Management control systems, strategy, and organization effectiveness: A transaction cost economics perspective

A fundamental issue with any organization is the need to control its members and activities in a manner that furthers its strategic objectives. Consequently, the study of management control has developed into one of the more important branches of behavioral accounting research. This study investigates, from the perspective of transaction cost economics (TCE), the performance consequences resulting from the association between business unit strategy and its system of management control.;TCE suggests that firms exist because they economize on transaction costs that would otherwise take place in the marketplace. However, once an organization is formed a control system must be put in place to ensure that efficient economic decisions are made by the agents in that organization. Management control is viewed here as a process consisting of three dimensions: assigning decision making responsibility, measuring performance, and designing a reward system.;Three of the four hypotheses suggested by the theoretical model were supported by survey data. It was found that balanced scorecard (BSC) usage enhanced organization effectiveness. Furthermore, BSC usage had a more positive impact on effectiveness for those business units following a product differentiation strategy. Finally, the evidence was consistent with the assertion that the method of determining incentive compensation interacts with strategy in impacting effectiveness. The data did not support the contention that organization structure complements strategy in positively influencing organization effectiveness.;This study contributes to the MCS literature by using TCE principles to present a model which allows one to examine whether differences in MCS design have an impact on organizational effectiveness. Several analytic treatments exist describing how MCS should be structured according to TCE principles, but there is little, if any, empirical evidence testing these propositions. This paper presents some of the first evidence in support of the theory's assertions. In addition, the research presented in this paper provides several guidelines that management should consider in the design of control systems.