are partly consistent with Widener’s (2007) study, which found that opera-
tions risks are associated with beliefs systems and diagnostic control
systems. Finally, also the additional results on MCS design and use
(Model 1A - 6A) provide unisonous support. To summarize, data support
hypotheses H1a, H1b, and H1d, but no evidence could be found for sup-
porting H1c.
The second set of hypotheses, i.e. H2a - H2e, targets associations be-
tween strategy execution risks and certain types of control systems.
Firms facing strategy execution risks to a greater extent focus on beliefs
systems (p < .05) and diagnostic control systems (p < .05) more inten-
sively than firms facing strategy execution risks to a lower extent, which
provides support for H2a and H2b. Surprisingly, H2c, H2d, and H2e are
not supported by Model 1 - 6, since strategy execution risks were found
not to be associated with interactive control systems, risk-based formal
controls, and risk-based use of controls. These findings led to the produc-
tion of additional results on MCS design and use modifying operationali-
zation of strategy execution risks, since reliability of the measure may be
weak. Interestingly, the additional results on MCS design and use show
at least some support for H2c, since there is a strong tendency for signifi-
cance between the relationship of strategy execution risks and interactive
control systems (p = .055). In addition, Model 1A - 6A provide support for
H2d and H2e since the exposure to strategy execution risks is positively
associated with the emphasis on risk-based formal controls (p < .05) and
risk-based use of controls (p < .05). Finally, there is consistent support for
H2a and H2b by the additional results on MCS design and use as well. In
regard to H2a, the finding is consistent with Simons’ argument that beliefs
systems are intensively related to opportunity-seeking behavior (Simons,
1995b) and with Marginson’s findings that beliefs systems affect a com-
panies’ strategic climate and thus affect managers’ strategic endeavors in
influencing ideas and initiatives (Marginson, 2002). Furthermore, as there
is some evidence that strategy execution risks are associated with inter-
active control systems, the finding in regard to H2c is in line with Kaplan
210 5. Results
& Mikes’ (2012) argument that for controlling strategy execution risks
interactive discussions are essential. Similarly, Simons’ view that interac-
tive control systems focus on strategic uncertainties and changing cir-
cumstances (Simons, 1995b) is supported as well. In addition, there is
conformity with empirical findings of Simons, Bisbe & Otley, and Aber-
nethy & Brownell, who found relations between interactive control sys-
tems and product introduction and technology risks (Simons, 1991), inno-
vation risks (Bisbe & Otley, 2004), and strategic change (Abernethy &
Brownell, 1999). In regard to H2b, the finding is consistent with Widener’s
conclusion that diagnostic and interactive control systems are comple-
mentary (Widener, 2007) and that there is a dynamic tension by joint
usage of both (Henri, 2006a). In addition, the result is in line with evi-
dence in literature that structure is necessary for interactive control sys-
tems to be effective (Chenhall & Morris, 1995; Widener, 2007), which is
also suggested by Simons (2000). In summary, for all hypotheses of the
second set there is support (H2a, H2b, H2d, and H2e), or at least some
support (H2c), through data.
The third set of hypotheses, i.e. H3a - H3c, predicts associations be-
tween external risks and certain types of control systems. Firms facing
external risks to a greater extent focus on interactive control systems (p <
.01) and risk-based use of controls (p < .05) more intensively than firms
facing external risks to a lower extent, which provides support for H3b
and H3c. In addition, there is some support for H3a since there is a
strong tendency that external risks are positively associated with diagnos-
tic control systems (p = .051). Finally, the additional results on MCS de-
sign and use (Model 1A - 6A) provide support for all hypotheses H3a -
H3c, hence also for the proposition that external risks are positively asso-
ciated with diagnostic control systems (p < .05). Conclusively, these find-
ings are consistent with Kaplan & Mikes’ (2012) argument that for control-
ling external risks interactive control models are necessary. Furthermore,
results are consistent with empirical findings that competitive, market,
and technological risks are associated with interactive control systems
(Bisbe & Otley, 2004; Widener, 2007). In addition, Chenhall’s (2007)
proposition in summarizing empirical findings in contingency-based MCS
research that increased uncertainty is associated with more open, exter-
nally focused and interactive MCS is supported. Finally, in a similar way

to the arguments above, the complementary relationship between diag-
nostic and interactive control systems, which is argued conceptually (Si-
mons, 2000) and empirically (Chenhall & Morris, 1995; Henri, 2006a;
Widener, 2007), is also supported. In summary, for hypotheses H3b and
H3c there is support, and for hypothesis H3a at least some support,
through data.
Finally, the findings of Model 1 - 6 and Model 1A - 6A provide interesting
results in regard to the existing body of literature on well-documented
contingencies of MCS design and use, i.e. organizational size, company
age, ownership structure, and strategy of a firm. The analysis of these
findings helps to integrate this study into the existing empirical body of
research on MCS design and use by identifying consistencies with cur-
rent theories and evidence.
Firstly, the multiple regression analyses show after step 1, i.e. after in-
cluding the control variables organizational size, company age, and own-
ership structure as predictors, that larger firms place more emphasis on
all four levers of control as well as the risk-based dimensions of the ex-
tended risk-based MCS framework. These findings are consistent with
early findings in contingency-based research that organizational size is
associated with a more intensive use of formal controls (Bruns & Water-
house, 1975; Khandwalla, 1972; Merchant, 1981) and, more generally,
with the institution of more formal controls (Chenhall, 2007) and MCS
adoption (Davila, 2005). While after step 2 of the multiple regression
analyses, i.e. after adding the strategy variables cost leadership and dif-
ferentiation to the models, the significance of organizational size as pre-
dictor for MCS design and use already decreases, after adding all predic-
tors the results show that larger firms put greater emphasis on risk-based
use of controls (p < .05), which may relate to Khandwalla’s (1972) finding
that organizational size is associated with the use of more sophisticated
controls. In addition, there is some evidence that boundary systems
(Model 2: p = .053; Model 2A: p < .05), and diagnostic control systems
(Model 3: p = .089; Model 3A: p = .061) are associated with organization-
al size. Interestingly, according to Simons’ (1995b) notion, these are the
negative controls, which supports Chenhall’s (2007) argument that for
212 5. Results
larger organizations an intensified and tightened institution of controls

such as rules and documentation becomes necessary in order to deal
with increased information quantities.
Secondly, the results of the multiple regressions analyses in Model 1 - 6
and Model 1A - 6A report no significant finding between the age of a
company and MCS design and use. Davila (2005) suggests that the ef-
fect of company age on MCS design may depend on the organizational
size of an organization, as learning in the case of smaller firms, which
occurs with aging, may not facilitate more formal controls. Thus, the fact
that this study focuses on medium-sized companies may be relevant for
the result that company age is not found to be a predictor for MCS design
and use.
Furthermore, the results of the multiple regressions analyses in Model 1 -
6 and Model 1A - 6A provide interesting results in regard to the control
variable ownership structure of a firm. After step 1, i.e. after including the
control variables organizational size, company age, and ownership struc-
ture as predictors, it is shown that owner-managed firms put less empha-
sis on boundary systems (p < .001), diagnostic control systems (p < .01),
interactive control systems (p < .05), risk-based formal controls (p < .01),
and risk-based use of controls (p < .01) than professionally managed
firms. After adding all predictor variables, i.e. after step 3 of the multiple
regression analyses, owner-managed firms are still associated with less
emphasis on boundary systems (p < .01), diagnostic control systems (p <
.05), and risk-based use of controls (p < .05). Thus, it is found that owner-
managed firms put less emphasis on negative controls, i.e. boundary and
diagnostic control systems, as well as on risk-based use of controls,
which is consistent with empirical findings that internal control procedures
(Daily & Dollinger, 1992), formal performance measures (Speckbacher &
Wentges, 2011), formal reporting procedures (Cromie et al., 1995), and
boundary MCS archetypes (King & Clarkson, 2015) have greater im-
portance in professionally managed firms and that formal structures and
rules are intensified when the founder manager is replaced by a profes-
sional CEO (Davila, 2005; Greiner, 1998).
Finally, the results on the strategy variables cost leadership and differen-
tiation are discussed, which also provide interesting insights. After step 2,
5.2. Risk profile contingent packages of MCS 213
i.e. after adding the strategy variables to the multiple regressions in Mod-
el 1 - 6 and Model 1A - 6A, it is found that while a focus on cost leader-
ship is associated with all four levers of control (p < .001) and both risk-
based dimension of the extended risk-based MCS framework (p < .001),
a focus on differentiation is associated with an emphasis on beliefs sys-
tems (p < .001), diagnostic control systems (p < .023), and interactive
control systems (p < .018). While the findings for differentiation strategies
are in line with findings for prospector-like strategies in literature, i.e. con-
trol systems fostering creativity and innovation (Abernethy & Brownell,
1998; Chenhall, 2007), there is an unexpected broad impact of cost lead-
ership strategies on MCS design and use which are connected to more
tight control systems in literature (e.g., Chenhall & Morris, 1993; Go-
vindarajan, 1988). After adding the risk profile variables as predictors, i.e.
after step 3 of the multiple regression analyses, cost leadership strategies
are associated with boundary systems (p < .05), diagnostic control sys-
tems (p < .01), interactive control systems (p < .001), risk-based formal
controls (p < .05), and risk-based use of controls (p < .001), and differen-
tiation strategies are associated with beliefs systems (p < .05). Thus, the
findings confirm the critical role of strategy as a predictor in contingency-
based MCS literature (Langfield-Smith, 2007), although some of the as-
sociations become non-significant after adding the predictor variables
preventable risks, strategy execution risks, and external risks to the anal-
ysis. Interestingly, while cost leadership strategies are important determi-
nants for tight use of control systems and both dimensions of risk-based
MCS, the results on formal controls clearly reflect theoretical (Miles &
Snow, 1978; Porter, 1980) and empirical (Chenhall, 2007) arguments and
evidence as cost leadership strategies are associated with boundary
systems but not with beliefs systems, and vice versa for differentiation
strategies.
5.2 Risk profile contingent packages of MCS

Following the procedure of the previous section, the theoretical model for
analyzing risk profile contingent packages of MCS and the quantitative
techniques together with their required assumptions will be presented
214 5. Results
first. Subsequently, the statistical analysis is conducted and an overview

of the resulting figures and significant findings provided. Finally, the pro-
posed cluster hypotheses, i.e. hypotheses H4a - H5b, are discussed and
their support through the data evaluated.

This section examines whether there are certain packages of MCS, i.e.
configurations of MCS, which are put in place in practice and if these
configurations of MCS differ in their risk profile. Hence, as a first step, the
packages of different control systems used by an organization, i.e. beliefs
systems (BELIEF), boundary systems (BOUND), diagnostic control sys-
tems (DIAGNOST), and interactive control systems (INTERACT), are
analyzed in order to derive actual MCS configuration membership. Sec-
ondly, the influence of the types of risks, i.e. preventable risks
(PREVRISK), strategy execution risks (STRATRISK), and external risks
(EXTRISK), on MCS configuration membership is assessed. Finally, after
conducting the analysis for Simons’ LOC framework, the study proceeds
by applying the risk-based MCS framework and thus integrating the addi-
tional risk-based dimensions as well, i.e. the dimensions risk-based for-
mal controls (rbFORMALMCS) and risk-based use of controls
(rbUSEMCS). Finally, additional results for these models will be present-
ed, which provide further insights into the hypotheses by applying a dif-
ferent methodology for operationalization of the measure for strategy
execution risks for the analysis.
In order to analyze whether firms build certain groups or clusters based
on their emphasis on each dimension of MCS, cluster analyses are con-
ducted. As a result, two cluster solutions for the LOC framework and the
risk-based MCS framework are explored, which indicate which packages
of MCS the firms in the different clusters use. While the dimensions of the
LOC framework consist of the construct measures BELIEF, BOUND,
DIAGNOST, and INTERACT, by applying the risk-based MCS frame-
work, the additional dimensions measured as rbFORMALMCS and
rbUSEMCS are incorporated in the examination as well. As a method for
175
producing clusters, two-step cluster analyses are conducted and the
176
Schwarz's Bayesian Criterion, i.e. BIC criterion, for selecting the num-
ber of clusters is applied, in which the number of clusters is automatically
177
detected by the statistics software.
To validate the results of the two-step cluster analyses, discriminant
analyses are conducted and the significance of the discriminant models
as well the number of correctly classified cases is evaluated. In addition,
predictive validity is assessed by examining differences on variables not
included in the cluster analyses but possessing strong theoretical support
to vary across the clusters (Hair et al., 2014). Furthermore, the validity of
analysis is tested by assessing the representativeness of the sample and
the impact of multicollinearity (Hair et al., 2014). First of all, as the sample
shows a satisfactory size to be representative for Austrian and German
mechanical engineering companies (see Section 4.1), generalizations to
other industries or countries remain problematic, as the data may not be
representative for these populations. Secondly, to avoid bias from multi-
collinearity, the predictor variables should not correlate too highly, i.e.
above .80 or .90 (Field, 2013; Hair et al., 2014), and the variance inflation
175
In two-step cluster analyses categorical as well as metric variables can be processed
and the number of clusters for the optimal cluster solution is detected automatically.
Compared to the hierarchical cluster analysis this method is preferred for rather large
sample sizes (Bühl, 2014).
176
The Schwarz's Bayesian Criterion, i.e. BIC criterion, is a goodness-of-fit statistic that is
comparable to the AIC statistic (see Footnote 163) but more conservative in its proce-
dure. That is, the BIC criterion is corrected for model complexity and penalizes additional
model parameters more harshly than the AIC. The statistic should be applied when
sample sizes are rather large and the number of parameters rather small, and enables
comparisons of different models with smaller values of BIC indicating better fit of the da-
ta (Field, 2013).
177
The software automatically detects the number of clusters using the BIC criterion (see
Footnote 176). While some authors advise against such a procedure as the automatic
determination may not produce the best solution possible (e.g., Bühl, 2014, p. 665), oth-
ers point out that no standard objective selection procedure exists and that “the selection
of the final cluster solution requires substantial researcher judgement and is considered
by many as too subjective. […]. It is thus imperative to employ whatever objective sup-
port is available and be guided by reasoned judgment, especially in the design and in-
terpretation stages” (Hair et al., 2014, p. 425). Furthermore, and most importantly, clus-
ter solutions should have theoretical validity assessed through external validation and all
clusters should be significantly different in regard to their clustering variables (Hair et al.,
2014, p. 446-448).
216 5. Results
factor (VIF) should be computed, which indicates whether a predictor has

a strong linear relationship with others. As can be seen in Table 9, the
highest correlation between two variables used in the cluster analyses is
.719 between the construct variables INTERACT and rbUSEMCS. In
addition, the highest VIF in the analysis of the LOC framework is 2.036 of
the construct INTERACT and the highest VIF in the analysis of the risk-
based MCS framework is 2.659 of the construct rbUSEMCS. Further-
more, in course of the LOC framework analysis the average VIF of all
clustering variables is 1.767 and in course of the risk-based MCS frame-
work analysis the average VIF of all clustering variables is 2.223. There-
fore, while multicollinearity seems not to be a problem in the LOC frame-
work cluster analysis, the risk-based MCS framework cluster analysis
results must be interpreted with caution, as the average VIF of all cluster-
ing variables is slightly increased.
As a next step, logistic regression analyses are conducted to assess the
predictive validity of the clusters and to test if types of risks influence
MCS cluster membership. In these analyses the dependent variable is
the MCS cluster membership in regard to the LOC framework and the
risk-based MCS cluster membership in regard to the extended risk-based
MCS framework. Therefore, two models are developed within this analy-
sis. The main independent variables in these models consist of the risk
profile variables, i.e. PREVRISK, STRATRISK, and EXTRISK. To im-
prove validity of the models, a set of control variables is included. As was
done for the multiple regression analyses in Section 5.1.2, I control for
the strategy of the firms by integrating the variables COSTSTRAT and
DIFFSTRAT, because a relationship between MCS and strategy is widely
recognized in literature (Langfield-Smith, 2007; see Section 2.3.2.2). Fur-
thermore, I control for organizational size, company age, and ownership
structure of the firms by integrating the variables SIZE, AGE, and OWN
since previous literature indicated that these characteristics affect the
control structure of the firm (Davila, 2005; see Section 2.3.2.3, 2.3.2.4,
and 2.3.2.5). As method for variables to be entered into the models, the
hierarchical entry method is chosen, which requires a decision on the
sequence of entering the predictors into the model and thus relies on
theoretical reasoning (Field, 2013; see Section 5.1.1). Equal to the pro-
cedure of multiple regression analyses in Section 5.1.2, in the first step

the control variables SIZE, AGE, and OWN are considered, since these
common structural variables have proven influential since the beginning
of contingency theory on organizational control systems and MCS
(Chenhall, 2003; Davila, 2005). In a second step, the strategy variables
COSTSTRAT and DIFFSTRAT are entered into the model as research
has provided wide evidence that strategy is related to the design and use
of MCS (Langfield-Smith, 2007). Finally, the third and last step adds the
risk profile variables PREVRISK, STRATRISK, and EXTRISK in order to
demonstrate the influence and additional explanatory power of these
predictors for MCS cluster membership. Furthermore, the significance of
2
the model after each step is assessed by using the χ -statistic and the
overall fit of the model as a whole, evaluated by computing the measure
2
RN . In addition, to evaluate if a step significantly improved the model, the
2
measure χ change is reported. Furthermore, the effects of independent
variables on the probability of the categorical outcome variable to occur
are evaluated by assessing the significance of each coefficient using the
Wald statistic, which indicates if the coefficient is significantly different
from zero. In addition, the odds ratio is examined to assess the effect of a
change of a predictor value to the odds of the outcome occurring (Field,
2013).
In order to verify the assumptions of the logistic regression analysis it is
tested for linearity of the logit and multicollinearity as suggested by Fields
(2013). First of all, to test if each continuous predictor variable is linearly
related to the log of the outcome variable, the interaction terms between
each predictor variable and the log of itself are calculated and included as
predictors, together with the corresponding predictor variables in a lo-
gistic regression analysis. After conducting the logistic regression, the
significance of the interaction terms is evaluated. As all interaction terms
have significance values greater than .05, with the lowest significance
level being p = .074 for the construct STRATRISK, it is indicated that the
assumption of the linearity of the logit is met. Additionally, results are
validated by performing bootstrapping analysis, which is a robust method
to generate confidence intervals and significance tests of the model pa-
rameters (see Footnote 173). All findings in each model have been con-
218 5. Results
firmed by bootstrapping analysis. Finally, to avoid bias from multicolline-

arity, the predictor variables should not correlate too highly, i.e. above .80
or .90 (Field, 2013; Hair et al., 2014), and the variance inflation factor
(VIF) should be computed, which indicates whether a predictor has a
strong linear relationship with others. As explained above, if the values
are each less than 10 and the average VIF is not substantially greater
than 1, then multicollinearity should be of no concern (Field, 2013). The
highest correlation between two variables used in the following models is
.569 between the construct variables COSTSTRAT and PREVRISK, with
most of the correlations being considerably lower (see Table 9). In addi-
tion, the highest VIF of the logistic regression analyses is 1.622 of the
construct variable PREVRISK, and the average VIF of all independent
variables in the logistic regression models is 1.310, indicating that multi-
collinearity is of no concern in these models.
5.2.2 Analysis
The analysis for examining risk profile contingent packages of MCS starts
with examining the relations for the LOC framework, and proceeds by
applying the risk-based MCS framework. Finally, additional results for
both frameworks of MCS are provided.

The two-step cluster analysis for the LOC framework revealed two differ-
ent clusters, i.e. configurations of MCS that differ slightly in their number
of members. As shown in Panel A of the following table, from the total
sample of 362 firms, 201 firms or 55.5% belong to Cluster 1 (C1LOC) and
161 firms or 44.5% belong to Cluster 2 (C2LOC).
Cluster analysis
LOC framework
Panel A: Cluster distribution
N % of Combined
Cluster 1 201 55.5
2 161 44.5
Combined 362 100.0
Panel B: Descriptive statistics of clusters
BELIEF BOUND
Mean Std. Deviation Mean Std. Deviation
Cluster 1 5.50 0.74 5.76 0.82
2 4.30 0.97 3.61 1.21
Combined 4.96 1.04 4.81 1.47
DIAGNOST INTERACT
Cluster 1 6.07 0.72 6.07 0.72
2 4.72 1.51 4.72 1.51
Combined 5.47 1.32 5.47 1.32
Table 17: Cluster analysis of the LOC framework
Panel B of Table 17 shows the differences in the variables BELIEF,

BOUND, DIAGNOST, and INTERACT which were used for production of
the clusters. As can be seen, all variables show higher values in C1LOC
than in C2LOC, on average.
For a cluster solution to be valid and practically significant, it is essential
that the clusters are “significantly different across the set of clustering
variables” (Hair et al., 2014, p. 448). Therefore, a discriminant analysis is
conducted, to test if the clusters discriminate significantly between the
clustering variables and if the discriminant model as a whole is signifi-
cant. The following table shows the results of the discriminant analysis for
application of the LOC framework:
220 5. Results
Discriminant analysis
LOC framework
Panel A: Canonical discriminant function coefficients and tests of equality of group means
unstandardized
F df1 df2 Sig.
coefficients
BELIEF 0.28 177.65 1 360 .000
BOUND 0.75 403.89 1 360 .000
DIAGNOST 0.17 125.35 1 360 .000
INTERACT 0.43 183.58 1 360 .000
Constant -7.92
Panel B: Classification results

Predicted group
membership
MSC
1 2 Total
Cluster
Original Count 1 196 5 201
2 9 152 161
% 1 97.5 2.5 100.0
2 5.6 94.4 100.0
96.1% of original grouped cases correctly classified.
Table 18: Discriminant analysis for the cluster solution of the LOC framework
In Panel A of Table 18, the discriminant coefficients are presented and it

is tested if the clustering variables are significantly different in both clus-
ters. As a result, it is apparent that the variable BOUND has the greatest
influence in assigning cluster membership, followed by INTERACT and
BELIEF. Furthermore, the values of the discriminant coefficients are sig-
nificantly different (p < .001) and thus the discriminant model as a whole
2
is significant (Wilks’ lambda = .331, χ (4) = 395.307, p < .001).
Finally, in Panel B the classification results are obtained and original and
predicted group membership is indicated, which leads to the finding that a
highly satisfactory number of 96.1% of the firms are correctly classified.
Additionally, as the discriminant analysis as a multivariate technique is
178
based on a number of assumptions, results are validated by perform-
ing bootstrapping analysis, which is a robust method to generate confi-
dence intervals and significance tests of the model parameters (Field,
2013). All findings of the model have been confirmed by bootstrapping
analysis.
178
Key assumptions for the discriminant function are “multivariate normality of the inde-
pendent variables and unknown (but equal) dispersion and covariance structures (matri-
ces) for the groups as defined by the dependent variable” (Hair et al., 2014, p. 250).
While the former is tested through tests for normality of individual variables, the latter is
tested by using the Box’s M test which assesses the significance of differences in the
matrices between the groups (Hair et al., 2014, p. 250). As some of these tests show
ambiguous results, bootstrapping analysis is conducted in order to verify the results.
222 5. Results
Logistic regression
LOC framework
Model 7
Predictors Explained variable: MCS_cluster
Step 1:
b EXP(b) p-value
Control variables
Constant 1.554
SIZE -0.327 0.721 .011*
AGE 0.039 1.040 .760
OWN -0.496 0.609 .021*
Step 2:
+ Strategy profile
Constant 7,108
SIZE -0.226 0,798 .099
AGE 0.013 1,013 .921
OWN -0.461 0,631 .046*
COSTSTRAT -0.864 0,421 .000***
DIFFSTRAT -0.158 0,854 .164
Step 3:
+ Risk profile
Constant 9.081
SIZE -0.189 0.828 .191
AGE -0.005 0.995 .972
OWN -0.216 0.806 .378
COSTSTRAT -0.655 0.519 .000***
DIFFSTRAT -0.034 0.966 .780
PREVRISK -0.169 0.844 .361
STRATRISK -0.266 0.767 .011*
EXTRISK -0.374 0.688 .036*
Step Nagelkerke RN2 Chi-square Sig.

1 .049 13.481 .004**
2 .210 61.915 .000***
3 .256 76.942 .000***
n=362
Table 19: Logistic regression for prediction of MCS cluster membership

To assess the predictive validity of the clusters and to test if types of risks
influence MCS cluster membership, a logistic regression analysis is con-
ducted, which is presented in Table 19 above.
The logistic regression analysis shows a model which accounts for 25.6%
of the amount of variation in the categorical outcome variable
MCS_cluster, which is coded as 0 for membership of C1LOC and as 1 for
membership of C2LOC. The logistic regression analysis is significant after
2 2 2 2
step 1 (RN = .049, χ (3) = 13.481, p = .004), step 2 (RN = .210, χ (5) =
2 2
61.915, p < .001), and step 3 (RN = .256, χ (8) = 76.942, p < .001). Fur-
thermore, the logistic regression model significantly improved after step
1, i.e. after adding the control variables SIZE, AGE, and OWN, and is
able to correctly classify 58.0% of the firms compared to 55.0% prediction
accuracy without any predictors. After step 2, i.e. after adding the strate-
gy profile variables COSTSTRAT and DIFFSTRAT, the model significant-
2
ly improved further (χ change(2) = 48.434, p < .001) and is able to correctly
classify 66.6% of the firms. Finally, through adding the risk profile varia-
bles PREVRISK, STRATRISK, and EXTRISK in step 3, the logistic re-
2
gression model significantly improved further (χ change(3) = 15.027, p =
.002) and is able to correctly classify 67.1% of the firms. After adding all
2
predictors in step 3, the variables COSTSTRAT (b = -0.665, z (1) =
2
13.649, p < .001), STRATRISK (b = -0.266, z (1) = 6.447, p = .011), and
2
EXTRISK (b = -0.374, z (1) = 4.389, p = .036) make a significant contri-
bution to the prediction of the outcome, i.e. MCS cluster membership,
and a change in the predictor COSTSTRAT (Exp(b) = 0.519) decreases
the odds of the outcome occurring the most, followed by EXTRISK
(Exp(b) = 0.688) and STRATRISK (Exp(b) = 0.767).
Finally, after validating the results of the cluster analysis, the following
can be derived from analyzing the corresponding figures:
 Cluster 1 (C1LOC) is slightly larger and 55.5% of the participants in the
survey belong to this cluster. The CEOs of the firms in C1LOC seem to
put more emphasis on each of the four types of control systems, i.e.
beliefs systems, boundary systems, diagnostic control systems, and
interactive control systems, than the CEOs of the firms in C2LOC. Fur-
thermore, firms in this cluster face strategy execution risks and exter-
nal risks to a greater extent than firms in the other cluster. Additional-
224 5. Results
ly, members of C1LOC pursue cost leadership strategies to a greater

extent than members of C2LOC. In general, CEOs of firms in C1LOC ap-
plied tighter MCS (Merchant & Van der Stede, 2012) and face risks
more intensively than firms in C2LOC.
 Cluster 2 (C2LOC) is slightly smaller and 44.5% of the participants in
the survey belong to this cluster. The CEOs of the firms in C2LOC
seem to put less emphasis on each of Simons’ levers of control, i.e.
beliefs systems, boundary systems, diagnostic control systems, and
interactive control systems, than the CEOs of the firms in C1LOC. Fur-
thermore, firms in this cluster face strategy execution risks and exter-
nal risks to a lesser extent than firms in the other cluster. Additionally,
members of C2LOC put less emphasis on cost leadership strategies
than members of C1LOC. In general, CEOs of firms in C2LOC applied
less tight MCS (Merchant & Van der Stede, 2012) and face risks to a
lower extent than firms in C1LOC.

The two-step cluster analysis for the risk-based MCS framework also
revealed two different clusters, i.e. configurations of risk-based MCS that
differ slightly in their number of members. As shown in Panel A of the
following table, from the total sample of 362, 192 firms or 53.0% belong
to Cluster 1 (C1rbMCS) and 170 firms or 47.0% belong to Cluster 2
(C2rbMCS).
Cluster analysis
Panel A: Cluster distribution
N % of Combined
Cluster 1 192 53.0
2 170 47.0
Combined 362 100.0
Panel B: Descriptive statistics of clusters
BELIEF BOUND
Cluster 1 5.58 0.66 5.76 0.88
2 4.26 0.94 3.73 1.25
Combined 4.96 1.04 4.81 1.47
DIAGNOST INTERACT
Cluster 1 6.05 0.75 6.05 0.75
2 4.82 1.51 4.82 1.51
Combined 5.47 1.32 5.47 1.32
rbFORMALMCS rbUSEMCS
Cluster 1 5.43 0.73 5.68 0.70
2 3.96 1.04 4.31 1.18
Combined 4.74 1.15 5.04 1.18
Table 20: Cluster analysis of the risk-based MCS framework
In line with the procedure in regard to the LOC framework, a discriminant

analysis is conducted to test if the clusters discriminate significantly be-
tween the clustering variables, and if the discriminant model as a whole is
significant. The following table shows the results of the discriminant anal-
ysis for the cluster solution of the risk-based MCS framework:
226 5. Results
Discriminant analysis
Panel A: Canonical discriminant function coefficients and tests of equality of group means
unstandardized
F df1 df2 Sig.
coefficients
BELIEF 0.41 242.643 1 360 .000
BOUND 0.53 322.348 1 360 .000
DIAGNOST 0.01 99.898 1 360 .000
INTERACT 0.34 175.863 1 360 .000
rbFORMALMCS 0.23 245.629 1 360 .000
rbUSEMCS 0.21 186.542 1 360 .000
Constant -8.42
Panel B: Classification results

Predicted group
membership
MSC
1 2 Total
Cluster
Original Count 1 187 5 192
2 5 165 170
% 1 97.4 2.6 100.0
2 2.9 97.1 100.0
97.2% of original grouped cases correctly classified.
Table 21: Discriminant analysis for the cluster solution of the risk-based MCS framework
In Panel A of Table 21 the discriminant coefficients are presented and it

is tested if the clustering variables are significantly different in both clus-
ters. Consequently, similarly to the results for the LOC framework, the
variable BOUND has the greatest influence in assigning MCS cluster
membership, followed by BELIEF and INTERACT. Furthermore, the val-
ues of the discriminant coefficients are significantly different (p < .001)
and thus the discriminant model as whole is significant (Wilks’ lambda =
2
.339, χ (4) = 386.458, p < .001). Finally, in Panel B the classification re-
sults are obtained and original and predicted group membership indicated
which leads to the finding that 97.2% of the firms, a highly satisfactory
number, are correctly classified, compared to 96.1% when applying the

LOC framework. Additionally, the results are validated by performing
bootstrapping analysis, which is a robust method to generate confidence
intervals and significance tests of the model parameters (Field, 2013). All
findings of the model have been confirmed by bootstrapping analysis.
To assess the predictive validity of the clusters and to test if types of risks
influence risk-based MCS cluster membership a logistic regression anal-
ysis was conducted, which is presented in Table 22 below.
228 5. Results
Logistic regression
Model 8
Predictors Explained variable: rbMCS_cluster
Step 1:
b EXP(b) p-value
Control variables
Constant 1.525
SIZE -0.355 0.701 .006**
AGE 0.127 1.136 .323
OWN -0.610 0.543 .005**
Step 2:
+ Strategy profile
Constant 6.888
SIZE -0.263 0.769 .054
AGE 0.112 1.119 .406
OWN -0.591 0.554 .010*
COSTSTRAT -0.837 0.433 .000***
DIFFSTRAT -0.148 0.863 .192
Step 3:
+ Risk profile
Constant 9.332
SIZE -.219 .803 .131
AGE .093 1.098 .495
OWN -.308 0.735 .209
COSTSTRAT -.591 .554 .001**
DIFFSTRAT -.004 .996 .974
PREVRISK -.216 .806 .252
STRATRISK -.344 .709 .001**
EXTRISK -.410 .663 .023*

1 .064 17.772 .000***
2 .211 62.326 .000***
3 .277 84.108 .000***
n=362
Table 22: Logistic regression for prediction of risk-based MCS cluster membership
The logistic regression analysis shows a model that accounts for 27.7%
of the amount of variation in the categorical outcome variable MCS clus-
ter membership compared to 25.6% when applying the LOC framework.
In this model, rbMCS_cluster is coded as 0 for membership of C1rbMCS
and as 1 for membership of C2rbMCS. The logistic regression analysis is
2 2 2
significant after step 1 (RN = .064, χ (3) = 17.772, p < .001), step 2 (RN
2 2 2
= .211, χ (5) = 62.326, p < .001), and step 3 (RN = .277, χ (8) = 84.108,
p < .001). Furthermore, the logistic regression model significantly im-
proved after step 1, i.e. after adding the control variables SIZE, AGE, and
OWN, and is able to correctly classify 58.8% of the firms compared to
53.0% prediction accuracy without any predictors. After step 2, i.e. after
adding the strategy profile variables COSTSTRAT and DIFFSTRAT, the
2
model significantly improved further (χ change(2) = 44.554, p < .001) and is
able to correctly classify 66.0% of the firms. Finally, through adding the
risk profile variables PREVRISK, STRATRISK, and EXTRISK in step 3,
2
the logistic regression model significantly improved further (χ change(3) =
21.782, p < .001) and is able to correctly classify 67.7% of the firms com-
pared to 67.1% in the base model. After adding all predictors in step 3,
2
the variables COSTSTRAT (b = -0.591, z (1) = 10.952, p = .001),
2
STRATRISK (b = -0.344, z (1) = 10.407, p = .001), and EXTRISK (b = -
2
0.410, z (1) = 5.205, p = .023) make a significant contribution to the pre-
diction of the outcome, i.e. risk-based MCS cluster membership, and a
change in the predictor COSTSTRAT (Exp(b) = 0.554) decreases the
odds of the outcome occurring the most, followed by EXTRISK (Exp(b) =
0.663) and STRATRISK (Exp(b) = 0.709).
Finally, after validating the results of the cluster analysis, the characteris-
tics of C1rbMCS and C2rbMCS are very similar to the characteristics of the
clusters identified when applying the LOC framework (see Section
5.2.2.1). However, the importance of strategy execution risks and exter-
nal risks increases and the importance of cost leadership strategies de-
creases as a predictor for risk-based MCS cluster membership compared
to the results when applying the LOC framework. In general, 53.0% of the
firms belong to C1rbMCS, applied tighter MCS (Merchant & Van der Stede,
2012), and face risks more intensively than firms belonging to C2rbMCS.
230 5. Results
To sum up, it can be concluded that the analysis for the risk-based MCS
framework revealed similar clusters compared to the analysis for the LOC
framework. While both cluster solutions show significant discrimination
between the clustering variables and satisfactory predictive validity, the
cluster solution of the risk-based MCS framework discriminates better
and the predictability of cluster membership is superior.
5.2.2.3 Additional results on predictability of MCS cluster membership

To provide further insights into the hypotheses H5a and H5b, additional
results have been produced to test if types of risks influence MCS cluster
membership and to assess the predictive validity of the clusters. As intro-
duced in Section 5.1.2.3, the following logistic regression models apply a
different approach for operationalization of the measure STRATRISK, as
the construct has been measured with just one item and reliability of the
scale may be weak (see Section 4.3.3). Specifically, a dummy variable
STRATRISK_dummy is calculated, which is set to 0 for firms with low
values of STRATRISK, i.e. below median, and set to 1 for firms with high
values of STRATRISK, i.e. median or above (see Equation 17). The ta-
bles below show the additional results of the logistic regression analyses
on MCS cluster membership of the LOC framework and on risk-based
MCS cluster membership of the risk-based MCS framework. All models
follow the same procedures as presented in the previous sections. How-
ever, as step 1 and step 2 are identical to the results reported above,
they are omitted in the following tables. For sake of clarity the subse-
quently presented models are labeled with the same digit as the corre-
sponding models above but with the suffix A.
Logistic regression
LOC framework
Model 7A
Predictors Explained variable: MCS_cluster
b EXP(b) p-value
Step 3:
+ Risk profile
Constant 8.455
SIZE -0.212 0.809 .143
AGE 0.004 1.004 .979
OWN -0.213 0.808 .385
COSTSTRAT -0.648 0.523 .000***
DIFFSTRAT -0.035 0.966 .775
PREVRISK -0.192 0.825 .301
STRATRISK_dummy -0.720 0.487 .004**
EXTRISK -0.376 0.686 .034*

3 .261 78.448 .000***
n=362
Table 23: Logistic regression – additional results on predictability of MCS cluster member-
ship
The additional results of the logistic regression analysis on MCS cluster

membership in Table 23 show that the significance of the improvement of
the models after each step and the significance of the models as a whole
remain unchanged. For Model 7A, the results on the significance of the
predictors are very similar to the original Model 7. However, the degree of
significance as a predictor for MCS cluster membership (MCS_cluster) of
2
the variable STRATRISK_dummy (b = -0.720, z (1) = 8.072, p = .004)
2
increased compared to Model 7 above (STRATRISK: b = -0.266, z (1) =
6.447, p = .011). Furthermore, while in Model 7 the variable COSTSTRAT
(Exp(b) = 0.519) is the most important predictor, in Model 7A the variable
STRATRISK_dummy (Exp(b) = 0.487) decreases the odds of the out-
come occurring the most.
232 5. Results
Logistic regression
Model 8A
Predictors Explained variable: rbMCS_cluster
Step 3:
b EXP(b) p-value
+ Risk profile
Constant 8.572
SIZE -.252 0.778 .086
AGE .109 1.115 .434
OWN -.294 0.745 .232
COSTSTRAT -.582 0.559 .001**
DIFFSTRAT -.003 0.997 .978
PREVRISK -.254 0.775 .182
STRATRISK_dummy -1.010 0.364 .000***
EXTRISK -.405 0.667 .024*

3 .291 88.940 .000***
n=362
Table 24: Logistic regression – additional results on predictability of risk-based MCS cluster
membership
The additional results of the logistic regression analysis on risk-based

MCS cluster membership in Table 24 show that the significance of the
improvement of the models after each step and the significance of the
models as a whole remain unchanged. As in the previous model, the
results on the significance of the predictors are very similar to the original
model. However, the degree of significance as a predictor for risk-based
MCS cluster membership (rbMCS_cluster) of the variable
2
STRATRISK_dummy (b = -1.010, z (1) = 15.380, p < .001) increased
2
compared to Model 8 above (STRATRISK: b = -0.344, z (1) = 10.407, p =
.001). Furthermore, while in the original model the variable COSTSTRAT
(Exp(b) = 0.554) is the most important predictor, in this model the variable
STRATRISK_dummy (Exp(b) = 0.364) decreases the odds of the out-
come occurring the most.
In sum, it is demonstrated that while all other findings have been con-
firmed, the additional results show that the significance of the explanatory
power of strategy execution risks to predict MCS cluster membership and
risk-based MCS cluster membership, respectively, improved compared to
the preceding findings. In addition, in contrast to the previous findings,
STRATRISK_dummy is the most important predictor in these models.

Evidence on the hypotheses H4a - H5b is provided by the cluster anal-
yses of the LOC framework and the risk-based MCS framework, as well
as by the logistic regressions Model 7 - 8 and Model 7A - 8A.
Hypothesis H4a proposes that there are packages of MCS which are put
in place in practice. The cluster analysis in Table 17 provides evidence
on H4a and found that in practice there are two different and distinct con-
figurations of MCS in place, C1LOC and C2LOC, and that 55.5% of the firms
belong to C1LOC and 44.5% of the firms to C2LOC. While firms in C1LOC put
more emphasis on all four levers of control, i.e. beliefs systems, boundary
systems, diagnostic control systems, and interactive control systems, the
opposite is the case for firms in C2LOC. In addition, evidence was found
for sound predictive validity in regard to these clusters, as the predictors
cost leadership strategy (p < .001), strategy execution risks (p < .05), and
external risks (p < .05) significantly predict cluster membership, i.e. the
greater the emphasis on these variables, the more likely that a firm be-
longs to C1LOC. Thus, support for H5a is also provided, since types of
risks significantly influence cluster membership. Finally, the additional
results supported all findings, and reported strategy execution risks (p <
.01) to be more influential than in the original model. While the homoge-
neous emphasis on each lever of control is surprising at first sight, the
findings are quite in consistency with theoretical arguments (Simons,
1995b) and empirical evidence (Henri, 2006a; Widener, 2007). Simons
(1995b, 2000) argues that all four levers have to work together to create
dynamic tension and thus an effective control environment, which is sup-
ported by Henri’s (2006a) empirical study. In addition, the findings are
234 5. Results
consistent with Widener’s (2007) evidence that in fact all four levers of
control are interdependent and complementary.
Furthermore, hypothesis H4b proposes that also in regard to the risk-
based MCS framework, there are configurations of risk-based MCS in
place. The cluster analysis in Table 20 provides evidence on H4b and
found similar relationships as in regard to the LOC framework. In prac-
tice, there are two different and distinct configurations of risk-based MCS
in place, C1rbMCS and C2rbMCS, and 53.0% of the firms belong to C1rbMCS
and 47.0% of the firms to C2rbMCS. While firms in C1rbMCS put more em-
phasis on all four levers of control – beliefs systems, boundary systems,
diagnostic control systems, interactive control systems – and both risk-
based dimensions of the extended risk-based MCS framework – risk-
based formal controls and risk-based use of controls – the opposite is the
case for firms in C2rbMCS. Similarly to the findings in regard to H4a, evi-
dence was found for sound predictive validity in regard to these clusters,
as the predictors cost leadership strategy (p < .01), strategy execution
risks (p < .01), and external risks (p < .05) significantly predict cluster
membership, i.e. the greater the emphasis on these variables, the more
likely that a firm belongs to C1rbMCS. Thus, support for H5b is also provid-
ed, since types of risks significantly influence cluster membership.
Finally, the additional results supported all findings, and reported strategy
execution risks (p < .001) to be more influential than in the original model.
Conclusively, the same considerations in regard to connections to the
existing body of literature take place as discussed above. Finally, it can
be stated that the results indicate that the risk-based MCS framework
provides for an incremental development of Simons’ LOC framework
(Simons, 1995b) and the risk-based dimensions integrate well into the
existing base framework.
5.3. Risk profile contingent performance analysis of MCS 235
5.3 Risk profile contingent performance analysis of MCS

Following the procedure of the previous sections, the theoretical model
for conducting a risk profile contingent performance analysis of MCS and
the quantitative techniques together with their required assumptions will
be discussed first. Subsequently, the statistical analyses are conducted
and the resulting figures presented. Finally, the proposed performance
hypotheses, i.e. hypotheses H6a - H8b, are discussed and their support
through the data evaluated.

In this section it is examined whether subjective and objective perfor-
mance measures, i.e. perceived firm performance (PERCPERF), per-
179
ceived MCS usefulness (USEFULMCS), and EBIT , relate to the fit
between type of MCS and risk profile. In the previous section, cluster
analysis was used to derive actual MCS cluster membership and thus
packages of MCS, i.e. actual configurations of MCS an organization puts
in place. Furthermore, predicted MCS cluster membership will be derived
through establishing a model of fit between the configuration of MCS
chosen by an organization and its risk profile, i.e. an organization’s expo-
sure to preventable risks (PREVRISK), strategy execution risks
(STRATRISK), and external risks (EXTRISK). For the purpose of the
following analyses it is assumed that this model captures, on average,
optimal behavior (e.g., Sandino, 2007). Such an approach admits that “at
any given point in time, a cross-sectional sample […] will be composed of
organizations that vary with respect to the optimal level of practice adop-
tion” (Ittner & Larcker, 2001, p. 399). Therefore, while organizations are
dynamically learning, the observed cross-sectional variation is distributed
around the optimal choice (Milgrom & Roberts, 1992) and “provides a
179
For the following analysis the measure EBIT_trimmed is used instead of EBIT, as the
measure EBIT shows extreme scores and in order to reduce the impact of outliers (see
Section 4.2.3. and Table 3).
236 5. Results
means to assess the performance consequences of managerial account-

180
ing choices” (Ittner & Larcker, 2001, p. 399).
Consequently, deviations from the model’s predictions are used and ac-
tual and predicted MCS cluster membership of each organization com-
pared, to calculate a dummy variable FIT, equal to 1 if the firm actually
chose that predicted type of MCS, and 0 otherwise.
1⁡𝑖𝑓⁡𝑝𝑟𝑒𝑑𝑖𝑐𝑡𝑒𝑑 = 𝑎𝑐𝑡𝑢𝑎𝑙⁡𝑀𝐶𝑆⁡𝑐𝑙𝑢𝑠𝑡𝑒𝑟⁡𝑚𝑒𝑚𝑏𝑒𝑟𝑠ℎ𝑖𝑝
𝐹𝐼𝑇𝑖 = {
0⁡𝑖𝑓⁡𝑝𝑟𝑒𝑑𝑖𝑐𝑡𝑒𝑑 ≠ 𝑎𝑐𝑡𝑢𝑎𝑙⁡𝑀𝐶𝑆⁡𝑐𝑙𝑢𝑠𝑡𝑒𝑟⁡𝑚𝑒𝑚𝑏𝑒𝑟𝑠ℎ𝑖𝑝
Equation 18: Calculation of dummy variable for FIT
As a result, firms are classified into “High-Fit” (FIT = 1) and “Low-Fit” (FIT
= 0) and univariate tests and multiple regression analyses are conducted
to compare these two groups in terms of their performance measures.
Similar to the procedure in the previous sections, the following examina-
tions will start by applying the LOC framework and proceed with the anal-
ysis for the risk-based MCS framework. Accordingly, the following figure
illustrates the theoretical model:
180
Milgrom & Roberts (1992) counter the argument that everybody optimizes all the time
and state that: “Paradoxically, the very imperfections in the rationality of people and in
the adaptability of organizations denied by many simple economic theories are neces-
sary in proving that rationality-based theories are descriptively and prescriptively useful.
With perfect rationality, one would rarely expect to observe two organizations in substan-
tially the same circumstances making substantially different choices, so there would be
no possibility of testing what kinds of organizations perform better. […] A more defensi-
ble position […] is that people learn to make good decisions and that organizations adapt
by experimentation and imitation, so there is at least ‘‘fossil evidence’’ available for test-
ing theories (Milgrom & Roberts, 1992, p. 43; see also Ittner & Larcker, 2001, p. 399).
Predictor variables Predicted variable
Preventable
risks
Logistic
Strategy regression
execution MCS_cluster
risks
ܲሺ‫ݎ݁ݐݏݑ̴݈ܿܵܥܯ‬௜ ሻ
ͳ
External ൌ
ͳ ൅ ݁ ିሺ௕బା௕భ௉ோா௏ோூௌ௄೔ା௕మ ௌ்ோ஺்ோூௌ௄೔ା௕యா௑்ோூௌ௄೔ሻ
risks
FIT = 1
if the actual MCS configuration
equals the predicted one by the
logit model
regression
ܲ݁‫݁ܿ݊ܽ݉ݎ݋݂ݎ‬௜ ൌ ܾ଴ ൅ ܾଵ ܵ‫ܧܼܫ‬௜ ൅ ܾଶ ‫ܧܩܣ‬௜ ൅ ܾଷ ܱܹܰ௜

Multiple
൅ ܾସ ‫ܶܣܴܱܶܵܶܵܥ‬௜
൅ ܾହ ‫ܶܣܴܶܵܨܨܫܦ‬௜ ൅ ܾ଺ ‫ܶܫܨ‬௜ ൅ ߝ௜
Control
Performance
variables
Figure 35: Theoretical model for risk profile contingent performance analysis of MCS
238 5. Results
As shown in the theoretical model in Figure 35 above, in a first step a

181
logistic regression analysis is conducted to yield a model of fit between
the configuration of MCS chosen by an organization and its risk profile.
Hence, the actual MCS cluster membership acts as dependent variable in
this analysis and the risk profile variables, i.e. PREVRISK, STRATRISK,
and EXTRISK, are the predictors of the model:
1
𝑃(𝑀𝐶𝑆_𝑐𝑙𝑢𝑠𝑡𝑒𝑟𝑖 ) =
1 + 𝑒 −(𝑏0 +𝑏1𝑃𝑅𝐸𝑉𝑅𝐼𝑆𝐾𝑖 +𝑏2𝑆𝑇𝑅𝐴𝑇𝑅𝐼𝑆𝐾𝑖 +𝑏3𝐸𝑋𝑇𝑅𝐼𝑆𝐾𝑖 )
Equation 19: Predicted MCS cluster membership
2
Furthermore, the significance of the model is assessed by using the χ -
statistic and the overall fit of the model as a whole evaluated by compu-
2
ting the measure RN . Finally, the classification tables before and after
adding the risk profile variables as predictors are presented to show the
182
improvement of the model.
181
The reasons why logistic regression analysis was preferred over discriminant analysis
are threefold: Firstly, when computing the additional results and operationalizing strategy
execution risks, a dummy variable and thus a categorical variable is used, which is not
permitted in discriminant analysis. Secondly, comparisons of the logistic regression
analyses in Section 5.2.2.1, Section 5.2.2.2, and Section 5.2.2.3 in regard to their predic-
tive ability should be feasible. Finally, analyses with discriminant models showed that the
findings are very similar and the percentage of correctly classified cases almost the
same (for example, 64.9% of the cases are correctly classified in the base model when
using the logistic regression analysis as well as when using the discriminant analysis,
respectively).
182
In contrast to the logistic regression analyses conducted in Section 5.2.2.1, Section
5.2.2.2, and Section 5.2.2.3 in order to evaluate predictive validity of clusters and test if
the risk profile influences MCS cluster membership, the logistic regression analyses in
this section only use the risk profile variables as predictors. The reasons for this are
threefold: Firstly, as the hypotheses which are examined propose that firms with a better
fit between their MCS and their risk profile experience superior performance, it is aimed
to model fit between MCS and risk profile without being influenced by other factors, e.g.
strategy. Secondly, the control variables strategy, organizational size, company age, and
ownership structure also affect performance and therefore these variables are used in
the multiple regression analyses on performance as control variables to further validate
the results on the FIT variable instead of computing this variable. Finally, as will be
shown, the predictability of MCS cluster membership of the logistic regression analyses
in this section show similar results as the logistic regression analyses in Section 5.2.2.1,
Section 5.2.2.2, and Section 5.2.2.3 using all variables as predictors (for example, 64.9%
or 66.6% of the cases are correctly predicted using the risk profile variables as predictors
In order to verify the assumptions of the logistic regression analysis, it is

tested for linearity of the logit and multicollinearity as suggested by Fields
(2013). The assumption of the linearity of the logit is assessed by con-
ducting the same logistic regression analysis including the interaction
terms between each predictor variable and the log of itself and evaluating
their significance (see Section 4.4.3). While the interaction terms of
PREVRISK (p = .682) and EXTRISK (p = .163) are non-significant, the
interaction term of STRATRISK (p = .033) shows a significance, indicat-
ing that for the variable STRATRISK the linearity of the logit may be bro-
ken, and that STRATRISK is not linearly related to the log of the outcome
variable when applying the LOC framework. Interestingly, when applying
the risk-based MCS framework, all interaction terms show significance
values greater than .05 with the lowest significance level being p = .137
for the construct EXTRISK and thus it is indicated that the assumption of
the linearity of the logit is met. However, results with regard to the LOC
framework have to be interpreted with caution. Furthermore, to avoid bias
from multicollinearity, the predictor variables should not correlate too
highly, i.e. above .80 or .90 (Field, 2013; Hair et al., 2014), and the vari-
ance inflation factor (VIF) should be computed, which indicates whether a
predictor has a strong linear relationship with others. As explained above,
if the values are each less than 10 and the average VIF is not substantial-
ly greater than 1, then multicollinearity should be of no concern (Field,
2013). The highest correlation between two variables used in the follow-
ing models is .405 between the constructs PREVRISK and STRATRISK.
In addition, the highest VIF of the logistic regression analyses is 1.292 of
the construct EXTRISK, and the average VIF of all independent variables
in the logistic regression models is 1.215, indicating that multicollinearity
is of no concern in these models. Finally, results are validated by per-
forming bootstrapping analysis, which is a robust method to generate
confidence intervals and significance tests of the model parameters (see
Footnote 173). All findings in each model have been confirmed by boot-
strapping analysis.
compared to 66.6% or 67.7% of the cases correctly predicted using all variables as pre-
dictors when applying the base MCS framework or the risk-based MCS framework, re-
spectively).
240 5. Results
As a next step, to test if firms with a better fit based on the logistic re-
gression models and the associated configuration of MCS perform better
than the others, univariate tests are conducted and the mean values of
the performance measures PERCPERF, USEFULMCS, and
EBIT_trimmed of both group of firms compared. To start with, an inde-
pendent-samples t-test is computed to evaluate if the means are signifi-
cantly different (see Equation 1). As the independent-samples t-test is
based on the normal distribution and relies on a number of assumptions,
to validate the results, bootstrapping analysis is performed and the Mann-
183 184
Whitney test, which is the non-parametric equivalent of the inde-
pendent-samples t-test, is computed.
Finally, multiple regression analyses are conducted with the measures for
organizational performance, i.e. PERCPERF, USEFULMCS, and
EBIT_trimmed, being the dependent variables in the analyses. These
examinations are performed for the LOC framework and the risk-based
MCS framework, and thus six regression models on performance are
conducted to examine if firms with a better fit perform better than others.
Consequently, for each regression model the following procedure is ap-
plied which can be formally expressed as:
𝑃𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒𝑖 = 𝑏0 + 𝑏1 𝑆𝐼𝑍𝐸𝑖 + 𝑏2 𝐴𝐺𝐸𝑖 + 𝑏3 𝑂𝑊𝑁𝑖 + 𝑏4 𝐶𝑂𝑆𝑇𝑆𝑇𝑅𝐴𝑇𝑖

+ 𝑏5 𝐷𝐼𝐹𝐹𝑆𝑇𝑅𝐴𝑇𝑖 + 𝑏6 𝐹𝐼𝑇𝑖 + 𝜀𝑖
Equation 20: Risk profile contingent performance analysis of MCS
In these regressions, the main independent variable is the dummy varia-

ble FIT, which indicates if a firm actually chose the predicted configura-
tion of MCS or deviates from the optimal choice (see Equation 18). In
183
The Mann-Whitney test is a non-parametric test and is based on a test statistic 𝑈 =
𝑛 (𝑛 +1)
𝑛1 𝑛2 + 1 1 − 𝑅1 , with n1 and n2 being the sample size of the groups and R1 being the
2
sum of ranks for group 1 (Field, 2013, p. 221).
184
Non-parametric tests rank the data and thus overcome the problem of the shape of the
distribution. While giving the lowest score rank 1, the next highest score rank 2 and so
on, effects of outliers are eliminated and the analysis carried out on ranks instead of ac-
tual data (Field, 2013).
addition and in line with the previous analyses, to improve validity of the
models a set of control variables is included, which have been argued to
not just affect the control structure of the firm (see Section 2.3.2.2, Sec-
tion 2.3.2.3, Section 2.3.2.4, and Section 2.3.2.5), but also the perfor-
mance of an organization (e.g., Sandino, 2007), i.e. COSTSTRAT,
DIFFSTRAT, SIZE, AGE, and OWN.
As a method for variables to be entered into the models, the hierarchical
entry method is chosen as in the previous analyses. This method re-
quires a decision on the sequence of entering the predictors into the
model and thus relies on theoretical reasoning. In general, known predic-
tors are entered into the model first in order to assess the influence of
newly tested variables (Field, 2013). Therefore, in the first step the con-
trol variables SIZE, AGE, and OWN and in the second step the strategy
variables COSTSTRAT and DIFFSTRAT are entered into the model.
Finally, the third and last step adds the dummy variable FIT (see Equa-
tion 18), in order to demonstrate the influence and additional explanatory
power of this predictor for the performance measures. The significance of
the model after each step is assessed by using the F-statistic which is
2
used to evaluate the significance of R and thus the overall fit of the
model as a whole. In addition, to evaluate if a step significantly improved
the model, the measure Fchange is computed, which assesses the signifi-
2
cance of the change in R . Finally, the significance and the impact of
each independent variable is evaluated by assessing the unstandardized
regression coefficients bi and the standardized regression coefficients βi.
In order to verify if the assumptions of the multiple regression analysis
have been met, a number of tests have been conducted for each model,
which were already outlined in Section 5.1.1 in the process of conducting
multiple regression analyses. First of all, the plot of standardized residu-
als against standardized predicted values and the partial plots of the re-
sidual of the outcome variable and each of the predictors were visually
examined, in order to test for the assumptions of linearity and homosce-
dasticity. In addition, the histograms and P-P plots (normal probability
plots) were visually examined, to test the assumption of normally distrib-
uted errors. While in general no serious signs for heteroscedasticity, non-
linearity, or non-normality have been found, there are a few graphs which
242 5. Results
show ambiguous results. Therefore, results are validated by performing

bootstrapping analysis, which is a robust method to generate confidence
intervals and significance tests of the model parameters as already ex-
plained above (see Footnote 173). All findings in each model have been
confirmed by bootstrapping analysis. Finally, the assumption of inde-
pendent errors is examined by conducting the Durbin-Watson test, which
tests if adjacent residuals are correlated (Durbin & Watson, 1951). The
Durbin-Watson test was computed for each model with a lowest value of
1.968 (Model 14) and a highest value of 2.116 (Model 10), which is within
the acceptable range of 1 - 3 and means that there is no cause for con-
cern in regard to independent errors.
Finally, the conditions for outcome and predictor variables to be used in
multiple regression analysis are assessed (see Section 4.4.1). First of all,
all values for each variable are derived from different firms and the varia-
bles are measured with a seven-point Likert scale, on a metric scale or
using a categorical dummy variable. Furthermore, the data collected for
the variables range from the minimum of 1 to the maximum of 7 with only
a few exceptions (see Table 10). While one can never rule out that exter-
nal variables exist that are correlated to predictor variables and have not
been included in the regression model, this study aims to improve the
validity of the regression models and to avoid spurious correlation by
including several control variables in the regression models, i.e. strategy,
organizational size, company age, and ownership structure. Finally, to
avoid bias from multicollinearity, the predictor variables should not corre-
late too highly, i.e. above .80 or .90 (Field, 2013; Hair et al., 2014), and
the variance inflation factor (VIF) should be computed, which indicates
whether a predictor has a strong linear relationship with others. The high-
est correlation between two variables used in the following models is .312
between the constructs COSTSTRAT and DIFFSTRAT. In addition, the
highest VIF of the multiple regression analyses is 1.136 of the construct
COSTSTRAT when applying the LOC framework and 1.135 of the con-
struct COSTSTRAT when applying the risk-based MCS framework, re-
spectively, which is well below the threshold of 10. Additionally, the high-
est average VIF in any of the multiple regressions is 1.082, indicating that
multicollinearity is of no concern in these models.
5.3.2 Analysis
In order to conduct the risk profile contingent performance analysis of
MCS, it is started by examining the relations for the LOC framework and
preceded by applying the risk-based MCS framework. Finally, additional
results for both frameworks of MCS are discussed.

To derive predicted MCS cluster membership and yield a model of fit
between the configuration of MCS chosen by an organization and its risk
profile, a logistic regression analysis is conducted, which is presented in
Table 25 below.
244 5. Results
Logistic regression
LOC framework
Model 9
Explained variable: MCS_cluster
Panel A: Step 0
Predicted MCS cluster
Observed
1 2 Total
MSC cluster
Classification Count 1 201 0 201
table 2 161 0 161
% 1 100.0 0.0 100.0
2 100.0 0.0 100.0
Percentage
55.5
Correct
Panel B: Step 1
b EXP(b) p-value
Constant 7.004
PREVRISK -0.499 0.607 .002**
STRATRISK -0.312 0.732 .002**
EXTRISK -0.545 0.580 .001**

Observed
1 2 Total
MSC cluster
table 2 74 87 161
% 1 73.6 26.4 100.0
2 46.0 54.0 100.0
Percentage
64.9
Correct
n=362, χ2 (3) = 58.216***, RN2 = .199

Table 25: Logistic regression for predicting MCS cluster membership via risk profile
2
The logistic regression analysis shows that the model is significant (RN =
2
.199, χ (3) = 58.216, p < .001) after adding the risk profile variables
PREVRISK, STRATRISK, and EXTRISK and accounts for 19.9% of the
amount of variation in the categorical outcome variable MCS cluster
membership (MCS_cluster), which is coded as 0 for membership of
C1LOC and as 1 for membership of C2LOC. All predictors in this model are
highly significant and after adding the risk profile variables, Model 9 is
able to correctly classify 64.9% of the firms (Panel B) compared to 55.5%
prediction accuracy without any predictors (Panel A). Furthermore, a
change in the predictor EXTRISK (Exp(b) = 0.580) decreases the odds of
the outcome occurring the most, followed by PREVRISK (Exp(b) = 0.607)
and STRATRISK (Exp(b) = 0.732).
According to Equation 18, the dummy variable FIT is calculated through
comparison of predicted and actual MCS cluster membership and named
FITLOC indicating that this variable was calculated when applying the LOC
framework.
The following table shows the results of the univariate performance tests
applying the LOC framework:
Univariate analyses
High-Fit Low-Fit Mann-Whitney

t-test
FITrbMCS = 1 FITrbMCS = 0 test
Performance
n mean n mean t p-value z p-value
Variable
PERCPERF 235 4.694 127 4.320 2.769 .006** 3.314 .001**
USEFULMCS 235 4.443 127 4.215 1.553 .121 1.760 .078+
EBIT_trimmed a 89 1.617 41 1.106 2.219 .028* 2.463 .014*
a
: mean value in Mio. EUR
PERCPERF, USEFULMCS: n = 362, EBIT_trimmed: n = 130
+
Table 26: Univariate analyses on performance – LOC framework

246 5. Results
The independent-samples t-test reported in Table 26 shows that there is

a significant difference between the means of the High-Fit group (FITLOC
= 1) and the Low-Fit group (FITLOC = 0) for the performance measures
PERCPERF (p = .006) and EBIT_trimmed (p = .028). Thus, on average
firms with a fit between their MCS and their risk profile perform better in
terms of aforementioned measures than others. Additionally, Levene’s
185
test for equality of variance was computed, to test if the assumption of
homogeneity of variances was met. As this test was non-significant for
each t-test with a lowest p-value of .080 for the variables USEFULMCS
this can safely be assumed.
In addition, Mann-Whitney tests for each performance measure have
been conducted and are shown in Table 26. As a result, firms with a fit
between their MCS and their risk profile, i.e. firms of the group High-Fit,
have a significantly higher value in the variables PERCPERF (p = .001)
and EBIT_trimmed (p = .014) than others. Furthermore, the variable
USEFULMCS shows high tendency for significance (p = .078).
on the dependent variables PERCPERF and USEFULMCS applying the
LOC framework.
185
Levene’s test is a test statistic which tests the null hypothesis that the variance in differ-
ent groups is equal. A significant result of the test reports that variances are significantly
different and indicates that the assumption of homogeneity of variances is violated
(Field, 2013).
LOC framework
Model 10 Model 11
variables PERCPERF USEFULMCS
Step 1:
Control variables
SIZE 0.241 .191 .000*** 0.266 .195 .000***
AGE -0.066 -.047 .382 0.009 .006 .909
OWN -0.016 -.006 .903 -0.205 -.077 .137
Step 2:
+ Strategy profile
SIZE 0.228 .180 .001** 0.211 .155 .003**
AGE -0.047 -.034 .533 0.040 .026 .616
OWN -0.021 -.008 .873 -0.166 -.062 .218
COSTSTRAT -0.027 -.020 .712 0.258 .183 .001**
DIFFSTRAT 0.137 .121 .028* 0.154 .126 .018*
Step 3:
+ FITLOC
SIZE 0.214 .170 .002** 0.205 .150 .004**
AGE -0.043 -.030 .570 0.042 .027 .599
OWN 0.010 .004 .936 -0.153 -.057 .257
COSTSTRAT -0.032 -.025 .652 0.256 .182 .001**
DIFFSTRAT 0.137 .121 .027* 0.154 .126 .018*
FITLOC 0.331 .128 .014* 0.136 .049 .334

1 .034 4.246 .006** .047 5.874 .001**
2 .048 3.560 .004** .109 8.715 .000***
3 .064 4.025 .001** .111 7.417 .000***
n=362
Table 27: Multiple regressions on performance – LOC framework

248 5. Results
The multiple regression analyses in Table 27 show that Model 10 ex-

plains 6.4% of the variance in the outcome variable PERCPERF and is
2 2
significant after step 1 (R = .034, F = 4.246, p = .006), step 2 (R = .048,
2
F = 3.560, p = .004), and step 3 (R = .064, F = 4.025, p = .001) of the
analysis. While the model improvement is not significant after step 2, i.e.
after adding the strategy profile variables COSTSTRAT and DIFFSTRAT
2
(R change = .013, Fchange = 2.479, p = .085), the model significantly im-
proved after step 3, i.e. after adding the dummy fit variable FITLOC
2
(R change = .016, Fchange = 6.093, p = .014). After adding all predictors in
step 3, the variables SIZE (b = 0.214, t = 3.141, p = .002), FITLOC (b =
0.331, t = 2.468, p = .014), and DIFFSTRAT (b = 0.137, t = 2.215, p =
.027) are significant predictors of PERCPERF and the variable SIZE (β =
.170) shows the highest degree of importance in the model, followed by
FITLOC (β = .128) and DIFFSTRAT (β = .121).
ance in the outcome variable USEFULMCS and is significant after step 1
2 2
(R = .047, F = 5.874, p = .001), step 2 (R = .109, F = 8.715, p < .001),
2
and step 3 (R = .111, F = 7.417, p < .001) of the analysis. While after
step 2, i.e. after adding the strategy profile variables COSTSTRAT and
2
DIFFSTRAT, the model significantly improved (R change = .062, Fchange =
12.414, p < .001), the model did not significantly improve further after
2
step 3, i.e. after adding the dummy fit variable FITLOC (R change = .002,
Fchange = 0.937, p = .334). After adding all predictors in step 3, the varia-
bles COSTSTRAT (b = 0.256, t = 3.409, p = .001), SIZE (b = 0.205, t =
2.861, p = .004), and DIFFSTRAT (b = 0.154, t = 2.379, p = .018) are
significant predictors of USEFULMCS and the variable COSTSTRAT (β =
.182) shows the highest degree of importance in the model, followed by
SIZE (β = .150) and DIFFSTRAT (β = .126).
Furthermore, a multiple regression analysis on the variable
EBIT_trimmed was conducted as well. While the model showed that the
variable FITLOC was significant (p = .027), the model as a whole was not
2
significant (R = .051, F = 1.094, p = .370). Thus, the model is not report-
ed.

To derive predicted risk-based MCS cluster membership and yield a
model of fit between the configuration of risk-based MCS chosen by an
organization and its risk profile, a logistic regression analysis is conduct-
ed, which is presented in Table 28 below.
Logistic regression
Model 12
Explained variable: rbMCS_cluster
Panel A: Step 0
Observed MSC
1 2 Total
cluster
table 2 170 0 170
% 1 100.0 0.0 100.0
2 100.0 0.0 100.0
Percentage
53.0
Correct
Panel B: Step 1
b EXP(b) p-value
Constant 7.710
PREVRISK -0.511 0.600 .002**
STRATRISK -0.392 0.676 .000***
EXTRISK -0.571 0.565 .001**

Observed MSC
1 2 Total
cluster
table 2 70 100 170
% 1 73.4 26.6 100.0
2 41.2 58.8 100.0
Percentage
66.6
Correct
n=362, χ2 (3) = 67.793 ***, RN2 = .228

Table 28: Logistic regression for predicting risk-based MCS cluster membership via risk
profile
250 5. Results
2
The logistic regression analysis shows that the model is significant (RN =
2
.228, χ (3) = 67.793, p < .001) after adding the risk profile variables
PREVRISK, STRATRISK, and EXTRISK and accounts for 22.8% of the
amount of variation in the categorical outcome variable risk-based MCS
cluster membership (rbMCS_cluster), which is coded as 0 for member-
ship of C1rbMCS and as 1 for membership of C2rbMCS. Furthermore, all pre-
dictors in this model are highly significant and after adding the risk profile
variables Model 12 is able to correctly classify 66.6% of the firms (Panel
B) compared to 53.0% prediction accuracy without any predictors (Panel
A). Furthermore, a change in the predictor EXTRISK (Exp(b) = 0.565)
decreases the odds of the outcome occurring the most, followed by
PREVRISK (Exp(b) = 0.600) and STRATRISK (Exp(b) = 0.676).
According to Equation 18, the dummy variable FIT is calculated through
comparison of predicted and actual risk-based MCS cluster membership
and named FITrbMCS indicating that this variable was calculated when
applying the risk-based MCS framework.
The following table shows the results of the univariate performance tests
applying the risk-based MCS framework:
Univariate analyses
High-Fit Low-Fit Mann-Whitney

FITrbMCS = 1 FITrbMCS = 0 t-test test
Performance
n mean n mean t p-value z p-value
Variable
PERCPERF 241 4.682 121 4.325 2.613 .009** 2.770 .006**
USEFULMCS 241 4.418 121 4.253 1.107 .269 1.271 .204
EBIT_trimmed a 95 1.510 35 1.310 0.814 .417 0.842 .400
a
: mean value in Mio. EUR
PERCPERF, USEFULMCS: n = 362, EBIT_trimmed: n = 130
Table 29: Univariate analyses on performance – risk-based MCS framework

The independent-samples t-test reported in Table 29 shows that there is

a significant difference between the means of the High-Fit group (FITrbMCS
= 1) and the Low-Fit group (FITrbMCS = 0) for the performance measure
PERCPERF (p = .009), which means that, on average, firms with a fit
between their risk-based MCS and their risk profile experience a higher
PERCPERF than others. Additionally, Levene’s test for equality of vari-
ance was computed, to test if the assumption of homogeneity of vari-
ances was met. As this test was non-significant for each t-test with a low-
est p-value of .180 for the variables USEFULMCS this can safely be as-
sumed.
In addition, Mann-Whitney tests for each performance measure have
been conducted and are shown in Table 29. As a result, firms with a fit
between their risk-based MCS and their risk profile, i.e. firms of the group
High-Fit, have a significantly higher value in the variable PERCPERF (p =
.006) than others. Furthermore, no significant difference in regard to the
variables USEFULMCS and EBIT_trimmed could be detected.
on the dependent variables PERCPERF and USEFULMCS applying the
risk-based MCS framework. All models follow the same procedures as
presented in the previous section in regard to the LOC framework. How-
ever, as step 1 and step 2 are identical to the results reported above,
they are omitted in the following table.
252 5. Results
Model 13 Model 14
variables PERCPERF USEFULMCS
Step 3:
+ FITrbMCS
Constant 2.819 .000*** 0.783 .209
SIZE 0.214 .169 .002** 0.207 .152 .004**
AGE -0.037 -.027 .620 0.042 .028 .596
OWN 0.001 .000 .996 -0.160 -.060 .234
COSTSTRAT -0.029 -.022 .687 0.257 .183 .001**
DIFFSTRAT 0.133 .117 .032* 0.153 .126 .019*
FITrbMCS 0.300 .115 .028* 0.072 .026 .612

3 .061 3.813 .001** .110 7.290 .000***
n=362
Table 30: Multiple regressions on performance – risk-based MCS framework
The multiple regression analyses in Table 30 show that Model 13 ex-

plains 6.1% of the variance in the outcome variable PERCPERF and is
2
significant after step 3 (R = .061, F = 3.813, p = .001) of the analysis.
Furthermore, the model significantly improved after step 3, i.e. after add-
2
ing the dummy fit variable FITrbMCS (R change = .013, Fchange = 4.886, p =
.028). After adding all predictors in step 3, the variables SIZE (b = 0.214,
t = 3.123, p = .002), FITrbMCS (b = 0.300, t = 2.210, p = .028), and
DIFFSTRAT (b = 0.133, t = 2.151, p = .032) are significant predictors of
PERCPERF and the variable SIZE (β = .169) shows the highest degree
of importance in Model 13, followed by DIFFSTRAT (β = .117) and
FITrbMCS (β = .115).

ance in the outcome variable USEFULMCS and is significant after step 3
2
(R = .110, F = 7.290, p < .001) of the analysis. Nevertheless, the model
did not significantly improve after step 3, i.e. after adding the dummy fit
2
variable FITrbMCS (R change = .001, Fchange = 0.258, p = .612). After adding
all predictors in step 3, the variables COSTSTRAT (b = 0.257, t = 3.431,
p = .001), SIZE (b = 0.207, t = 2.886, p = .004), and DIFFSTRAT (b =
0.153, t = 2.363, p = .019) are significant predictors of USEFULMCS and
the variable COSTSTRAT (β = .183) shows the highest degree of im-
portance in Model 14, followed by SIZE (β = .152) and DIFFSTRAT (β =
.126).
Furthermore, a multiple regression analysis on the variable
EBIT_trimmed was conducted as well. As a result, the model showed that
neither the variable FITrbMCS was significant (p = .439), nor the model as a
2
whole (R = .017, F = 0.350, p = .909). Thus, the model is not reported.
5.3.2.3 Additional results on superior performance through matching

MCS and risk profile
In line with the procedures in Section 5.1.2.3 and Section 5.2.2.3, addi-
tional analyses have been produced for the LOC framework and the risk-
based MCS framework, through conducting the analyses with a different
approach for operationalization of the measure STRATRISK, as the con-
struct has been measured with just one item and reliability of the scale
may be weak (see Section 4.3.3). Specifically, a dummy variable
STRATRISK_dummy is calculated which is set to 0 for firms with low
values of STRATRISK, i.e. below median, and set to 1 for firms with high
values of STRATRISK, i.e. median or above (see Equation 17).
254 5. Results
However, the analyses revealed no further insights compared to the re-

sults reported above. In the univariate tests applying the LOC framework,
the variables PERCPERF (p = .046) and EBIT_trimmed (p = .039) have
been found to be significant performing the independent-samples t-test
and the variables PERCPERF (p = .015) and EBIT_trimmed (p = .033)
have been found to be significant performing the Mann-Whitney test. In
the multiple regression analyses applying the LOC framework the varia-
ble FITLOC (p = .084) showed high tendency for significance when con-
ducting the regression on PERCPERF and the variable FITLOC (p = .042)
was significant when conducting the regression on EBIT_trimmed, alt-
hough the latter model as a whole was not significant. No significance
was found applying the risk-based MCS framework.

Evidence on the hypotheses H6a - H8b is provided by univariate anal-
yses in Table 26 and 29 and by the multiple regressions Model 10 - 11
and Model 13 - 14. The following figure illustrates the significant findings
for matching MCS and risk profile and its implications on performance:
Matching MCS Performance Control variables

and risk profile
Table 26 / 29
Perceived firm
performance
Panel A:
(PERCPERF)
Univariate setting
Table 26 / 29
Perceived useful-
FIT ness of MCS
(USEFULMCS)
Table 26 / 29
EBIT_trimmed
Cost leadership
strategy
(COSTSTRAT)
Model 10 / 13
Perceived firm
m
D
Differentiation
performance
Panel B: strategy
(PERCPERF)
Multivariate setting (DIFFSTRAT)
Model 11 / 14
Perceived useful- O
Organizational
FIT ness of MCS size
(USEFULMCS) (SIZE)
S
Model - / -
Company
age
EBIT_trimmed (AGE)
Ownership
structure
(OWN)
Panel A: For each significant finding the t-value of the independent-samples t-test when
applying the LOC framework and, after the diagonal slash, when applying the risk-based
MCS framework is quoted as well as the corresponding significance level.
Panel B: For each significant association the standardized coefficient β of the respective
model when applying the LOC framework and, after the diagonal slash, when applying the
risk-based MCS framework is quoted as well as the corresponding significance level.
Figure 36: Graphical depiction of significant results on risk profile contingent performance
256 5. Results
Hypotheses H6a and H6b predict that firms with a better fit between their
MCS and their risk profile experience a superior perceived firm perfor-
mance. In an univariate setting, evidence has been found that firms that
choose MCS design and use better suited to their risk profile have a
higher perceived firm performance when applying the LOC framework (p
< .01) and when applying the risk-based MCS framework (p < .01), re-
spectively. Additionally, multiple regression analyses report that the fit
between MCS and risk profile is a significant predictor for perceived firm
performance when applying the LOC framework (p < .05) and when ap-
plying the risk-based MCS framework (p < .05), respectively. Thus, sup-
port for H6a and H6b is provided by data.
Furthermore, hypotheses H7a and H7b predict that firms with a better fit
between their MCS and their risk profile experience a better usefulness of
their MCS. In both univariate and multivariate analyses, no support for
hypotheses H7a and H7b are provided, which undermines Chenhall’s
(2007) conclusion on the aspect of usefulness of MCS and its effects on
organizational performance stating that “there is no compelling evidence
to suggest that such links exist” (Chenhall, 2003, p. 132).
Finally, hypotheses H8a and H8b predict that firms with a better fit be-
tween their MCS and their risk profile have a higher level of EBIT. Uni-
variate analyses show that firms that choose MCS design and use better
suited to their risk profile have a higher level of EBIT when applying the
LOC framework (p < .05). However, no association between matching
MCS and risk profile and higher level of EBIT when applying the risk-
based MCS framework could be found. Furthermore, multiple regression
analyses show that in fact the EBIT is significantly influenced by the fit
between MCS and the risk profile when applying the LOC framework (p <
.05), but the multiple regression models as a whole are non-significant
and thus the models are not reported. In summary, it can be argued that
there is some support for H8a, since firms with a higher fit between MCS
and risk profile were found to have, on average, significantly higher EBIT
figures than others. Nevertheless, data provided no support for H8b.
6 Conclusions
In this final chapter, the main findings and contributions to the research
field are presented. Furthermore, as it is the case for most research, this
study is limited for a number of reasons, which are discussed subse-
quently. Finally, in order to highlight potential key avenues, implications
for future research are addressed.
6.1 Findings and contributions

This study provides evidence on the importance and role of the risk pro-
file of an organization with regard to MCS design and use. Furthermore,
an extension of the LOC framework is put forward, in order to integrate
risk-based dimensions of MCS and empirically test the extended frame-
work.
Firstly, it is found that types of control systems are associated with certain
types of risks an organization is exposed to. In general, all three different
types of risks – preventable risks, strategy execution risks, and external
risks – drive MCS design and use of an organization. Specifically, evi-
dence is provided that the exposure to preventable risks is positively as-
sociated with the emphasis organizations place on formal control sys-
tems, i.e. beliefs systems and boundary systems, as well as on the risk-
based dimension of these systems. Furthermore, it is shown that organi-
zations exposed to strategy execution risks to a greater extent have more
sophisticated beliefs systems in place and show a greater reliance on
risk-based formal controls. Finally, both strategy execution risks and ex-
ternal risks are positively related to exercising a more intensive and risk-
based use of control systems, both through diagnostic and interactive
control systems.
Furthermore, it is demonstrated that certain configurations, i.e. packages,
of MCS are put in place in practice and that the risk profile significantly
influences the configuration of MCS applied by an organization. For both
the LOC framework and the risk-based MCS framework two different and
distinct configurations of MCS have been found, which are applied by
organizations and differ in their emphasis on each dimension of MCS,

258 6. Conclusions
resulting in a type of rather tight MCS and a type of rather loose MCS. In
addition, it is shown that the probability of belonging to the group of rather
tight MCS is increased for organizations that are exposed to strategy
execution risks and external risks to a greater extent.
Finally, evidence is provided that organizations which choose MCS de-
sign and use better suited to their risk profile perform better than others.
Specifically, organizations with a better fit between their MCS design and
use and their risk profile experience a superior organizational perfor-
mance, both with subjective and objective measures.
Thus, the following contributions for theory and practice can be derived:
First of all, this study demonstrates that the types of risks an organization
faces affect MCS design and use. Therefore, evidence is provided for
acknowledging the risk profile of an organization as essential contingency
factor in management accounting and control research next to other well
established contingencies such as strategic choice (Langfield-Smith,
2007). This result is in line with Simons’ (2000) arguments and Widener’s
(2007) findings and adds further insight to the rather less recognized
consequences of uncertainty for MCS (Otley, 2012, 2014). Moreover, as
the “basic premise of contingency theory is that a proper “fit” will result in
higher performance” (Fisher, 1995, p. 47), it was shown that an organiza-
tion’s implementation of their MCS has performance implications depend-
ing on the types of risks they are exposed to. Specifically, organizations
with matching MCS and risk profile reveal superior performance. This
finding is consistent with Mikes & Kaplan’s (2014) argument that the “in-
herent nature and controllability of the different types of risk the organiza-
tion faces” (Mikes & Kaplan, 2015, p. 40) is decisive to the effectiveness
of the control model and, as a consequence, to organizational effective-
ness.
Secondly, implications for implementing MCS are derived, as specific
types of risks drive certain aspects of MCS. It was found that preventable
risks are associated with an emphasis on formal controls - beliefs sys-
tems and boundary systems - while strategy execution and external risks
are associated with an interactive use of control systems. In line with
Widener’s (2007) findings, these results imply that formal control systems
are rather focused on the internal environment, while the uncertainty
6.1. Findings and contributions 259
stemming from the external environment facilitates interactive control

systems. Moreover, there is consistency and support for Kaplan & Mikes’
(2012) argument that preventable risks demand an integrated culture-
and-compliance model for controlling these risks, while interactive dis-
cussions and envisioning techniques are required as key features of con-
trol models when dealing with strategy execution and external risks.
Thirdly, this study contributes to research on the concept of MCS as a
package in deriving configurations of MCS which are implemented in
practice. Specifically, the notion is supported that all levers of control are
interdependent and rather complements than substitutes. This is demon-
strated by the finding that the configurations of MCS differ in their em-
phasis on all levers of control. This result is consistent with Simons’
(2000) argument that for an effective control system all four levers of
control have to be balanced, resulting in organizational effectiveness.
Moreover, Widener’s (2007) findings are supported arguing that all levers
of control must be considered and that the controls in the LOC framework
are interdependent and complementary. Specifically, Widener’s (2007) as
well as the present study found that interactive control systems are inter-
dependent with diagnostic control systems, supporting Chenhall & Morris’
(1995) argument that for interactive controls to be effective, structure is
necessary. Moreover, this is line with Henri’s (2006a) finding, who argues
that the dual use, i.e. diagnostically and interactively, of control systems
facilitates dynamic tension as suggested by Simons’ (1995b, 2000). Fi-
nally, the presence of configurations of MCS in practice that differ in their
emphasis of all levers of controls implies that there is a cost for control,
and thus controls are implemented by organizations only when the bene-
fits outweigh the costs.
Fourthly, this study provides theoretical implications by proposing an
extended risk-based MCS framework building on Simons’ LOC frame-
work (Simons, 1995b) and drawing on extant literature. The risk-based
MCS framework represents a holistic approach aiming at considering
systematical integration of risk as additional feature of MCS while retain-
ing the elements of the original framework. Thus, the existing levers of
control characterizing the design of MCS – beliefs systems and boundary
systems – and use of MCS – diagnostic control systems and interactive
260 6. Conclusions
control systems – are extended by risk-based features of MCS, i.e. the

aspects of risk-based formal controls and risk-based use of controls. This
proposed conceptualization was drafted to put forward a research tool,
which provides for a framework to holistically examine design attributes,
attention patterns, and risk-based dimensions of MCS. In empirically test-
ing the extended risk-based MCS framework, it was demonstrated that
the additional dimensions of MCS do not emerge to disrupt the findings in
regard to the LOC framework but rather provide for incremental im-
provements in providing evidence for the interrelationship between MCS,
risk profile, and organizational performance.
Fifthly, this study contributes to a depiction of the status quo of MCS de-
sign and use in a specific context. According to Chenhall (2007), findings
in literature not only propose that national and organizational culture is
associated with the design of MCS, but the relevance will increase in
future as multinational operations develop further. Through targeting Aus-
trian and German medium-sized companies in the mechanical engineer-
ing industry to examine the research questions, insight is provided into
specific cultural and institutional aspects addressed in this study.
Sixthly and finally, besides contributing to the academic literature on
management accounting and control systems, this study has practical
implications in providing a more integrated picture of different natures of
risks and implications on MCS design and use. Specifically, as this study
targeted Austrian and German medium-sized companies in the mechani-
cal engineering industry to examine the research questions, this popula-
tion is invited to take benchmarks and stimulate selective improvements
to gain competitive advantage.
Overall, the results presented in this study contribute to an emerging
literature in the field of management accounting and control concerned
with implications from increased uncertainty on MCS design and use.
6.2 Limitations and implications for future research

As with most research, this dissertation is subject to a number of potential
limitations that may limit the scope of the findings and thus have to be
considered.
6.2. Limitations and implications for future research 261
First of all, as this study relies on data collected from a cross-sectional

single respondent survey-based instrument, it is subject to common
drawbacks of survey research (e.g., Birnberg et al., 1990) despite steps
that have been taken to ensure reliability of the data (see Section 4.2.2).
For one, results may be distorted, as the perceptions of the CEO are
measured and they may differ from reality. In addition, due to a lack of
control over the data collection process, the non-target respondent prob-
lem may apply, resulting from circumstances where not the CEO but oth-
er persons fill in the questionnaire. Furthermore, while this study took
some effort to examine potential non-response bias and common method
bias, it cannot be precluded that the characteristics between responders
and non-responders differ in some aspects or that respondents are influ-
enced by guessing the relationships being studied. What is more, by us-
ing cross-sectional obtained survey data, no clear evidence of causality
can be established. Finally, as the target population comprises Austrian
and German medium-sized companies from the mechanical engineering
industry, the generalization of results to other populations should be tak-
en with caution.
Besides general limitations resulting from survey based research, the
findings of the statistical analyses may be interpreted with caution due to
the limited number of independent variables considered. In general, the
statistical models suggest that other variables exist that affect the results
but that are not considered in this study. Thus, the estimated coefficients
of the variables included may be biased if there is a correlation to the
excluded ones. Furthermore, as some of the constructs in this study have
not been used in previous research, they had to be newly defined and
conceptually specified (Bisbe et al., 2007). In spite of careful develop-
ment of respective constructs, after examining collected data some items
of certain constructs had to be removed in order to strengthen reliability
of scale. Particularly, reliability of the measure for operationalizing the
construct strategy execution risks may be weak as the final scale consists
of one item. While this has been approached through an alternative
method of operationalization of the construct and producing of additional
results, it cannot be ruled out that measures may be noisy.
262 6. Conclusions
The limitations of this study serve as a starting point for providing a num-
ber of directions and opportunities for future research. To overcome the
weaknesses of survey-based research, the usage of multiple research
methods, for example combinations with case studies (Kaplan, 1986), to
examine the relationships is promising to strengthen validity of the inves-
tigation (Birnberg et al., 1990). Furthermore, multi-period research de-
signs and panel analyses seem promising to further examine cause-and-
effect relations. Moreover, to check for robustness of the findings, addi-
tional well-established contingencies of MCS design and use such as
generic and contemporary concepts of technology (e.g., Chenhall, 2007)
should be integrated into the study. Finally, newly conceptually specified
constructs such as strategy execution risks should be further improved in
order to develop more precise measurements of key variables.
In addition, there are a vast number of possibilities to further examine the
interrelationship between MCS design and use, risk profile, and organiza-
tional performance. For example, the influence of the types of risks on
MCS design and use could be examined using a non-linear model as the
impact of certain levers of control may differ depending on various levels
of respective risks. Furthermore, another classification for types of risks
could be operationalized, to broaden the understanding of the proposed
relationships. Finally, the initial approach of this study to integrate as-
pects of risk-based dimension of MCS into a holistic framework could be
further developed.
Overall, there are numerous exciting avenues ahead to further shed
some light on this unresolved but crucial venture to control uncertainty.
Appendix
Survey constructs of the study
Preventable risks (PREVRISK)
To what extent are the following factors critical to achieving the organization’s strategy?
(1 = not at all, 7 = to a great extent)
Item Label
The quality of operations PREVRISK_quality of operations

The safety of operations PREVRISK_safety of operations
The reliability of operations PREVRISK_reliability of operations
Strategy execution risks (STRATRISK)
Item Label
The conscious acceptance of risks STRATRISK_acceptance of risks

The achieving of superior returns STRATRISK_superior returns
Investments with uncertain return, e.g. STRATRISK_investments with uncertain
research and development activities return
External risks (EXTRISK)
Item Label
Behavior or strategies of our competitors EXTRISK_competitors

Behavior or buying patterns of customers EXTRISK_customers
Behavior or strategies of our suppliers EXTRISK_suppliers
Technological development in our EXTRISK_disruptive technologies
company's primary industry
Legal or political developments EXTRISK_political developments

Unternehmensführung & Controlling, https://doi.org/10.1007/978-3-658-28091-8
264 Appendix
Beliefs system (BELIEF)
Please indicate the extent to which the following items describe your organization:
(1 = not descriptive, 7 = very descriptive)
Item Label
Our mission statement clearly communi- BELIEF_mission statement

cates the firm's core values to our workforce
Top managers communicate core values to BELIEF_values communication

our workforce
Our workforce is aware of the firm's core BELIEF_values workforce
values
Our mission statement inspires our work- BELIEF_inspiration workforce
force
Boundary system (BOUND)
Item Label
Our firm relies on a code of business con- BOUND_code of conduct

duct to define appropriate behavior for our
workforce
Our code of business conduct informs our BOUND_communication
workforce about behaviors that are off-limits
Our firm has a system that communicates to BOUND_risks
our workforce risks that should be avoided
Our workforce is aware of the firm's code of BOUND_knowledge
business conduct
Appendix 265
Diagnostic controls (DIAGNOST)
Our company uses performance measures at the management level to …

Item Label
… track progress towards goals DIAGNOST_monitoring progress

… monitor results DIAGNOST_monitoring results
… compare outcomes to expectations DIAGNOST_deviation analysis
… review key measures DIAGNOST_key measures
Interactive controls (INTERACT)
Our company uses performance measures at the management level to …

Item Label
… foster discussion in meetings of INTERACT_fostering discussion

superiors and subordinates
… enable continual challenge and debate INTERACT_enabling debate
of underlying data, assumptions and
action plans
… discuss changes in the business INTERACT_business environment
environment with superiors and
subordinates
… generate dialogue that encourages INTERACT_information sharing
information sharing when getting
involved in subordinates’ activities
266 Appendix
Risk-based formal controls (rbFORMALMCS)
Item Label
Top managers communicate the extent and rbBELIEF_risk appetite communication

kind of risks our firm is willing to take in
order to achieving the goals
Our workforce is aware of the extent and rbBELIEF_risk appetite knowledge
kind of risks our firm is willing to take in
order to achieving the goals
Top managers communicate risk limits rbBOUND_risk limit communication
which must not be exceeded
Our workforce is aware of risk limits which rbBOUND_risk limit knowledge
must not be exceeded
Risk-based use of controls (rbUSEMCS)
Our company considers risk information at the management level

when …
Item Label
… analysing and correcting deviations rbDIAGNOST_analysis of deviations

… reviewing key measures rbDIAGNOST_review key measures
… debating and discussing performance rbINTERACT_debate assumptions
measures and their assumptions
… getting personally involved in the rbINTERACT_decision activities
decision activities of subordinates
Appendix 267
Cost leadership strategy (COSTSTRAT)
Please rate the degree of emphasis on the following activities:

Item Label
Achieving lower cost of services than com- COSTSTRAT_lower cost than competitors
petitors
Making services or procedures more cost COSTSTRAT_cost efficient
efficient
Improving the utilization of available equip- COSTSTRAT_improving utilization
ment, services and facilities
Differentiation strategy (DIFFSTRAT)
Please rate the degree of emphasis on the following activities:

Item Label
Introducing new services or procedures DIFFSTRAT_introduce new services quick-

quickly ly
Providing services that are distinct from that DIFFSTRAT_distinct services from com-
of competitors petitors
Offering a broader range of services than DIFFSTRAT_broader range of services
the competitors
268 Appendix
Perceived firm performance (PERCPERF)
Please rate the performance of your organization compared to your strongest competitors
on each of the following dimension in the last three years:
(1 = not at all satisfactory, 7 = outstanding)
Item Label
Sales volume PERCPERF_sales
Return on investment PERCPERF_profitability
Result PERCPERF_result
Perceived MCS usefulness (USEFULMCS)
Please rate the extent to which you agree or disagree with the following:
(1 = strongly disagree, 7 = strongly agree)
Item Label
Control systems have facilitated our compa- USEFULMCS_growth

ny's growth
Control reports have provided timely infor- USEFULMCS_information
mation to respond to new threats and oppor-
tunities
Control systems have protected our compa- USEFULMCS_risks
ny from loss or excessive risk
Control systems have reduced flexibility USEFULMCS_flexibility (RC)
(hurting our company's ability to operate
timely and efficiently)
Appendix 269
Organizational size (SIZE_employees)
How many employees do you have on your pay list at the moment?
________ employees
Company age (AGE_founding date)
When was your company founded?
________ (YYYY)
Ownership (FAMILYCOMP_ownership)
Is your company owned by a family?
 No  Yes, up to 0,1%-25%
 Yes, up to 25,1%-50%  Yes, up to 50,1%-100%
Ownership (FAMILYCOMP_management)
Does the top management consist of members of an owner family?
 No  Partly  Exclusively
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Unternehmensführung & Controlling

Wolfgang Becker · Patrick Ulrich Hrsg.

Reihe herausgegeben von

Weitere Bände in der Reihe http://www.springer.com/series/12530

Risk Profile Contingent

Dissertation der Technischen Universität Wien, 2018

Unternehmensführung & Controlling

Today’s business environment is characterized by an ever-increasing

The big challenge that enterprises face nowadays in the ever-increasing

Univ.-Prof. Dr. Walter S.A. Schwaiger, MBA

2.3 Contingency-based studies in management control ............... 70

4 Methods ......................................................................................... 129

5.2 Risk profile contingent packages of MCS.............................. 213

Figure 1: Research design ...................................................................... 7

Figure 25: Conceptual specification of risk profile ................................ 151

Table 1: Overview of hypotheses ....................................................... 126

Table 21: Discriminant analysis for the cluster solution

Equation 1: t-statistic ........................................................................... 136

AGE measure of company age

rbFORMALMCS measure of risk-based formal controls

This dissertation studies the interrelationship between management con-

As the existence of enterprises is a direct result of the fact of uncertainty

© Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2020

1.1 Research questions and design

ganization faces, which is generally recognized in management account-

RQ1: How are the choices of (risk-based) control systems associated

RQ2: What different configurations of (risk-based) MCS (=packages)

To address the questions above, quantitative data is analyzed, which is

MCS framework. In doing so, Simons’ LOC framework is extended in

Following, the conceptual design of the research is presented:

Explanatory Other potentially

RQ3: Performance analysis of MCS

Otley‘s (1980) minimum necessary contingency framework

Figure 1: Research design

As shown in Figure 1, each research question relates to specific parts of

1.2 Structure and outline

Introduction to Design of Contingency-based

Risk profile contingent Risk profile contingent

Figure 2: Outline of dissertation

Chapter 2 provides the foundation of management control theory by re-

This chapter reviews theoretical and empirical literature concerning man-

2.1 Introduction to management control

© Springer Fachmedien Wiesbaden GmbH, part of Springer Nature 2020

2.1.1 Control problem in management

control incorporated concepts of coordination problems and information

To sum up, it can be argued that the existence of control problems in

2.1.2 Definitions and evolution of management control

plying an over-narrow view of the management control process” (Otley &

& Quinn, 1993) to continually evaluate viability of strategy. Moreover,

patterns of behaviour” (Otley, 1999, p. 364). Therefore, the twofold pur-

2.1.3 Uncertainty, risk and management control

2.1.3.1 Risk management and management control

increased complexity and constant change of the competitive environ-

reporting requirements and which can be applied relatively easily by any

Information & Communication

Figure 3: Enterprise risk management – Integrated framework

Williamson (2007) states that COSO’s framework on ERM “makes a val-

2.1.3.2 Kaplan & Mikes’ conceptualization of risk types

employees’ undesirable and unauthorized actions. As preventable risks

Category Preventable Strategy External

Definition Risks arising from Risks taken for External, uncontrol-

Risk Mitigation Avoid or eliminate Reduce likelihood Reduce impact

Control Model Integrated culture- Interactive discus- “Envisioning” risks

Figure 4: Kaplan & Mikes’ conceptualization of risk types