Introducing The First Management Control Systems: Evidence From The Retail Sector

THE ACCOUNTING REVIEW
Vol. 82, No. 1

2007
pp. 265–293
Introducing the First Management

Control Systems: Evidence from the
Retail Sector
Tatiana Sandino
University of Southern California
ABSTRACT: Focusing on a sample of U.S. retailers, I study the management control
systems (MCS) that firms introduce when they first invest in controls, and identify four
categories of initial MCS, which are defined in terms of the purposes these MCS fulfill.
The first category, ‘‘Basic MCS,’’ is adopted to collect information for planning, setting
standards, and establishing the basic operations of the firm. The other three categories
are contingent on more specific purposes: ‘‘Cost MCS’’ focus on enhancing operating
efficiencies and minimizing costs; ‘‘Revenue MCS’’ are introduced to foster growth and
be responsive to customers; and ‘‘Risk MCS’’ focus on reducing risks and protecting
asset integrity. I hypothesize and find that the choice among these categories reflects
the firms’ strategy, and that firms that choose initial MCS better suited to their strategy
perform better than others.
Keywords: management control systems; corporate strategy; entrepreneurial organi-
zations; firm growth.
I. INTRODUCTION
M
anagerial concerns tend to change frequently in young companies in an early-
stage of their growth phase (hereinafter ‘‘early-stage’’ firms). New functions
emerge, levels in the management hierarchy multiply, jobs become more inter-
related, and new coordination and communication needs arise (Greiner 1998). A growing
firm confronts not only an internal transformation, but also increasing environmental com-
plexity (Miller and Friesen 1984). As a result, managers of early-stage firms introduce
formal management control systems (hereafter, MCS), which are ‘‘formal (written and
standardized) information-based procedures and statements, used by managers to monitor
and influence the behavior and activities in a firm’’ (Simons 1994, 5). Such MCS enable
I thank my dissertation committee: Srikant Datar (Co-Chair), Robert Simons (Co-Chair), Robert Kaplan and Alvin
Silk, as well as Dennis Campbell, Henri Dekker, Fabrizio Ferri, Paul Healy, Susan Kulp, Kenneth Merchant, Mina
Pizzini, Edward Riedl, Dhinu Srinivasan, Christiane Strohm, Wim Van der Stede, Ingrid Vargas, Terry Wang, Mark
Young, workshop participants at ESADE, Emory University, Harvard University, IESE, INSEAD, Instituto de
Empresa, Lancaster University, New York University, University of Southern California, The University of Texas
at Austin, Washington University in St. Louis, and discussants and reviewers at the 2004 Global Management
Accounting Research Symposium, 2004 AAA Annual Meeting, 2005 MAS Midyear Meeting for their comments
and suggestions. I am also indebted to two anonymous reviewers for their guidance and insightful comments, and
to Deloitte & Touche and Harvard University for financial assistance.
Editor’s note: This paper was accepted by Dan Dhaliwal.
Submitted May 2005

Accepted June 2006
265
266 Sandino
managers not only to cope with increasing information needs, but also to avoid loss of
control because of lack of monitoring (Child and Mansfield 1972). However, MCS are
costly and time-consuming to install and operate. As a consequence, early-stage firms are
likely to choose their first set of MCS selectively.
Prior accounting research has studied MCS choices in mature firms; however, the issues
underlying the choices of MCS in early-stage firms differ from those confronted by mature
firms for three reasons. First, mature companies usually have an extensive amount of formal
systems already in place and, thus, are less concerned about running ‘‘out of control’’ than
early-stage firms.1 Second, the first MCS introduced provide a foundation for the future
development of MCS in the firm (Davila 2005; Davila and Foster 2005b; Nelson and Winter
1982). In this respect, while the main concern in a mature company will be how to integrate
new MCS with the existing ones, a young firm must consider how the first MCS will affect
the choice of future MCS. Third, early-stage firms utilize informal control systems more
intensely than do mature firms (Cardinal et al. 2004; Moores and Yuen 2001) and, thus,
they might decide to invest only in those formal MCS that liberate managers from routine
operations and allow them to informally focus on the firm’s strategy.
Notwithstanding that MCS are critical to the success, and even the survival, of early-
stage firms (Merchant and Ferreira 1985), academic work in this area has been sparse and
offers little guidance to practitioners. Thus, conditional on the firms’ decision to start in-
vesting in MCS, this study examines managers’ choices regarding the first MCS they
introduce in early-stage firms (hereafter, ‘‘initial MCS’’).
The study is conducted in two phases using data from 40 field interviews and 97
responses to a survey directed to early-stage store-based retailers. In the first phase, based
on the field study, I sought to understand what initial MCS were introduced in early-stage
firms and why. I found that the initial MCS introduced in early-stage firms could be cate-
gorized usefully based on their purpose. In the second phase I use the survey data to test:
(1) whether the strategy pursued by an early-stage firm significantly determines the firm’s
choice of particular categories of initial MCS, and (2) whether early-stage firms with a
better fit between the initial MCS and their strategy experience superior performance.
The first phase interviews reveal that entrepreneurs characterize initial MCS in terms
of the purposes MCS should fulfill, rather than in terms of individual control systems such
as budgets, inventory controls, etc., mostly because individual control systems can be used
to achieve different purposes (e.g., inventory control systems could be used by some firms
to learn about customers’ preferences and by other firms to prevent merchandise theft) and
it is the purpose that entrepreneurs really care about. Four categories of initial MCS, defined
in terms of the MCS purposes, emerge from the data: Basic MCS, which constitute a
‘‘common-platform’’ across all firms, are used to collect information for planning and es-
tablishing the basic operations; Cost MCS are introduced to achieve operation efficiencies
and cost minimization; Revenue MCS are used to achieve growth and to learn and respond
to the market; and Risk MCS are used to reduce risks and protect asset integrity. It is
important to highlight that individual control systems are classified into these categories
based on the purpose they fulfill. For example, a marketing database used to understand
and respond to customer preferences (purpose) would be classified as a Revenue MCS,
1
An ‘‘out of control’’ situation is one where a firm is likely to have poor performance, despite having a reasonable
strategy in place (Merchant and Van Der Stede 2003, 10). Stinchcombe (1965) argued that new organizations
suffer a liability of newness, that is, a greater risk of failure than older organizations, because they lack structure
and legitimacy. Empirical studies have supported that such risk persists even after controlling for different
contingencies such as size and industry (Singh et al. 1986).
The Accounting Review, January 2007

Introducing the First Management Control Systems 267
while a system of internal auditing and transaction tracking used to prevent theft (purpose)
would be classified as a Risk MCS.
The second stage of the study examines whether firms adapt their initial MCS to the
firm’s strategy, and the performance consequences of such adaptation (see Figure 1). I
predict and find that firms emphasizing differentiation strategies tend to choose as their
most important initial MCS a set of Revenue MCS—as well as individual control systems
such as marketing databases and sales productivity controls—rather than Cost MCS or Risk
MCS.2 For firms emphasizing low-cost strategies I hypothesize a more intense use of Cost
MCS and Risk MCS, but find only weak evidence for this prediction. There are two possible
FIGURE 1
Conceptual Diagram: FIT between the Strategy and (non-basic) Initial MCSa
Categories of (non-basic) Initial MCS

Category/purpose Individual control systems
associated to this category
1. Cost MCS ➣Cost controls
➣Quality controls
Strategy
Low cost / 2. Revenue MCS ➣Marketing Databases
differentiation Multinomial ➣Sales Productivity
Logit
➣Loss Prevention Controls
➣Internal Audits, Transaction
3. Risk MCS Tracking, Checks & Balances
➣Codes of Conduct
➣Credit Controls
➣Policies and Procedures
FIT=1 if the category of Initial MCS

OLS, and Ordinal chosen is the one predicted by the
Logits regressing FIT multinomial logit AND at least 50% of
Performance on FIT the individual control systems
associated with that category are
introduced initially
Performance:
➣Initial MCS usefulness
➣ Business Performance
a
Note the (non-basic) Initial MCS exclude the ‘‘Basic MCS’’ category. I do not test a relation between the firm’s
strategy and this category, since ‘‘Basic MCS’’ are a common platform introduced by most early-stage firms,
regardless of specific purposes pursued by the firm.
2
Interestingly, when I further distinguish between two types of differentiation strategies—customization and
product leadership—I find that the above result only holds for customizers, while product leaders tend to place
more emphasis on Cost MCS. While apparently counterintuitive, this finding is consistent with Kaplan and
Norton’s (2004) notion that, once product characteristics are determined, product leaders focus on controlling
costs.

268 Sandino
reasons for this: (1) Basic MCS already fulfill some of the information needs required by
low-cost leaders; (2) Cost MCS and Risk MCS are implemented more broadly than Revenue
MCS (i.e., most early-stage firms implement at least some Cost MCS and Risk MCS, even
if their strategy is not one of ‘‘low cost’’), perhaps to avoid the risk of failure that most
start-ups confront, or to control routine operations that distract managers from informally
focusing on strategic decisions. Finally, regarding the performance consequences of the
choice of initial MCS (bottom of Figure 1), results indicate that a better fit between initial
MCS and firm strategy is associated with a higher perceived usefulness of MCS and per-
ceived business performance, as well as higher store and sales growth.
This study contributes to the management control literature in two ways. First, it com-
plements an emerging literature related to the introduction of MCS in early-stage firms.
This emerging research has focused on the time start-up companies take to adopt formal
control systems as well as the determinants of such adoption. For example, Moores and
Yuen (2001) show that young firms in their early growth stage increase the formality of
their MCS, while Davila (2005) and Davila and Foster (2005a, 2005b) find that age, size,
the presence of outside investors, a change in CEO, CEO experience, and a planning culture,
are positively associated with the rate of adoption and the sequence of introduction of
different categories of MCS. Second, this study contributes to the contingency research that
relates strategy to MCS in mature companies (Langfield-Smith 1997), but which is usually
influenced by confounding effects such as the need to integrate new MCS to the existing
ones and the need to develop a strategy aligned with previously existing MCS. By analyzing
the first set of MCS introduced by early-stage firms, this study provides a cleaner setting
to understand the causal relationship between strategy and MCS choice.
Besides contributing to the academic literature on MCS, this study offers important
insights to practitioners—entrepreneurs, investors and consultants—about the value and
appropriateness of particular categories of MCS for early-stage firms. While some studies
have suggested that the very implementation of MCS—by inhibiting risk taking and ability
to react quickly to changes in the environment—runs contrary to the entrepreneurial spirit
(Morris and Trotter 1990; Adizes 1988), managers and investors generally agree that in
early-stage, high-growth firms some form of control is needed and the real question is not
whether MCS are needed, but which MCS are best suited to the contingencies of each firm.
The remainder of the paper proceeds as follows: Section II develops the research ques-
tions, while Section III describes sample selection and data collection methods. Section IV
focuses on the first stage of the study by developing a categorization of initial MCS.
Sections V and VI develop the second stage of the study, by investigating the relationship
between the choice of particular categories of initial MCS and the strategy pursued by the
firm, and the performance implications associated with that choice, respectively. Section
VII concludes.
II. RESEARCH QUESTIONS

A number of studies, spanning several disciplines and developed largely on the basis
of experience—hereafter referred to as life-cycle studies—propose that certain categories
of MCS are introduced at particular stages of firm growth and suggest that MCS introduced
in early-stage firms usually focus on plans, budgets, and incentives (Flamholtz and Randle
2000; Simons 2000; Greiner 1998; Miller and Friesen 1984, 1983; Churchill and Lewis
1983). While highlighting the importance of the firm’s growth stage in the choice and use
of MCS, for the most part these studies do not consider the role of contingencies within
each growth stage, implicitly assuming that all firms in the same growth stage introduce
the same types of MCS.

In contrast, the contingency-based research in managerial accounting shows that large,

mature organizations design their MCS as a function of a number of contextual variables,
including strategy, environment, technology, organizational structure, and firm size (for a
summary of this literature see Chenhall 2003), resulting in differences in the type of in-
formation collected.3
Combined, these two avenues of research lead to the first research question:
Research Question 1: What types of initial MCS do early-stage firms put in place?
Do initial MCS vary across early-stage firms?
Another logical question is: What are the determinants of the choice of particular types
of initial MCS? Since the 1980s, the contingency literature in managerial accounting has
focused on strategy as the most important driver of MCS design. Extensive research has
documented an association between MCS and strategy in mature firms (see Langfield-Smith
[1997] for an overview). In part, strategy has dominated other contingencies because it
constitutes the means by which managers can influence all other contextual variables (ex-
ternal environment, technology, etc.) that were previously treated as exogenous (Chenhall
2003). Strategy also gained importance following insights from the organization theory
literature suggesting that a strategy supported by the firm’s organization design and control
systems could be a powerful source of competitive advantage (Chandler 1962; Porter 1980;
Miller and Friesen 1982). I explore the choice of the type of initial MCS by examining the
following question:
Research Question 2: Are the choices of particular types of initial MCS in early-stage
firms associated with the firm’s strategy?
Note that the type of initial MCS introduced will not reflect the firm’s strategy if early-
stage firms rely heavily on informal communications to support their strategy (Lorange and
Murphy 1984; Churchill and Lewis 1983), e.g., if these firms introduce their first MCS
mostly to ‘‘liberate’’ management’s time from routine matters so that management can
informally focus on the strategy, or if the initial MCS are exclusively intended to reduce
the risk of failure typically faced by new organizations (Singh et al. 1986; Freeman et al.
1983; Stinchcombe 1965). Under any of these scenarios, the type of initial MCS would not
relate to the strategy but would instead aim at monitoring nonstrategic routine issues or
collecting risk-related information.
A natural follow-up question is related to the performance implications of the choice
of the type of initial MCS. In the context of mature firms, Chenhall and Langfield-Smith
(1998), Simons (1987), and Govindarajan and Gupta (1985) found evidence suggesting that
certain combinations of strategies and MCS lead to superior performance. In early-stage
firms, the adaptation of initial MCS to the strategy may be even more relevant for future
performance, since these MCS provide the foundation over which future MCS are devel-
oped (Davila 2005; Davila and Foster 2005b). This leads to the third question of this study:
3
Contingency research has found differences in MCS with respect to the content of information: (1) internal
versus external (Guilding 1999; Gordon and Narayanan 1984); (2) financial versus nonfinancial (Van der Stede
2000; Ittner and Larcker 1995); (3) tight versus flexible (Chenhall and Morris 1995; Simons 1987; Merchant
1984); and (4) used for learning versus used for monitoring (Kaplan and Norton 2004; Margison 2002; Abernethy
and Brownell 1999; Simons 1987); as well as with respect to attributes of information (Bowens and Abernethy
2000; Chenhall and Morris 1986): (1) aggregation, by time period, by functional area, or by formula; (2)
integration, if it contributes to the coordination of subunits; (3) timeliness, if frequent or by immediate request;
and (4) broad scope, if external, forward looking and nonfinancial.

270 Sandino
Research Question 3: Are business performance and the perceived usefulness of initial
MCS related to the fit between the initial MCS introduced and
the firm’s strategy?
I explore Research Question 1 through field interviews and Research Questions 2 and
3, by using a survey-based database to test hypotheses detailed in Sections V and VI
respectively.
III. SAMPLE AND DATA COLLECTION

I develop this study using exploratory interviews with experts in entrepreneurship and
retailing, as well as a survey-based database for a sample of U.S. store-based retailers.
Focusing on a single industry provides depth to the study and allows me to control for
several industry-specific conditions that may be relevant to the introduction of MCS in a
company. Relative to other sectors, the store-based retail sector presents two major advan-
tages, namely, more variation along the different contingencies that typically affect the
choices of MCS (strategy, organizational structure), and more visible control problems
associated with the growth of early-stage firms (e.g., an increase in the number of stores
increases risk of theft, difficulty in understanding customer needs, problems of ineffective
replenishment of inventory, lack of coordination and the need to train employees and align
them to the company’s strategy).4
I base my analysis on two main sources of information. First, I utilize information from
18 exploratory interviews that I conducted with professionals with expertise about entre-
preneurial control systems and/or the retail sector. Second, I use data from a survey of top
managers in 97 early-stage retail companies. The first section of the survey gathers infor-
mation on each firm’s strategy and asks about any major changes in strategy since the firm’s
inception. The second section focuses on the description of the initial MCS introduced by
the firm (purpose of the initial MCS, time of introduction of different individual control
systems, etc.). Other questions ask managers to self-assess the overall performance of the
firm and the usefulness of MCS in the firm’s development, or are designed to obtain a set
of control variables.
After designing and pilot testing the questionnaire, I sent it to the CEOs of U.S.-based
retailers no more than 20 years old5 that distributed their products through at least 20 stores
or retail points. These criteria were chosen to ensure that the resulting sample was composed
of young but growth-oriented firms (i.e., excluding ‘‘mom-and-pop’’ retailers). Through a
search in Compustat, One Source, Thomson Research, and Career Search, I identified and
contacted 598 firms satisfying these criteria, including 104 publicly traded firms.
4
A number of other reasons made the store-based retail sector an attractive candidate for this study: (1) the
diversity of retailers (jewelry, electronics, restaurants, apparel, home improvement) facilitates the generalizability
of results; (2) it is a sector characterized by multiple start-ups, a necessary condition to achieve a meaningful
sample size for statistical analysis; (3) it is a relatively mature industry, thus it does not suffer from the lack of
stability in performance that affects most of the other industries with numerous start-ups (e.g., biotech, computer
software and hardware); (4) the retail sector’s performance relies heavily on MCS, as opposed to other factors
such as R&D discoveries; and finally; and (5) it is a significant sector of the economy, accounting for approx-
imately 25 percent of the U.S. GDP and with an average annual growth rate of 5 percent during the last two
decades.
5
I assumed that managers could only recall relatively recent information. Therefore, I limited the sample to firms
where the founder or a veteran employee was available to answer the survey, and the firm’s age was equal or
less than 20 years (a company’s founding date was defined as the time when the first store was opened). For
the resulting sample, the time between the introduction of the initial MCS and the survey response (that is, how
far the respondent had to recall) was, on average, nine years (median of eight years).

Of the 598 firms targeted, I gathered survey data from 131 (32 public and 99 private),
for a response rate of 21.9 percent.6 In 22 cases, the survey was completed in face-to-face
interviews, providing me with an opportunity to explore the reasoning behind the respon-
dents’ answers. After eliminating unsuitable responses (see Table 1, Panel A), 97 completed
surveys were utilized in the analyses. In most cases, the respondent was either the president
or the CEO of the firm (see Table 1, Panel B). The average (median) retailer in the sample
had 130 (45) stores, and the age of the surveyed firms ranged between 2 and 20 years,
averaging 13 years. Table 1, Panel C shows that 17 percent of these retailers emerged as a
subsidiary or spin-off of a corporation, and 26 percent were funded by venture capitalist
firms. Although most firms pursued their growth internally, 22 percent were franchisors.
In terms of industry composition, a Chi-square test shows that the sample of respondent
firms is not significantly different from the target population (see Table 2, Panel A). Sim-
ilarly, I find no evidence of differences in size and age between respondents and non-
respondents (see Table 2, Panel B).7 Thus, at least with respect to size, age, and industry
composition, nonresponse bias does not appear to be a concern.
IV. FIELD STUDY ON INITIAL MCS

The first goal of this research—corresponding to Research Question 1—was to explore
the types of initial MCS introduced in early-stage firms, i.e., the first set of MCS in which
the firm made a significant investment.8 This section describes a field study that followed
an iterative grounded approach, where I went back and forth between the data collected
through interviews and surveys, and the emerging categories of initial MCS (Strauss and
Corbin 1998). The section concludes with a summary of the findings, which suggests four
categories of initial MCS.
I started off by consulting publications about retailers and conducting exploratory in-
terviews with retail experts, to identify individual control systems used in the retail industry.
I came up with a list of 20 individual control systems9 presented in the first column of
Table 3. As I conducted my interviews, I tried to identify which of these specific control
systems were most important in early-stage firms.10 However, after conducting a few inter-
views, it became very clear that interviewees conceived initial MCS in terms of the purposes
initial MCS were meant to fulfill, not in terms of individual control systems, since (1)
different individual control systems can be used to achieve the same purpose—e.g., a firm
trying to learn about customer service could use marketing databases or mystery shoppers
to achieve the same purpose—and (2) the same individual control system can be used to
achieve different purposes—e.g., inventory control systems could be used by some firms
6
To maximize the rate of response, I sent one or two packets to each firm including the survey, a stamped return
envelope, a pen, and an introductory letter directed to the CEO that briefly described the motivation for the
study, offered a copy of the results, asked to direct the questionnaire to a qualified respondent, and guaranteed
confidentiality. I followed up this mailing with two rounds of faxes and at least three telephone calls. I offered
respondents a choice of completing the survey online or on paper, and public firms had the additional option
of completing the survey through a telephone or face-to-face interview.
7
The nonresponse bias analysis presented in Table 2, yields equivalent results when the 598 target firms are
compared to the 97 firms used in the final sample (instead of the 131 firms that responded the survey).
8
The date of the firm’s first significant investment in MCS is determined based on the respondent’s answer to a
specific question in the survey. Focusing on the first significant investment in MCS also reduces the ‘‘low
saliency’’ problem that often increases the memory error (Silk 1990).
9
Notice most of these individual control systems are used in other industries as well, although ‘‘pricing controls,’’
‘‘shoplifting,’’ and ‘‘mystery shoppers’’ tend to be more relevant for retailing than for other industries.
10
Examples of exploratory questions I asked are: ‘‘If you were starting a new business intended to grow fast, what
control systems (if any) would you put in place?’’ ‘‘What are the main functions that control systems should
accomplish in an early-stage firm?’’ ‘‘What types of situations lead to the introduction of control systems in
most early-stage firms?’’

272 Sandino
TABLE 1
Sample Description
Panel A: Sample Selection

Number of young retail firms targeted 598
Number of respondents (21.9 percent) 131
Less—Incomplete or invalid surveys (17)
Less—Respondents not fitting the selection criteria:
● Firms from other industries (5)
● Firms older than 20 years (8)
● Firms resulting from an acquisition (4)
Final Sample 97
Panel B: Position of the Respondents

●
President 29 (30%)
●
Chief Executive Officer 24 (25%)
●
President and Chief Executive Officer 21 (22%)
●
General Management (VP, Chief Administrative Officer, Director) 7 (7%)
●
Finance or Information Management (CFO, CIO, VP Controller, 7 (7%)
VP Information Systems) 5 (5%)
● Operations Management (COO, VP related to operations) 4 (4%)
● Others (Founder, Chairman, Owner)
Total Sample 97 (100%)
Panel C: Descriptive Statistics of the Sample (n ⫽ 97)

Lower Upper
Variable Mean Std. Dev. Quartile Median Quartile
SIZE (# Stores) 129.73 211.18 28 45 125
AGE (in # years) 13.27 5.18 9 15 18
PUBLIC 0.24 0.43 — — —
VC DUMMY 0.26 0.44 — — —
SUBSIDIARY 0.17 0.38 — — —
FRANCHISE 0.22 0.41 — — —
to learn about customers’ preferences; by some other firms to keep track of merchandise
that could otherwise be stolen; or still by other firms to learn about the efficiency of their
logistics.
To learn more about the purposes pursued by entrepreneurs when they made their first
investments in MCS, I continued my data collection and, after each exploratory interview,
analyzed the purposes described by each individual. Different individuals described diverse
purposes that I classified into three analytical categories:11
● Minimize Cost: These initial MCS are implemented to control costs, improve the
efficiency of operations, and achieve internal learning by constantly setting targets
and comparing actual performance against these targets. According to the interview-
ees, this type of initial MCS help entrepreneurs:
11
In order to achieve theoretical saturation, I completed 18 interviews. No additional purposes emerged from the
last three interviews, confirming that theoretical saturation was indeed achieved.

TABLE 2
Sample Description: Nonresponse Bias
Panel A: Retail Industry Composition

Target Firms Sample Firms
Retail Industry # of Firms % # of Firms %
Sporting goods stores 5 0.8 2 1.5
Building materials and hardware stores 6 1.0 2 1.5
Jewelry stores 7 1.2 2 1.5
Automotive dealers and gasoline service 8 1.3 3 2.3
stations
Drug stores 9 1.5 1 0.8
Optical goods stores 11 1.8 1 0.8
Radio, TV, and Computer stores 11 1.8 3 2.3
General merchandise stores 17 2.9 3 2.3
Stationary, games, hobbies and gift stores 23 3.9 8 6.1
Home furnishings and equipment stores 32 5.4 8 6.1
Apparel and accessory stores 42 7.0 8 6.1
Food stores 65 10.9 9 6.9
Eating and drinking establishments 351 58.7 76 58.0
Other miscellaneous retail stores 11 1.8 5 3.8
Total 598 100% 131 100%
Chi-Square Testa
Chi-Square ⫽ 10.48
Degrees of Freedom ⫽ 13
Pr ⬎ Chi-Square ⫽ 0.654
Panel B: Differences between Target and Sample Firms

Mean for
Respondent Difference t-test Wilcoxon Test
Variable Firms Nonrespondents in Means (Pr ⬎ t) (Pr ⬎ z)
SIZE (# Stores) 109.6 121.6 ⫺12.0 0.67 0.48
AGE (in # years) 14.2 14.5 ⫺0.3 0.53 0.38
a
The Chi-square statistic is calculated as Q ⫽ 冘 (ƒ ⫺e e ) , where ƒ are the observed frequencies of each
i
i
i
i
2
industry in the sample of respondents (ƒi ⫽ Respondents’ Sample Size * %Responding Firms in Industry i) and
ei are the expected frequencies based on the industry composition of the target firms (ei ⫽ Respondent’s
Sample Size * %Target Firms in Industry i).
● manage and understand costs (how are employees spending resources?);

● distinguish controllable from fixed costs;
● control costs once competition steps in and squeezes gross margins;
● provide information to help employees do their work efficiently and productively;
● define goals (but without imposing constraints on how to achieve those goals);
● learn how to react to contingencies;
● learn how to forecast and plan under different scenarios; and

274 Sandino
TABLE 3
Introduction of Individual Control Systems
Proportion
Introduced Time to Introduce Control
Initiallyb System (years)c
Individual Control Systemsa Mean Std. Dev. Mean Median n Std. Dev.
a. Quality standards and controls 0.762 0.428 2.15 0 87 3.96
b. Policies and procedures 0.721 0.450 2.97 2 92 4.30
c. Pricing system 0.711 0.455 2.43 0 86 4.10
d. Budget controls 0.680 0.469 3.27 0 89 4.81
e. Inventory control systems to optimize 0.649 0.479 3.63 0 88 5.33
stock levels and replenishment
f. Internal audits, transaction tracking, and 0.649 0.479 3.60 2 92 5.02
checks and balances of information
g. Cost controls 0.649 0.479 2.48 0 80 4.13
h. Codes of business conduct 0.598 0.493 3.24 1.5 84 4.87
i. Performance-based compensation systems 0.577 0.497 3.85 2 83 5.10
j. Credit rules and controls 0.557 0.499 3.33 0 73 5.40
k. Restrictions to strategic choices (e.g., 0.546 0.500 2.22 2 76 3.72
products not to be sold, customers not to
be served, etc.)
l. Key performance indicators 0.536 0.501 3.78 2 88 4.84
m. Sales productivity standards (input-output 0.505 0.502 3.85 2 83 4.87
measures: sales / employee, sales / square
foot, etc.)
n. Loss prevention / shoplifting controls 0.495 0.502 3.21 2 77 4.69
o. Controls on employee behavior and 0.464 0.501 4.60 2 86 5.36
development (turnover, training, etc.)
p. Statement of purpose / mission / credo 0.454 0.500 4.32 2 83 4.56
q. Controls for investment in long-term 0.453 0.500 4.52 2 80 5.10
assets
r. Mystery shoppers 0.361 0.483 4.23 2 74 4.81
s. Externally oriented information systems, 0.309 0.464 5.00 2 64 5.27
other than those related to direct
customers (e.g., Market share data, data
from A. C. Nielsen, Information
Resources Inc, etc.)
t. Marketing databases (e.g., Customer 0.257 0.439 5.93 3 70 5.97
Relationship Management systems, etc.).
Source: Survey Data
a
The 20 Individual Control Systems were classified in the questionnaire into: Strategy Related Controls (controls
k, l, p, and q); Market / Customer Related Controls (controls r, s, and t); Ongoing Operations Controls (controls
a, c, d, e, g, j, and m); Personnel Controls (controls i and o); and Risk Minimization Controls (controls b, f, h,
and n).
b
Individual Control Systems are defined as introduced initially if they were introduced in the year (or before the
year) when, according to the interviewee, the firm made its first significant investment in Control Systems.
c
Summary measures of number of years from founding date to introduction of each control system. Each line
includes only the n firms (from a total of 97) that had introduced the system at the time they answered the
survey.

● learn how to manage inventory and eliminate the costs of obsolescence.

● Enhance Revenue: The second category consists of MCS used to analyze external
information, to learn and respond to customers, and to foster and support fast growth.
Examples classified in this category suggest these initial MCS are used to:
● learn about the market and competitors;
● learn about prospective new store locations and their inventory needs;
● implement a strategy and culture that leads to growth;
● attract financial investors that would help the company grow;
● direct the attention to the maximization of sales-per-square-foot;
● build customers’ confidence;
● understand customer preferences; and
● learn the drivers of sales (which products are selling, how effective are the ads).
● Minimize Risk: The last initial MCS are meant to protect asset integrity, and avoid
internal risks and out of control situations (defined in footnote 1). Interviewees ex-
plained that these initial MCS are used to:
● avoid inconsistencies in information;
● secure and audit the systems;
● define consistent rules and routines throughout the company;
● avoid out-of-control situations that would harm the firm’s growth and financial
health;
● control theft, by checking cash and inventory levels; and
● (in subsidiaries) limit exposure to risks that would harm the parent company’s
brand.
After learning about the three main purposes of initial MCS from the exploratory
interviews, and identifying 20 individual control systems used in the retail industry, I ex-
plored whether the three major purposes affected the frequency of introduction of any
specific individual control systems. Thus, I incorporated two sets of questions into the
survey instrument. The first set explored which of the 20 individual control systems were
introduced in each firm, and when. Table 3 summarizes the survey responses. For each
individual control system, the table shows: (1) the proportion of firms that adopted it ini-
tially, i.e., in the year the firm made its first significant investment in controls; (2) the
average and median time from the firm’s founding date (date the company opened its first
store) to its introduction; and (3) the number of firms that had introduced the particular
control by the time they answered the survey (n). Table 3 suggests that most of the indi-
vidual control systems introduced early are internal and relate to operations, while individ-
ual control systems used to learn about customers and to scan external information are
introduced later. For example, the most frequent individual control systems introduced in-
itially include quality controls, policies and procedures, pricing controls, and budgeting. In

276 Sandino
contrast, marketing databases and externally oriented information systems tend to be intro-
duced at a later stage.12
A second set of questions in the survey asked about the purposes of introducing the
initial set of control systems (minimize cost, enhance revenue, minimize risk). Each purpose
was ranked in a Likert scale from 1 to 7, where 1 indicated that the first set of controls
systems were ‘‘not used at all’’ and 7 indicated that they were ‘‘used to a great extent’’ for
the purpose in question. To formally evaluate whether the choice of individual control
systems relates to the three MCS purposes, I conducted the following analysis. For each
of the 20 individual control systems (j ⫽ 1, 2,...,20) identified in Table 3, I ran a logistic
regression where the dependent variable was a dummy indicating whether the individual
control system j was introduced among the initial set of control systems in firm i (INITI-
ALCSji ⫽ 1, or 0 otherwise), and the independent variables were the Likert values for the
three purposes (COSTLIKERTi, REVENUELIKERTi, and RISKLIKERTi):13
Pr(INITIALCSji ⫽ 1) ⫽ ␣ ⫹ ␤1*COSTLIKERTi ⫹ ␤2*REVENUELIKERTi

⫹ ␤3*RISKLIKERTi ⫹ εi (1)
Results in Table 4 indicate that eight of the 20 MCS are significantly related to one of
the three purposes (minimize cost, enhance revenue, minimize risk). This suggests an as-
sociation between those individual control systems and the corresponding initial MCS cat-
egory (or purpose). The analysis also suggests the presence of three individual control
systems that do not appear to be associated to any particular purpose pursued by the firm,
yet were introduced by most of the sample firms among the initial set of control systems
(more than 60 percent as indicated in Table 3). I describe these individual control sys-
tems as a set of ‘‘Basic MCS,’’ which are commonly adopted because they are believed to
be essential to the development of early-stage firms. These systems, which were utilized
broadly, seem to be in line with some of the needs previously attributed to the purpose
‘‘Minimize Cost.’’
To summarize, as a result of the above analysis, I propose a categorization of initial
MCS that includes two sets of systems, a set of ‘‘Basic MCS’’ introduced by most early-
stage firms, regardless of the specific purposes emphasized by the firm, and a set of MCS
chosen by early-stage firms based on specific purposes. This latter set includes ‘‘Cost
12
To verify the robustness of the order of introduction of these individual control systems, I repeat the analysis
in Table 3 by:
(1) redefining the founding date as the incorporation date instead of the date the first store opened. The resulting
order is almost equivalent to that in Table 3, with four individual control systems moving one position and
only one control system changing two positions.
(2) using a subset of firms less than ten years old (n ⫽ 30), on the grounds that technological changes may
have affected the rate of introduction of individual control systems (by reducing costs, etc.) and that a
memory bias may lead older firms to ‘‘group’’ together individual control systems that were actually put in
place at different times. The order of introduction of the individual control systems is basically unchanged,
with ‘‘budgets’’ being the individual control system most often introduced initially and ‘‘marketing data-
bases’’ and ‘‘external controls’’ being the least often introduced initially. Noticeably, the average time to
introduction for the 20 individual control systems decreases from 3.6 years for the full sample to 1.3 years
for the less than ten year-old subsample, an indication of significant changes in the economics of the decision
to adopt controls.
13
In untabulated tests I also include industry dummies to verify the robustness of the results.

Introducing the First Management Control Systems
TABLE 4
Logit Regressions Linking MCS Purposes to the Decision to Introduce Individual Control Systems Initiallya
Dependent Variable
Dummy ⴝ 1 if control system was introduced COST REVENUE RISK
early Intercept p-value LIKERT p-value LIKERT p-value LIKERT p-value
1 Cost controls ⫺0.22 0.38 0.21 0.08 ⫺0.07 0.32 0.07 0.28
2 Quality standards and controls ⫺0.86 0.15 0.23 0.08 0.14 0.19 0.16 0.15
3 Sales productivity standards ⫺0.28 0.34 ⫺0.23 0.05 0.26 0.04 0.07 0.29
4 Marketing databases ⫺2.41 0.00 0.09 0.28 0.24 0.07 ⫺0.02 0.44
5 Loss prevention / shoplifting controls ⫺1.91 ⬍ 0.01 0.08 0.32 ⫺0.06 0.35 0.50 ⬍ 0.01
6 Internal audits, transaction tracking, and ⫺0.32 0.33 0.09 0.26 ⫺0.08 0.29 0.25 0.03
checks and balances of information
7 Policies and procedures ⫺0.17 0.41 ⫺0.05 0.37 0.09 0.28 0.29 0.03
8 Codes of business conduct ⫺1.23 0.05 0.08 0.28 0.11 0.22 0.23 0.04
9 Credit rules and controls 0.17 0.40 ⫺0.06 0.33 ⫺0.07 0.30 0.17 0.09
10 Budget controls 0.40 0.29 0.03 0.41 ⫺0.01 0.47 0.07 0.29
11 Pricing system 1.01 0.10 0.06 0.34 ⫺0.19 0.10 0.12 0.19
12 Inventory control systems ⫺0.86 0.12 0.14 0.16 0.07 0.37 0.17 0.10
13 Performance-based compensation systems 0.35 0.30 ⫺0.08 0.28 0.12 0.19 ⫺0.06 0.32
14 Controls on employee behavior and ⫺1.51 0.02 0.15 0.13 0.17 0.11 ⫺0.002 0.50
development
15 Controls for investment in long-term assets 0.30 0.33 ⫺0.02 0.45 ⫺0.07 0.30 ⫺0.03 0.40
16 Externally oriented information systems ⫺0.57 0.22 ⫺0.18 0.11 0.03 0.43 0.11 0.19
17 Restrictions to strategic choices 1.20 0.05 ⫺0.05 0.35 ⫺0.18 0.09 ⫺0.004 0.49
18 Key performance indicators 0.81 0.12 0.05 0.35 ⫺0.25 0.04 0.04 0.38
19 Statement of purpose / mission / credo 1.33 0.03 ⫺0.14 0.16 ⫺0.26 0.04 0.03 0.39
20 Mystery shoppers ⫺0.71 0.16 ⫺0.11 0.21 0.10 0.23 0.05 0.33
a
p-values are one-tailed.
COSTLIKERT, REVENUELIKERT, RISKLIKERT: Likert values describing the extent to which initial MCS are used to (1) minimize cost and achieve operation
efficiencies, (2) increase revenue and adapt to the market, and (3) minimize risks, respectively, where 1 indicates ‘‘not used at all’’ and 7 ‘‘used to a great extent.’’
Shaded values indicate a significantly positive relation between the early introduction of the individual control systems and COSTLIKERT, REVENUELIKERT, or
RISKLIKERT.
277
278 Sandino
MCS,’’ ‘‘Revenue MCS’’ and/or ‘‘Risk MCS.’’ These categories are described as
follows:14
Category of Purposes fulfilled by these Individual control systems associated

Initial MCS Initial MCS with these Initial MCS
Basic MCS ● To set plans, standards, and ● Budget
support basic operations (this is ● Pricing System
a general purpose shared by ● Inventory Controls
almost all firms).
Cost MCS ● To minimize costs, and ● Cost Controls
improve operation efficiencies, ● Quality Controls
using internal and financial
information.
Revenue ● To enhance revenue, support ● Marketing Databases
MCS growth, and learn about the ● Sales Productivity
market, using external and
nonfinancial information.
Risk MCS ● To avoid internal risks and ● Loss Prevention Controls
protect asset integrity, using ● Internal Audits, Transaction
internal rules and procedures. Tracking, Checks and Balances
● Codes of Conduct
● Credit Controls
● Policies and Procedures
Note that given my classification criteria, nine of the 20 individual control systems in
Table 3 were not assigned to any of the four types of initial MCS, because (1) I did not
find convincing evidence of a systematic relation between their frequency of introduction
among the set of initial set of control systems and the early-stage firms’ purposes, and (2)
even when introduced somewhat frequently, they did not seem to fit the definition of ‘‘Basic
MCS’’ for early-stage firms.15 This should not be viewed necessarily as a limitation of the
analysis, since my objective was not to classify all the individual control systems introduced
by retailers, but to provide an intuitive framework that would capture the individual control
systems most often introduced by early-stage firms with different purposes.
V. THE CHOICE OF INITIAL MANAGEMENT CONTROL SYSTEMS

The second research question is to determine whether a relationship exists between the
strategy followed by an early-stage firm and the categories of initial MCS it chooses. This
section describes the research design used and presents the corresponding analyses and
results.
14
Note that I could have established the association between individual control systems and the different categories
of Initial MCS using alternative classification criteria, and thus the third column of the table should be viewed
as tentative. For example, if I had started defining the ‘‘Basic MCS’’ category before assigning the individual
control systems to different purposes, quality controls would most likely have been classified as ‘‘Basic MCS’’
rather than ‘‘Cost MCS.’’
15
For example, among the unassigned individual control systems, the one most frequently introduced initially (but
less frequently than the ones categorized as Basic MCS) was ‘‘performance-based compensation systems.’’ I did
not classify it as Basic MCS for two reasons: (1) many of the firms not introducing ‘‘performance-based
compensation systems’’ explained that, since they were just starting to measure performance, they had no clear
expectations as to set targets for compensation purposes; this is a common issue in early-stage firms and cautions
against viewing such systems as ‘‘Basic’’; (2) firms introducing ‘‘performance-based compensation systems’’
initially over time moved toward a higher percentage of performance-based compensation and lower use of
subjective measures of performance, suggesting that the use of ‘‘performance-based compensation systems’’ was
initially not heavy.

Research Design
I examine Research Question 2 by testing two hypotheses relating the categories of
initial MCS to the firm’s strategy, which I characterize based on the firm’s strategic posi-
tioning as a cost leader and/or a differentiator (Porter 1980).16
Several studies involving mature companies have found that firms following cost lead-
ership strategies (or similar strategies such as defender or harvest strategies) focus on cost
objectives that are translated into operating goals and cost monitoring, and controls that
promote efficiency and problem solving (Langfield-Smith 1997; Dent 1990; Miles and Snow
1978). Porter (1980) suggests that, in order to be successful, cost leaders should introduce
cost controls and compare the cost of every activity over time and among business units
and competitors (i.e., against different targets). They should also emphasize quality controls
to guarantee that their products/services are comparable to those in the market (Kaplan
and Norton 2004). Such characterization of MCS can be closely related to my Cost MCS
category of initial MCS and the individual control systems that relate to Cost MCS (i.e.,
cost controls and quality controls).
Miles and Snow (1978) also indicate that firms following this strategy use MCS to
reduce uncertainty and to secure conformance with planned activities, creating highly spe-
cialized jobs and standard procedures. The desire to minimize uncertainty, standardize pro-
cedures, and contain costs related to inventory shrinkage or cash shortages in a retail firm,
may also lead cost leaders to introduce Risk MCS at an early stage. These studies suggest
the following hypothesis:
H1: Early-stage retailers following low-cost strategies will introduce Cost MCS and
Risk MCS initially more intensively than retailers not following low-cost strategies.
Firms following differentiation strategies (or similar strategies such as prospector or

build strategies) use fewer formal controls and more flexible structures and processes
to respond rapidly to competition and environmental change (Kaplan and Norton 2004;
Guilding 1999; Porter 1980; Miles and Snow 1978). Several studies show that differentiators
collect information related to customer needs and utilize subjective and nonfinancial mea-
sures to evaluate performance in an attempt to promote a long-term orientation in the firm
(Langfield-Smith 1997; Simons 1987; Govindarajan and Gupta 1985; Porter 1980). These
MCS characteristics can be more closely related to my Revenue MCS.17 In the context of
initial MCS, the above findings suggest the following hypothesis:
H2: Early-stage retailers following differentiation strategies will introduce Revenue

MCS initially more intensively than retailers not following differentiation
strategies.
16
Porter (1980) describes differentiation and cost leadership as the two predominant sources of competitive ad-
vantage. ‘‘Differentiation’’ consists of differentiating the product or service, and thus offering to the market
something that is perceived as unique. ‘‘Cost Leadership’’ consists of achieving overall cost leadership by
excelling in operations. Cost leaders offer highly competitive prices combined with consistent quality, ease and
speed of purchase, and excellent, though not comprehensive, product selection.
17
In contrast with some of the research described above, Simons (1987) finds that firms following differentiation
(prospector) strategies use financial control systems more intensively than cost leaders (defenders), while
Chenhall and Langfield-Smith (1998) find that differentiators receive greater benefits from quality systems than
cost leaders. Both of these findings would suggest a potential relationship between differentiators and Cost MCS.

280 Sandino
Note that I do not expect the strategy to influence the choice of Basic MCS, given that
Basic MCS are a common platform introduced by most early-stage firms, regardless of
specific purposes pursued by the firm.
To test H1 and H2 in a univariate setting, I compare firms following different strategies
along the dimensions of cost leadership (Low Cost versus No Low Cost) and differentiation
(High Differentiation versus Low Differentiation).18 For these dimensions I analyze:
● Differences between subsamples in terms of their average emphasis on the three
categories of initial MCS—COSTLIKERT, REVENUELIKERT, RISKLIKERT—
described in Section IV.
● Differences between subsamples in terms of the proportion of firms introducing
initially the particular individual control systems associated with each category of
initial MCS.
● In a multivariate setting, I develop the following choice model (a multinomial logit
model, see Figure 1):
Pr(CHOICEMCSi ⫽ MCS category)

⫽ f (LOWCOSTi, DIFFERENTIATIONi, CONTROLSi)
(2)
CHOICEMCS is a categorical variable describing the three categories of initial MCS.

This variable is coded as 1 for firms mostly emphasizing Risk MCS, 2 for Revenue MCS,
and 3 for Cost MCS. Each of these emphases was rated by the survey respondents based
on a Likert scale. In particular, for each firm, I define as the ‘‘most emphasized’’ category
of initial MCS the one that received the highest Likert value. Firms with ties between two
or more categories of initial MCS were excluded from the analysis, resulting in a sample
size of 67 observations (with 30 firms emphasizing Cost MCS, 19 emphasizing Revenue
MCS, and 18 emphasizing Risk MCS).
The main independent variables in this model consist of the strategy variables, LOW-
COST and DIFFERENTIATION, constructed as composite measures from a set of survey
questions that characterize the strategy of the firm. The LOWCOST measure reports higher
values for strategies emphasizing low price, and lower values for firms and customers
indifferent to prices. The DIFFERENTIATION measure reports higher values for strategies
putting more emphasis on uniqueness, and vice versa. See the Appendix, Panel A for a
definition of these measures.
The model includes a set of control variables (CONTROLS, defined in the Appendix,
Panel A). At an organizational level, I control for the degree of DECENTRALIZATION of
the firm, the DIVERSITY of its activities and whether the firm is still developing its strategy
or not (dummy variable SEARCHSTRAT). Previous literature on mature firms (Merchant
1984, 1981; Bruns and Waterhouse 1975) indicates that more decentralized firms use formal
operating control systems more heavily. Thus, I expect that decentralized firms use Risk
MCS and Cost MCS more intensely to achieve tighter control over the units. Accounting
theories also predict that higher diversity in products and processes induces firms to use
more sophisticated cost allocation systems (Kaplan 1998; Banker et al. 1995). Thus, I expect
firms with more diverse assortments to use Cost MCS more intensely. Finally, other studies
18
Unlike Porter (1980), I do not assume that these dimensions are mutually exclusive, since subsequent research
has shown that these generic strategies may indeed be linked in a variety of ways (Hill 1988; Jones and Butler
1988; Murray 1988).

have indicated that MCS are utilized differently depending on whether they are used for
strategy formation or for strategy implementation (Margison 2002; Ittner and Larker 2001;
Simons 1990, 1994). I predict that firms in the process of developing their strategy (dummy
SEARCHSTRAT ⫽ 1) will use Revenue MCS and Cost MCS more intensely than Risk
MCS, so as to learn more about the business. In the multinomial regression, both the
LOWCOST and DIFFERENTIATION strategy measures are set to zero in the cases when
SEARCHSTRAT ⫽ 1 (13 percent of the observations). This is achieved by interacting
each of the strategy variables (LOWCOST and DIFFERENTIATION) with the variable
(1 – SEARCHSTRAT).
I also control for ownership structure—since it has been shown to affect the control
structure of the firm (Baker et al. 2002; Pfeffer and Salancik 1978)—by including three
dummies indicating whether the firm grew through franchising (FRANCHISE), whether it
was a subsidiary or spin-off of another company (SUBSIDIARY), and whether it received
financing from a venture capitalist prior to the introduction of initial MCS (VCDUMMY).
I expect FRANCHISE companies to emphasize Revenue MCS and Risk MCS over Cost
MCS as these types of companies focus on building the brand while relying on the incen-
tives provided by the ownership structure to achieve cost efficiencies. Presumably, SUB-
SIDIARY firms will use Risk MCS more intensely to protect the parent company’s image,
whereas VCDUMMY firms may be more interested in Revenue MCS to increase the firm’s
option value for the venture capitalists holding equity in the firm.
Finally, I control for industry effects by introducing a dummy (RESTAURANT) indi-
cating whether the firm is an ‘‘eating and drinking establishment’’ (the most represented
retail subsector in my sample, see Table 1) or not. I expect RESTAURANTs to place more
emphasis on Cost MCS and Risk MCS—given their intense focus on operations, processing
of food, managing short-lived inventories, complying with FDA standards, and avoiding
the risk of food theft.
Results
The univariate results shown in Table 5 provide some support for H1 in that firms
pursuing a low-cost strategy place more emphasis on the use of initial MCS to Minimize
Costs (see COSTLIKERT, p-value ⫽ 0.059) and, as a consequence, introduce cost controls
initially more frequently (p-value ⫽ 0.088).19 They also place significantly less emphasis
on initial MCS to enhance revenues, perhaps an indication that differentiation and low-cost
strategies are not often pursued simultaneously, as suggested by Porter (1980).
The univariate tests summarized in Table 5 also provide support for H2. Firms following
a differentiation strategy place significantly greater emphasis on the use of Revenue MCS
and, consequently, are more likely to adopt sales productivity controls and (more weakly)
marketing databases early on, consistent with their need to be responsive to the market and
collect data related to customers. Firms following a differentiation strategy also tend to
place less emphasis on the use of Cost MCS, consistent with Simons (1987). However, they
place a special emphasis on the use of policies and procedures.
To control for other factors expected to affect the introduction of initial MCS, in a
multivariate setting I analyze the multinomial logit proposed in the research design section.
Because of the small sample size, Table 6, Panel A includes only the strategic determinants
and the three organizational characteristics as independent variables. Panel B extends this
model to include the ownership and industry variables, presenting the complete set of
19
The rate of introduction of quality controls is not different for low-cost strategy firms. However, this finding is
not surprising given the widespread use of quality controls early on across all firms documented in Table 3.

TABLE 5
Univariate Tests Relating Strategy to the Introduction of Initial MCS
Low Cost Strategyb Differentiation Strategyc

Difference in Difference in
Means Means
CATEGORIES OF INITIAL MCS Low No Low Predicted Differentiation No Predicted
Individual control systems by category Costd Costd Sign p-valuesa Strategyd Differentiationd Sign p-valuesa
COSTLIKERT 4.67 4.10 ⫹ 0.57 0.059 4.12 4.65 ? ⫺0.53 0.074
Cost Controls 0.71 0.58 ⫹ 0.13 0.088 0.64 0.65 ? ⫺0.01 0.470
Quality Controls 0.76 0.77 ⫹ ⫺0.01 0.428 0.79 0.73 ? 0.06 0.256
REVENUELIKERT 3.88 4.44 ? ⫺0.56 0.054 4.56 3.75 ⫹ 0.81 0.010
Marketing Databases 0.20 0.31 ? ⫺0.11 0.112 0.31 0.20 ⫹ 0.11 0.112
Sales Productivity Controls 0.49 0.52 ? ⫺0.03 0.381 0.58 0.42 ⫹ 0.16 0.063
RISKLIKERT 3.79 3.43 ⫹ 0.36 0.161 3.65 3.59 ? 0.06 0.441
⫹
282
Loss Prevention Controls 0.51 0.48 0.03 0.381 0.52 0.47 ? 0.05 0.308
Internal Audits 0.67 0.62 ⫹ 0.05 0.310 0.69 0.61 ? 0.08 0.220
Codes of Business Conduct 0.65 0.54 ⫹ 0.11 0.133 0.64 0.55 ? 0.09 0.172
Credit Controls 0.55 0.56 ⫹ ⫺0.01 0.455 0.60 0.51 ? 0.09 0.177
Policies and Procedures 0.67 0.77 ⫹ ⫺0.10 0.143 0.81 0.63 ? 0.18 0.022
Number of observations 49 48 48 49
a
p-values present one-tailed results.
Strategy Measures:
b
The low cost strategy measure is a composite drawn from two survey questions, one on the firm’s emphasis on low price and promotions, the other on the price sensitivity of
its customers, both measured on a Likert scale.
c
The differentiation strategy is a composite drawn from three survey questions, measured by a Likert scale, on the firm’s emphasis on uniqueness (in terms of products and
customization).
d
Firms that place the most emphasis on the particular strategy (above sample median) are compared to those that place the least emphasis (below median).
Initial Management Control Systems:
● COSTLIKERT, REVENUELIKERT, RISKLIKERT: Likert values describing the extent to which initial MCS are used to (1) minimize cost and achieve operation
efficiencies, (2) increase revenue and adapt to the market, and (3) minimize risks, respectively, where 1 indicates ‘‘not used at all’’ and 7 ‘‘used to a great extent.’’
● Cost Controls, Quality Controls, Marketing Databases, Sales Productivity Controls, Loss Prevention Controls, Internal Audits, Codes of Business Conduct, Credit
Controls and Policies and Procedures: Dummy variables indicating if each control system was introduced initially (1) or not (0). Results present the % firms
introducing each individual control system.
TABLE 6
Multinomial Logit: Strategic Choice of Initial Management Control Systems
Comparison of Emphases of MCS

REVENUEMCS / COSTMCS / REVENUEMCS /
RISKMCS RISKMCS COSTMCS
Pr ⬎ Pr ⬎ Pr ⬎
Coefficient ChiSq Coefficient ChiSq Coefficient ChiSq
Panel A: Strategic and Organization Determinants of Initial MCS
(n ⫽ 61, Count R2 ⫽ 0,56, AdjCount R2 ⫽ 0.21)
Intercept ⫺0.120 0.772 0.385 0.292 ⫺0.505 0.189
LOWCOST* ⫺0.074 0.722 ⫺0.163 0.409 0.089 0.636
(1 ⫺ SEARCHSTRAT)
DIFFERENTIATION* 0.109 0.546 ⫺0.220 0.169 0.328 0.041
(1 ⫺ SEARCHSTRAT)
DECENTRALIZATION ⫺0.320 0.072 ⫺0.191 0.241 ⫺0.129 0.399
DIVERSITY ⫺0.107 0.092 ⫺0.030 0.483 ⫺0.077 0.210
SEARCHSTRAT 0.852 0.419 0.451 0.642 0.401 0.652
Panel B: Add Ownership Controls and Industry

(n ⫽ 61, Count R2 ⫽ 0.66, AdjCount R2 ⫽ 0.38)
Intercept 0.740 0.409 0.921 0.287 ⫺0.180 0.796
LOWCOST* ⫺0.071 0.744 ⫺0.205 0.316 0.135 0.493
(1 ⫺ SEARCHSTRAT)
DIFFERENTIATION* 0.099 0.612 ⫺0.217 0.212 0.316 0.068
(1 ⫺ SEARCHSTRAT)
DECENTRALIZATION ⫺0.232 0.297 ⫺0.197 0.321 ⫺0.035 0.851
DIVERSITY ⫺0.158 0.096 ⫺0.034 0.586 ⫺0.124 0.160
SEARCHSTRAT 1.033 0.356 0.754 0.463 ⫺0.279 0.770
FRANCHISE 0.399 0.679 ⫺0.686 0.489 1.085 0.243
VCDUMMY ⫺0.198 0.860 ⫺0.844 0.398 0.646 0.512
SUBSIDIARY ⫺0.516 0.641 ⫺0.744 0.421 0.228 0.831
RESTAURANT ⫺1.359 0.276 ⫺0.199 0.863 ⫺1.159 0.256
Source: Survey Data
Dependent Variable:
It was constructed utilizing the categorical variable CHOICEMCS, which indicates what initial MCS does the
firm emphasize: Risk MCS, Revenue MCS, or Cost MCS. For details, see Section V.
Strategy Variables (see details in Section V):
LOWCOST ⫽ composite measure that proxies for the firm’s emphasis on cost leadership. It takes
higher values for firms emphasizing low costs strategies; and
DIFFERENTIATION ⫽ composite measure indicating the extent to which a firm pursues a differentiation
strategy.
Control Variables (see details in Appendix, Panel A):
DECENTRALIZATION ⫽ composite measure from two variables, describing the extent of decentralization in the
firm;
DIVERSITY ⫽ proxy for heterogeneity of activities, measuring the diversity of the assortment offered
by the retailer;
FRANCHISE ⫽ dummy indicating whether a firm grew mostly through franchising (1) or not (0);
SEARCHSTRAT ⫽ dummy indicating whether the firm defined its strategy after introducing its MCS (1)
or not (0);
SUBSIDIARY ⫽ dummy equal to 1 if the firm is / was a subsidiary or spin-off from a larger company,
and 0 otherwise;
VCDUMMY ⫽ dummy on whether the firm received VC funding (1) or not (0) before the
introduction of initial MCS; and
RESTAURANT ⫽ dummy equal to 1 if the retail firm is an eating and / or drinking establishment, 0
otherwise.
284 Sandino
hypothesized determinants of the choice of initial MCS. Consistent with H2, results show
that firms following a differentiation strategy tend to place more emphasis on Revenue
MCS than on Cost MCS (right column of Table 6).20 This result is robust across the two
panels and is consistent with the univariate tests in Table 5. The multinomial test, however,
does not provide support for H1: low-cost strategies do not appear associated with a more
intense use of Cost MCS. This may occur either because Basic MCS already incorporate
controls that support a low-cost strategy, or because Cost MCS and Risk MCS are imple-
mented to some extent by most early-stage firms—even if they their strategy is not one of
‘‘low cost’’—perhaps to avoid the risk of failure, or to control routine operations that
distract managers from informally focusing on strategic decisions. Table 6 also shows that
a higher degree of decentralization and product diversity is associated with more emphasis
on Risk MCS relative to Revenue MCS. The former result is consistent with a number of
studies that have documented a greater use of tight (less subject to discretion) control
systems in decentralized organizations (Bruns and Waterhouse 1975; Child 1972). As for
product diversity, a potential explanation is that early-stage firms that grow rapidly by
offering a diverse assortment of products need to invest in Risk MCS to avoid running out
of control. The multinomial model predicts correctly the choice of initial MCS in 66 percent
of the cases. A more refined measure of fit is the adjusted count R2 (Long 1997), which is
equal to 38 percent and can be interpreted as the extent to which the multinomial model
reduces errors in prediction relative to a model that predicts that all firms will emphasize
the most frequent type of initial MCS.21
Additional Results on Differentiation Strategies

To provide further insights into H2, I analyze two types of differentiation strategies,
one based on Customization and one based on Product Leadership.22 Univariate and mul-
tivariate analyses (untabulated) show that, consistent with the results for differentiators in
general, both firms following product leadership and firms focused on customization place
stronger emphasis on the use of Revenue MCS. However, this emphasis translates into a
higher rate of adoption of two different revenue-related individual control systems: mar-
keting databases for products leaders, and sales productivity controls for customization
firms. Two other interesting aspects that distinguish customizers from product leaders are:
冋册
20
Results are presented in three columns (expressed in the form A / B) where the coefficients represent the log-
Pr(CHOICEMCS ⫽ ‘‘A’’)
odds of outcome ‘‘A’’ versus outcome ‘‘B’’: ln . For example, the next to last column
Pr(CHOICEMCS ⫽ ‘‘B’’)
expresses the log-odds that a firm chooses REVENUE MCS versus COST MCS. In Panel A, results indicate that
for a unit change in the ‘‘differentiation strategy’’ measure, the log-odd ratio of REVENUE MCS versus COST
MCS is expected to increase by 1.39 times, where 1.39 ⫽ exp (0.328).
21
I verify the robustness of the results in the multinomial logit model in two ways: (1) I use the Hausman and
McFadden (1984) test to verify the Independence of Irrelevant Alternatives (IIA) assumption implicit in the
multinomial logit and find that the assumption cannot be rejected; (2) I conduct three logit regressions where
the dependent variable reflects the relative emphasis on two categories of initial MCS (e.g., Revenue MCS and
Risk MCS) while the emphasis on the third category (e.g., Cost MCS) is explicitly controlled for as additional
independent variable. The results (untabulated) are generally consistent with the findings in the multinomial
model. Firms following differentiation strategies emphasize Revenue MCS over Risk MCS and Risk MCS over
Cost MCS, while firms with a more diverse assortment of products and a more decentralized structure put more
emphasis on Risk MCS than Revenue MCS.
22
Customization strategies are focused on building long-lasting relationships with the customers, requiring that
the firm develop excellent service capabilities and employees’ responsiveness to targeted customers. Product
leadership strategies consist of offering unique products that customers are willing to pay a premium for. ‘‘Prod-
uct leaders’’ must develop systems to discover new opportunities for superior products and services but should
also reduce costs once product characteristics have been stabilized (Kaplan and Norton 2004; Treacy and
Wiersema 1995).

first, customizers place more emphasis on Risk MCS than Cost MCS, possibly because of
the importance that the customizers give to ‘‘policies and procedures’’ aimed at maintaining
a long-term relationship with customers; and second, while firms focused on customization
(similar to differentiators in general) place much less emphasis on the use of Cost MCS,
product leaders tend to place more emphasis on such use, and as a consequence, are sig-
nificantly more likely to introduce quality controls and cost controls. This apparently puz-
zling result is consistent with Kaplan and Norton’s (2004) observation that firms differen-
tiating through product leadership need to control costs once product characteristics are
defined. In the case of retailers, this might reflect the product leaders’ focus on negotiating
favorable terms with suppliers.
VI. PERFORMANCE IMPLICATIONS OF THE CHOICE OF INITIAL

MANAGEMENT CONTROL SYSTEMS
The multinomial logit analysis yields a model of fit between the category of initial
MCS chosen (emphasized) by a firm and its strategy and organizational characteristics. In
this section, I assume that such model captures, on average, optimal behavior, and I use
deviations from the model’s predictions to answer Research Question 3—i.e., whether busi-
ness performance and the perceived usefulness of initial MCS relates to the fit between
initial MCS and firm’s strategy. Specifically, I test the following hypothesis:
H3: Early-stage firms with a better fit between their initial MCS and their strategy
experience (a) superior business performance and (b) a higher perceived usefulness
of initial MCS.
Research Design
To test H3, I classify the sample firms in two groups based on whether their choice of
a category of initial MCS deviates from the ‘‘optimal’’ choice predicted by the multinomial
logit model. For each firm, I identify the category of initial MCS with the highest probability
of being selected according to the multinomial logit and define a dummy variable, FIT,
equal to 1 if the firm actually chose (i.e., placed most emphasis on) that predicted category
of initial MCS and introduced at least 50 percent of the individual control systems related
to that category, and 0 otherwise. As a result, firms are classified into: ‘‘High-Fit’’ (FIT
⫽ 1), and ‘‘Low-Fit’’ (FIT ⫽ 0). I then compare these two groups in terms of the usefulness
of initial MCS and three measures of business performance:
● USEFULMCS: This is a categorical variable based on a survey question where man-
agers were asked to assess from 1 to 7 the overall usefulness of their firms’ initial
MCS (with 7 being most useful).
● PERCPERFORM: This is a categorical variable drawn from a survey question where
managers were asked to evaluate the firm’s overall performance since founding,
relative to the retail industry. The scale of this variable is described as 1 if the firm’s
performance is in the bottom 10 percent, 2 if it is in the bottom 25 percent, 3 if it
is average, 4 if it is in the top 25 percent and 5 if it is in the top 10 percent.
● SALESGROWTH and STOREGROWTH: These variables are the geometric average
of the annual growth in sales and number of stores, respectively, since the year of
introduction of initial MCS (or the first subsequent year with available data).23
23
Notice that I measured performance after the introduction of Initial MCS to mitigate concerns with endogeneity.
These data were obtained from Compustat, Lexis-Nexis, and a follow-up telephone call to the respondents (to
obtain number of stores).

286 Sandino
The first two measures are based on the respondents’ assessment and thus represent mea-
sures of perceived usefulness of initial MCS and business performance, respectively. The
other two variables represent instead measures of actual business performance.
To perform the multivariate test, I run two Ordinal Logit Models where the dependent
variables are the measures of perceived usefulness of initial MCS and perceived perform-
ance described above—USEFULMCS and PERCPERFORM—and two Ordinary Least
Squares Models where the dependent variables are the two measures of actual performance
(see Figure 1). In these regressions, the independent variables include the dummy variable
FIT and a number of control variables:
USEFULMCSi or PERFORMANCEi ⫽ ƒ(FITi, CONTROL VARIABLESi). (3)
I include a set of control variables from the literature (see the Appendix, Panel B for
detailed definitions), which are correlated both with the introduction of MCS and the per-
formance of an early-stage firm. These variables include CEOCHANGE, VCDUMMY, EX-
PERIENCE, SIZE, and AGE. Previous literature has found that the change of CEO and the
presence of VC funding are positively associated with improved performance and increased
probability of effectively introducing initial MCS (Davila 2005; Certo et al. 2001; Hellman
and Puri 2002; Willard et al. 1992; Singh et al. 1986). Similarly, I predict that the presence
of a CFO/top manager with previous experience introducing MCS in a growing firm will
increase the chances of introducing effective MCS and, thus, enhance performance (Bruderl
et al. 1992). Size and age have also been associated with performance as well as with the
emergence of MCS in companies. With respect to performance, older firms are more likely
to survive—i.e., achieve higher performance—than younger firms (Hannan and Freeman
1989; Singh et al. 1986; Freeman et al. 1983), and smaller firms have been documented to
experience lower operating performance than larger firms (Fama and French 1995), pre-
sumably because small companies tend to be riskier and large firms can improve perform-
ance through economies of scale.24 With respect to the use of MCS, literature in accounting
has found a more intensive use of MCS in larger and older firms (Davila 2005; Davila and
Foster 2005a, 2005b; Merchant 1981; Khandwalla 1977; Bruns and Waterhouse 1975),
suggesting a right FIT of initial MCS may be most useful and more likely to enhance
performance in such firms. On the other hand, USEFULMCS might be negatively associated
with age, given that technologies have become more available and less expensive in recent
years, increasing the potential benefits younger firms can derive from initial MCS.
Results
Univariate results in Table 7, Panel A show that firms with a better fit based on the
multinomial logit and the associated individual control systems (High-Fit) appear to perform
better than the other firms (Low-Fit), in terms of both perceived and actual performance,
consistent with H3. For the variables PERCPERFORM, USEFULMCS, and SALES-
GROWTH, the difference in mean performance across the two subsamples is statistically
significant. For STOREGROWTH, though insignificant, the difference is in the predicted
direction.
24
Note that since my measure of size is based on current data, a positive association with performance can partly
reflect a survivorship bias (Brown et al. 1997) or simply that top performers grew bigger.

TABLE 7
Performance Tests
Panel A: Univariate Resultsa

Mean for Subsample
Performance High-Fit Low-Fit Difference t-test Wilcoxon Test
Variable FIT ⫽ 1 FIT ⫽ 0 in Means (Pr ⬎ t) (Pr ⬎ z)
PERCPERFORM 3.94 3.50 0.45 0.038 0.064
USEFULMCS 5.78 4.33 1.45 0.001 0.001
SALESGROWTH 0.47 0.24 0.23 0.059 0.032
STORESGROWTH 0.28 0.22 0.06 0.174 0.121
Panel B: Multivariate Results

Performance ⫽ ƒ(FITi, CEOCHANGEi, EXPERIENCEi, VCDUMMYi, SIZEi, AGEi)
Performance Measure
Ordinal Logitsb OLS Regressions
PERCPERFORM USEFULMCS SALES GROWTH STORE GROWTH
Constant 0.635 0.144
p-value 0.031 0.204
FIT 1.288 2.209 0.321 0.158
p-value 0.032 ⬍0.001 0.020 0.016
CEOCHANGE ⫺2.468 ⫺0.039 ⫺0.120 ⫺0.014
p-value ⬍0.001 0.947 0.480 0.842
EXPERIENCE 0.339 0.552 ⫺0.055 0.128
p-value 0.592 0.373 0.746 0.068
VCDUMMY 0.688 0.169 ⫺0.025 0.076
p-value 0.346 0.813 0.860 0.314
SIZE 0.004 0.003 0.0002 0.0001
p-value 0.019 0.044 0.347 0.342
AGE 0.081 ⫺0.100 ⫺0.031 ⫺0.009
p-value 0.156 0.077 0.058 0.173
R2 (n) 0.156c (55) 0.111c (55) 0.297 (22) 0.161 (42)
Prob ⬎ ␹2:
Likelihood
ratio test of 0.494 ⬍ 0.001
proportionality
of odds
a
p-values in the univariate analysis describe one-tailed tests.
b
Cutoff points predicted for the ordinal logit are untabulated.
c
Pseudo-R2s are reported for ordinal logit results.
PERCPERFORM ⫽ a categorical variable drawn from a question in the survey, measuring
managers’ perception of firm’s performance since founding, in a scale
where 1 indicates bottom performance and 5 top;
USEFULMCS ⫽ a categorical variable from the survey where managers were asked to
assess from 1 to 7 the overall contribution of initial MCS to the
development of their firms (with 7 being most useful);
SALESGROWTH, STOREGROWTH ⫽ the geometric average of the annual growth of sales and number of stores
respectively, starting on the year MCS were first introduced in the firm
(using all data available);
(continued on next page)

288 Sandino
TABLE 7 (Continued)
FIT ⫽ a dummy equal to 1 if the firm implemented the MCS predicted as the
most probable by the multinomial logit model, and 0 otherwise;
CEOCHANGE ⫽ a dummy variable that indicates whether the founder was replaced by a
CEO (1) or not (0);
EXPERIENCE ⫽ a dummy indicating if CFO had experience introducing MCS in growing
firms (1) or not (0);
VCDUMMY ⫽ a dummy indicating whether firm received VC funding (1) or not (0);
SIZE ⫽ the number of stores in the firm; and
AGE ⫽ the number of years since the date of founding.
Multivariate results in Table 7, Panel B, show a significant positive association between

FIT and all the performance measures, providing further support for H3.25 As for the control
variables, as predicted SIZE and EXPERIENCE are positively related to the measures of
initial MCS usefulness and business performance, although the relation is statistically sig-
nificant only in some cases. AGE is negatively related to USEFULMCS and SALES-
GROWTH, perhaps since AGE captures improvements in technology that may have resulted
in more useful initial MCS, as well as higher growth possibilities in younger retail firms.
Somewhat surprisingly, CEOCHANGE is negatively related to most performance variables,
although significantly so only when PERCPERFORM is the dependent variable.
To verify the robustness of the univariate and multivariate results, I also redefined the
variable FIT in two ways: (1) FITabove40, a dummy equal to 1 if the firm emphasizes a
category of initial MCS with a predicted probability of being selected above 40 percent
(based on the multinomial logit model) and introduced at least 50 percent of the individual
control systems associated to that category, and 0 otherwise; and (2) FITdegree, a contin-
uous variable measuring the probability that the firm emphasized the observed category of
initial MCS, based on the multinomial model. The key findings remain unchanged (untab-
ulated results).
Note that the performance effect presented above cannot be exclusively attributed to
the fit between the initial MCS and the strategy, since the multinomial model is also based
on other organizational variables separate from the strategy. I conduct two additional anal-
yses to better understand whether the fit between initial MCS and strategy plays a role on
performance: (1) I replicate the results in Table 7, Panel B for the subsample of firms with
a differentiation score above median, given that differentiation was the only strategy variable
that was a significant predictor in the multinomial model; (2) I replicate the results in Table
7, Panel B using a re-defined FIT variable, where the multinomial model is substituted for
one that only includes the strategy variables as explanatory variables. The FIT variable is
positively related to the usefulness of initial MCS and all business performance measures
in both tests (1) and (2). However the result becomes insignificant when the dependent
variable is STOREGROWTH in test (1), and when the dependent variables are PERCPER-
FORM and SALESGROWTH in test (2).
VII. CONCLUSIONS
This study provides insights about the choices made by entrepreneurs when deciding
what type of initial MCS to introduce, and the determinants and consequences of such
25
In the bottom row of Table 7, Panel B, I test the proportional odds assumption implicit in the Ordinal Logit
model. The assumption is not rejected for the test using PERCPERFORM as the dependent variable. However,
the assumption is rejected at the 1 percent level when USEFULMCS is the dependent variable. To verify the
robustness of the USEFULMCS results, I additionally run an OLS regression and find similar results (i.e., FIT
remains positively and significantly related to USEFULMCS at the 1 percent level).

choices. Looking at a sample of store-based retailers, I find that early-stage firms tend to
introduce four categories of initial MCS based on the purposes pursued: Basic MCS, which
are similar across all firms, are used to collect information for planning and establishing
basic operations; Cost MCS, which are introduced to achieve operation efficiencies and
cost minimization; Revenue MCS, which are used to achieve growth and learn about—and
be responsive to—the market; and Risk MCS, which are used to reduce risks and protect
asset integrity.
I hypothesize and find that the choice among these categories of initial MCS depends
on the firm’s strategy and structure, and that firms that choose initial MCS better suited to
their strategy perform better than other firms. The findings, however, should be interpreted
with caution. First, the focus on a single industry—the retail sector—rather than multiple
industries may limit the ability of generalizing the results, particularly with respect to
manufacturing companies where technological considerations may affect the choice of the
types of initial MCS (see Chenhall [2003, section 5.2] for a summary on technology con-
tingencies). Second, ideally this study should have used ‘‘real-time’’ data, rather than relying
on the recollections of survey respondents, and should have employed triangulation (i.e.,
more than one respondent per firm) to minimize memory and interpretation biases. In
practice, such an approach would have been prohibitively costly and time consuming. Third,
the weak results relating the low-cost strategy with the use of Cost MCS and Risk MCS
should not be taken as conclusive, since this finding may be reflecting lack of power due
to the small sample size. Finally, the study also presents potential survival and self-selection
biases. I partially mitigated the survival bias by including firms ranging from 2 to 20 years
old, the self-selection problem by increasing efforts to maximize the rate of response.
Notwithstanding these limitations, the results presented in this study contribute to an
emerging literature in the accounting, control, and entrepreneurship fields concerned with
the development of MCS in early-stage businesses. By establishing the importance of con-
tingencies in the choice of different types of initial MCS in early-stage firms and by pro-
viding evidence on the performance implications of that choice, this study calls for more
work to deepen our understanding of the trade-offs faced by early-stage firms when imple-
menting MCS.
APPENDIX
Variables for Models of Choice and Performance
Panel A: CHOICEMCSi ⴝ ƒ(LOWCOSTi , DIFFERENTIATIONi , CONTROLSi)

Expected Relation
to Dependent
Variable
LOWCOST is a principal components measure that captures 81 Emphasis on: Cost
percent of the variation in two questions: (1) the extent to and Risk MCS
which the firm’s customers search for lower prices and, (2)
the emphasis the firm places on lower prices and promotions
as a way to attract and retain customers. The corresponding
Cronbach’s alpha is 0.77.a

290 Sandino
DIFFERENTIATION is a principal components measure that Emphasis on:

captures 65 percent of the variation in three questions: (1) the Revenue MCS
customer’s demand for uniqueness, (2) the extent to which
the firm offers unique products highly valued by target
customers, and (3) the extent to which the firm emphasizes
service and customization to the customers. The Cronbach’s
alpha in this case is 0.70.a
DECENTRALIZATION is a composite measure developed Emphasis on: Cost
through principal components analysis of items describing the and Risk MCS
extent of decentralization in the firm. It explains 78 percent
of the variation found in two questions in the survey that ask
about the extent to which store managers have authority to
make decisions about: (1) hiring and firing personnel, (2)
signing invoices. Cronbach’s alpha is 0.56. Higher values
indicate higher levels of decentralization (decision making by
managers rather than head office).
DIVERSITY is a measure of the heterogeneity of activities in Emphasis on: Cost
the firm. It is a composite measure developed through MCS
principal components analysis that captures 86 percent of the
variation of four questions (three Likert-based questions on
the firm’s strategic emphasis on the diversity and the relative
breadth and depth of the assortment, and one question
indicating the number of SKUs offered by the retail
company). The Cronbach’s alpha is 0.70.
FRANCHISE is a dummy indicating whether a firm grew mostly Emphasis on: Risk
through franchising or not. and Revenue MCS
SUBSIDIARY is a dummy indicating whether the retail firm is/ Emphasis on: Risk
was a subsidiary or spin-off from a larger company (general MCS
information, first section of the survey).
VCDUMMY is a dummy indicating whether the firm received Emphasis on:
VC funding or not before the introduction of initial MCS. Revenue MCS
RESTAURANT is a dummy indicating whether the firm is an Emphasis on: Risk
eating and/or drinking establishment (SIC 5812) or not and Cost MCS
(obtained from One Source and Career Search).
SEARCHSTRAT is a dummy indicating whether the firm defined Emphasis on: Cost
its strategy after introducing its MCS (1) or not (0). and Revenue MCS
Panel B: PERFORMANCEi ⴝ ƒ (FITi , CONTROL VARIABLESi )

CEOCHANGE is a dummy indicating whether or not the Positive
founder was replaced by a CEO before the introduction of
initial MCS.
EXPERIENCE is a dummy indicating whether the person Positive
introducing the initial MCS (e.g., CFO) had previous
experience introducing controls in growing firms.
AGE is the number of years since the date of founding. Positive
SIZE is the number of stores in the firm. Positive

VCDUMMY is a dummy indicating whether the firm received Positive

VC funding or not before the introduction of initial MCS.
a
Chenhall and Langfield-Smith (1998) use similar questions to identify cost leadership and differentiation
strategies.
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Introducing The First Management Control Systems: Evidence From The Retail Sector

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THE ACCOUNTING REVIEW

Vol. 82, No. 1

Introducing the First Management

Submitted May 2005

The Accounting Review, January 2007

Categories of (non-basic) Initial MCS

FIT=1 if the category of Initial MCS

The Accounting Review, January 2007

II. RESEARCH QUESTIONS

The Accounting Review, January 2007

In contrast, the contingency-based research in managerial accounting shows that large,

The Accounting Review, January 2007

III. SAMPLE AND DATA COLLECTION

The Accounting Review, January 2007

IV. FIELD STUDY ON INITIAL MCS

The Accounting Review, January 2007

Panel A: Sample Selection

Panel B: Position of the Respondents

Panel C: Descriptive Statistics of the Sample (n ⫽ 97)

The Accounting Review, January 2007

Panel A: Retail Industry Composition

Panel B: Differences between Target and Sample Firms

● manage and understand costs (how are employees spending resources?);

The Accounting Review, January 2007

The Accounting Review, January 2007

● learn how to manage inventory and eliminate the costs of obsolescence.

The Accounting Review, January 2007

Pr(INITIALCSji ⫽ 1) ⫽ ␣ ⫹ ␤1*COSTLIKERTi ⫹ ␤2*REVENUELIKERTi

The Accounting Review, January 2007

Category of Purposes fulfilled by these Individual control systems associated

V. THE CHOICE OF INITIAL MANAGEMENT CONTROL SYSTEMS

The Accounting Review, January 2007

Firms following differentiation strategies (or similar strategies such as prospector or

H2: Early-stage retailers following differentiation strategies will introduce Revenue

The Accounting Review, January 2007

Pr(CHOICEMCSi ⫽ MCS category)

CHOICEMCS is a categorical variable describing the three categories of initial MCS.

The Accounting Review, January 2007

The Accounting Review, January 2007

Low Cost Strategyb Differentiation Strategyc

Comparison of Emphases of MCS

Panel B: Add Ownership Controls and Industry

Additional Results on Differentiation Strategies

The Accounting Review, January 2007

VI. PERFORMANCE IMPLICATIONS OF THE CHOICE OF INITIAL

The Accounting Review, January 2007

USEFULMCSi or PERFORMANCEi ⫽ ƒ(FITi, CONTROL VARIABLESi). (3)

The Accounting Review, January 2007

Panel A: Univariate Resultsa

Panel B: Multivariate Results

(continued on next page)

The Accounting Review, January 2007

Multivariate results in Table 7, Panel B, show a significant positive association between

The Accounting Review, January 2007

Panel A: CHOICEMCSi ⴝ ƒ(LOWCOSTi , DIFFERENTIATIONi , CONTROLSi)

The Accounting Review, January 2007

DIFFERENTIATION is a principal components measure that Emphasis on:

Panel B: PERFORMANCEi ⴝ ƒ (FITi , CONTROL VARIABLESi )

The Accounting Review, January 2007

VCDUMMY is a dummy indicating whether the firm received Positive

The Accounting Review, January 2007

The Accounting Review, January 2007

Pr(INITIALCSji ⫽ 1) ⫽ ␣ ⫹ ␤1COSTLIKERTi ⫹ ␤2REVENUELIKERTi