Relevance and Usage of Management Control Systems with Reference to Strategy Formulation and Control: Evidence from Italian SMEs

Relevance and Usage of Management Control Systems with Reference to Strategy Formulation and Control: Evidence from Italian SMEs

Selena Aureli (University of Bologna, Italy)
DOI: 10.4018/978-1-4666-5962-9.ch017


Management control systems (MCSs) can undoubtedly support organizations' strategic processes as they help coordinate and align personnel behaviour to organizational goals, verify the validity of the organization's strategic plan and contribute to better formulate future plans. However, past research indicates that SMEs scarcely adopt MCSs. With the aim to update past research, the present chapter explores the current role and quality of MCSs used by SMEs in relation to strategic processes. Moreover, it evaluates whether MCSs adoption is associated to specific SMEs owner-managers' beliefs and other contingency factors. A survey conducted in Italy in 2012 indicates that SMEs attribute an important role to MCSs in supporting strategy formulation, its control and subsequent reformulation, but this strategic role is not associated with the adoption of advanced MCSs. SMEs still rely on traditional accounting-based control systems or perform some ad hoc analysis to obtain information useful for top managers strategic decision making.
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In order to face environmental uncertainty, create wealth for stakeholders and survive in the long term, every organization should define its strategy, implement it and control its results (Ansoff & McDonnel, 1990). All the decisions, processes, and actions that enable an organization to formulate and control strategies for achieving long-term objectives are included in the concept of strategic management (Selznick, 1957; Ansoff, 1965, 1979; Ansoff et al., 1976). This is a discipline originating in the 1950s with the work of Chandler, Selznick, Ansoff and Drucker, which involves defining a company’s vision, mission, and objectives, developing plans and programs, and allocating resources to implement them. Moreover, it stresses the importance of using managerial tools which provide rationality to strategy formulation (like market segmentation in strategic business areas, portfolio analysis, decision trees, economic value added model), as well as tools supporting the implementation and evaluation of strategies (like planning and budgeting systems) (Hax & Majluf, 1991).

Despite its recognized benefits for smaller organizations (Robinson & Pearce, 1984), past literature indicates that strategic management was not largely diffused in the context of small and medium-sized enterprises (SMEs). According to Marchini (1995) and Raffa and Iandoli (2005), who studied Italian SMEs, strategic management does not make sense in this specific context because the decision-making authority is centralized at the top and the owner-entrepreneur is solely responsible for making executive decisions; strategic choices are not formalized nor communicated to all employees and strategy formulation and subsequent strategy implementation do not represent distinct processes. In addition, tools and processes supporting strategic management are considered too bureaucratic to be effective instruments. They contrast with the traditional small firms’ business model, which is based on organizational flexibility (Marchini, 1995; Raffa & Iandoli, 2005).

However, time has passed since the aforementioned studies. As suggested by Farneti and Bartolini (2009) in a recent survey on SMEs located in Central Italy, these entities are more aware than in the past that adequate procedures and structured information systems are necessary for managers and entrepreneurs to make informed decisions and take appropriate actions. Moreover, probably thanks to the decreasing cost of information and communication technologies (ICTs), several Italian medium-sized businesses have recently began to use computer-based management control systems as instruments supporting strategy development and control (see the works of DelBaldo, 2008 and Aureli et al., 2012, which mainly refer to Central Italy).

This empirical evidence suggests that today SMEs are collecting and analyzing more detailed information about both internal and external environments, and are increasingly adopting structured management control systems to monitor operational and strategic results and to direct future actions. A pattern which is probably related to the recent financial and economic crisis and growing environmental complexity1.

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