Accounting Organizations and Society, Vol. 10, No. 1, pp. 51-66, 1985. 0361-3682/85 $3.00+.

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Printed in Great Britain ~ 1985 Pergamon Press Ltd.
LI NKI NG CONTROL SYSTEMS TO BUSINESS UNI T STRATEGY:
I MPACT ON PERFORMANCE*
V. GOVINDARAJAN
The Ohio State University
and
ANIL I~ GUPTA
Bost on Uni versi t y
Abstract
Rooted in continguency theory, this paper examines linkages between strategy, incentive bonus system and
effectiveness at the strategic busines unit (SBU) level within diversified firms. Data from 58 SBUs reveal ( 1 )
that greater reliance on long-run criteria as well as subjective (non-formula) approaches for determining
the SBU general managers' bonus contributes to effectiveness in the case of"build" SBUs but hampers it in
the case of "harvest" SBUs, and (2) that the relationship between extent of reliance on short-run criteria
and effectiveness is virtually independent of SBU strategy.
Recent st udi es i n account i ng and cont r ol have
t ended t o ut i l i ze "cont i ngency" rat her t han "one
best way" perspect i ves. Mi rrori ng earl i er
research i n or gani zat i on t heor y (e.g., Burns &
Stalker, 1961; Woodwar d, 1965; Lawrence &
Lorsch, 1967), t hese st udi es have sought t o
uncover t he i mpact of si ze ( Mer chant , 1981),
t echnol ogy (Daft & McInt osh, 1981), envi ron-
ment (Hayes, 1977; Govi ndaraj an, 1983) and
organi zat i onal st ruct ure ( Br uns & Wat er house,
1975; Merchant , 1981 ) on t he desi gn of budget s
and ot her organi zat i onal cont r ol mechani sms.
Gi ven this r el evance of devel opment s i n organi-
zat i on t heor y for research on organi zat i onal con-
trol, it is not ewor t hy t hat whi l e t he br oader field
of or gani zat i on t heor y has, i n r ecent years, come
t o vi ew organi zat i onal strategy as yet anot her
and per haps t he pr e- emi nent sour ce of con-
t i ngenci es for t he desi gn of organi zat i ons (e.g.,
Chandl er, 1962; Fouraker & Stopford, 1968;
Child, 1972; Rumel t , 1974; Miles & Snow, 1978;
Gal brai t h & Nat hanson, 1978; Snow & Hre-
biniak, 1980; Hambri ck, 1981; Gupt a & Govi n-
darajan, 1984), concept ual as wel l as empi ri cal
i nvest i gat i ons on l i nkages bet ween st rat egy and
cont r ol syst ems have t ended t o be very sparse.
Furt her, t he few st udi es t hat have focused
expl i ci t l y on t he r el at i onshi p bet ween st rat egy
and cont r ol syst ems have t ended t o
operat i onal i ze st rat egy onl y i n t er ms of t he
degr ee and nat ur e of t he organi zat i on' s pr oduct
and geographi c di versi fi cat i on (Salter, 1973;
Lorsch & Allen, 1973; Der mer , 1977; Vancil,
1980; Otley, 1980; Pitts, 1980). Gi ven t he
* Both authors contributed equally. The sequence of names, as presented here, was arrived at randomly. The authors wish to
acknowledge the useful comments provided by Professors Robert N. Anthony, W.W. Cooper, J.F. Dillard, Jim Kinard, Ken
Merchant, John K. Shank, Gordon Shillinglaw, Ray Stephens, Richard F. Vancil, participants at The Ohio State University
Accounting Research Colloquium, and two anonymous reviewers. Funding support for research on which this paper is based
was provided by the Graduate School, Boston University, Graduate School of Business Administration, Harvard University
and College of Administrative Science, The Ohio State University.
51
52 V. GOVINDARAJAN and ANIL K. GUPTA
increasing trend towards diversification in most
industrialized countries (Scott, 1973), this focus
on corporat e diversification strategy seems
highly relevant. However, strategy formulation
and implementation t are place not just at the
level of the diversified firm as a whol e but also at
the level of the diversions/strategic business
units ( or SBUs) comprising the firm (Hofer,
1975; Hambrick, 1980). In such a context, the
near absence of empirical studies on the role
played by control systems in implementing bus-
iness unit level strategies presents a significant
research opportunity.
This paper presents the results of an empirical
study of the effects of linking the SBU general
manager' s incentive compensat i on (an impor-
tant organizational mechanism for controlling
managerial behavior) to SBU strategy on SBU
performance. SBU strategy is operationalized in
terms of the strategic mission. The component s
of incentive compensat i on system studied are:
( 1) the relative i mport ance given to long- and
short-run criteria in assessing the general man-
ager' s performance for the purposes of bonus
determination, and ( 2) for any given level of per-
formance, the degree of reliance on quantitative
formulas vs subjective discretion in determining
the amount of bonus to be paid to the manager.
THEORETICAL BACKGROUND
AND PROPOSITIONS
Business uni t strategy
Strategic mission/portfolio strategy (Hender-
son, 1970; Hofer & Schendel, 1978), competi-
tive posture (Porter, 1980), and the extent and
nature of linkages with ot her SBUs within the
same corporat i on (Rumelt, 1974; Vancil, 1980)
constitute some of the most critical strategic
issues at the level of SBUs within diversified
firms. While all of these strategic dimensions
have the potential to influence the choi ce of
control mechanisms, this study focuses only on
the implications of variations in strategic mis-
sion.
By definition, strategic mission (or portfolio
strategy) signifies the nature of the SBU's
intended trade-offs bet ween market share
growt h and short-term earnings/cash flow
maximization (Abell & Hammond, 1979; Hen-
derson, 1970). Similar to Larreche & Shrinivasan
(1982), this study views alternative strategic
missions as spanning a continuous spectrum. At
one end of the spect rum are SBUs whose mission
is to increase market share (usually resulting in
low short-term profitability and l ow or negative
short-term cash flow); these SBUs typically have
"low relative market share" in "high growt h
industries." At the ot her end are SBUs whose
mission is the maximization of short-term earn-
ings and cash flow (usually resulting in a slippage
in market share); these SBUs typically have "high
relative market share" in "low growt h or declin-
ing industries." While most strategy researchers
(e.g., Buzzell & Wiersema, 1981; Hofer & Schen-
del, 1978; MacMillan, 1982; Rothschild, 1976)
have t ended to operationalize strategic mission
as a nominal variable, a closer examination of the
typologies devel oped indicates that these nomi-
nal approaches are essentially consistent with
the cont i nuous approach being taken in this
study. For instance, the six categories ofHofer &
Schendel ( 1978) - - share increasing strategies,
growt h strategies, profit strategies, market con-
centration and asset reduct i on strategies, tur-
naround strategies and liquidation or divestiture
strategies - - and the eight categories of MacMil-
lan ( 1982) - - aggressive build, gradual build,
selective build, aggressive maintain, selective
maintain, competitive harasser, prove viabiity
and divest - - bot h reflect a more or less steady
transition from a "pure build" strategy at one
end to a "pure harvest" or "divest" strategy at the
other. Since this study focuses on strategy
implementation for ongoing businesses only, its
focus is only on the cont i nuum from "pure
build" to "pure harvest" and it does not deal with
the implications of a "divest" strategy.
Importance of bonus criteria
Three groups of literature provide support to
expectations of linkages bet ween importance of
bonus criteria, SBU strategy, and SBU effective-
ness.
LINKING CONTROL SYSTEMS TO BUSINESS UNIT STRATEGY 53
The first set of studies has dealt with the impli-
cations of c or por at e (rather than SBU) level
strategy for the design of incentive compensa-
tion systems for SBU level general managers. For
instance, in compari ng financial conglomerates
to relate diversified firms, Berg ( 1965) report ed
that, unlike the latter, the former reward their
managers solely on the basis of divisional finan-
cial results. He argued that the financial con-
glomerates' strategy of unrelated diversification
resulted in very little i nt erdependency among
the divisions; hence the logic for an incentive
system based on the divisional "bottomline".
Similarly, in compari ng diversified with verti-
cally integrated firms, Lorsch & Allen ( 1973)
report ed that while the former made bonus deci-
sions for their division managers almost exclu-
sively on the basis of the divisions' profit perfor-
mance, the latter did not link division managers'
incentive compensat i on solely to divisional pro-
fits thereby relying also on top management' s
discretion; the researchers explained the differ-
ences in the incentive systems of these two types
of companies in terms of the degree of inter-
dependence among divisions created by their
respective corporat e strategies. Consistent with
these empirical findings, Salter ( 1973) has also
argued that there is no single "best" incentive
compensat i on system for all companies and that
such systems should "fit" the requirements of
corporat e strategy. While the focus of all of these
studies has been on strategy at the corporate
rather than the SBU level, it might be not ed that,
at least on a prima-facie basis, the rationale for
linking the SBU general manager' s incentive
compensat i on to SBU-level strategy woul d be
even stronger than that for linking it to corpo-
rate-level strategy; as such, the above studies
lend support to the research being presented
here.
The second set of studies has dealt with the
behavioral effects of incentive mechanisms on
individual motivation and task performance. The
common conclusions of these studies has been
that when an individual' s rewards are tied to per-
formance along certain criteria, his/her behavior
woul d be guided by the desire to optimize per-
formance with respect to those criteria. For
instance, Spitzer ( 1964) report ed a significant
positive correlation bet ween employees' actual
cont ri but i on to cost reduct i on and their percep-
tions regarding the degree to whi ch contribu-
tion to cost reduct i on woul d be helpful in attain-
ing more pay. Similarly, Schuster, et aL ( 1971 )
found that the more an empl oyee believed that
performance influenced pay, the harder he
worked to improve his performance. Based on
data collected from questionnaires filled in by
managers in bot h private industry and govern-
ment, Porter & Lawler ( 1968) also found a defi-
nite t endency for managers who believe that
their performance on the job woul d have a sig-
nificant impact on their pay to be assessed by
their superiors as more effective than managers
who believed that performance had relatively
insignificant impact on their pay. Similar lin-
kages bet ween financial incentives and task per-
formance have also been observed in a series of
related laboratory studies by Locke et al.
(1968), Pritchard & Curts ( 1973) and Terborg
& Miller (1978). The general conclusion of
these behavioral studies are also consistent with
the normative implications of "agency theory"
(e.g., Holmstrom, 1979).
The third set of studies has focused on the dys-
functional - - rather than the functional - - con-
sequences of incentive compensat i on systems.
In a study of the responses of government
administrators to evaluation on the basis of
statistical performance indices, Blau ( 1955)
found that the administrators behaved so as to
increase their performance in terms of these
indices even if the overall result was dysfunc-
tional for the organization. Dearden ( 1961 ) has
also report ed many situations where the incen-
tive system led division managers to optimize
their divisions' performance while, at the same
time, suboptimizing corporat e performance.
Similarly, citing several examples of poor perfor-
mance on the part of subordinates, Kerr ( 1975)
has put the blame on incentive systems that
tended to reward behaviors the superior was try-
ing to discourage while the desired behaviors
were not being rewarded at all. While these
studies help emphasize that incentive systems
can indeed have dysfunctional consequences,
54 v. GOVINDARAJAN and ANIL K. GUPTA
t he i mpl i cat i on is not t hat such syst ems shoul d
be done away with. Rather, i n poi nt i ng out t hat
i ncent i ve syst ems can have power f ul behavi oral
consequences, t hey i mpl y t hat such syst ems
must be l i nked very careful l y to t he desi r ed
rat her t han t he nondes i r ed behavi or s/ out comes.
Ext rapol at i ng from t he st udi es r evi ewed
above, it seems valid t o hypot hesi ze t hat busi-
ness uni t obj ect i ves are mor e likely to be
achi eved if t he i ncent i ve compens at i on syst em
is t i ed to t he st rat egy bei ng pur s ued by t he focal
SBU r at her t han to a uni f or m set of per f or mance
cri t eri a ( such as r et ur n on i nves t ment ) across
al l SBUs. Taki ng not e of t he fact that, by defini-
t i on, a bui l d st rat egy demands at t ent i on to tasks
whi ch have l ong- t er m i mpl i cat i ons wher eas a
harvest st rat egy demands at t ent i on to tasks wi t h
shor t - t er m payoffs, it fol l ows that:
Pl: Greater reliance on long-run criteria (specifically:
sales growth, market share, new product development,
market development, R&D, personal development, and
political/public affairs) in the determination of the incen-
tive bonus for SBU general managers will have a stronger
positive impact on effectiveness in the case of SBUs at the
"build" end of the strategy spectrum than in the case of
SBUs at the "harvest" end.
P2: Greater reliance on short-run criteria (specifically:
cost control, operating profits, profit margins, cash flow,
and return on investment) in the determination of the
incentive bonus for SBU general managers will have a
stronger positive impact on effectiveness in the case of
SBUs at the "harvest" end of the strategy spectrum than
in the case of SBUs at the "build" end.
Rel i ance on f o r mu l a vs s ubj ect i ve ( non- f or -
mu l a ) appr oaches t owar ds t he de t e r mi nat i on
o f i ncent i ve b o n u s
For any SBU, i n addi t i on to var yi ng t he i mpor-
t ance of di fferent bonus criteria, gi ven a specific
l evel of per f or mance, super i or s must also deci de
as t o what appr oach t o take i n det er mi ni ng a
specific bonus amount : at one ext eme, t he bonus
amount may be der i ved st ri ct l y from a formul a
wher e numer i cal measur es of per f or mance on
one or mor e cri t eri a const i t ut e t he i ndependent
vari abl e(s); at t he ot her ext r eme, t he super i or
may rel y t ot al l y on hi s/ her subj ect i ve j udgment
i n det er mi ni ng t he SBU gener al manager ' s
bonus; al t ernat i vel y, part of t he bonus may be
formul a-based and part may be subj ect i ve.
This st udy hypot hesi zes that, i n t er ms of
i mpact on effectiveness, t he ut i l i t y of det er mi n-
i ng t he bonus i n a subj ect i ve rat her t han for-
, mul a- based ma nne r wi l l be great er for bui l d t han
for harvest managers. Two reasons are offered i n
suppor t of this expect at i on: ( 1 ) Unl i ke t he case
for a harvest manager, mor e aspect s of a bui l d
manager ' s j ob - - such as mar ket devel opment ,
new pr oduct devel opment , R&D, and per s onnel
devel opment - - are not quant i fi abl e and, t here-
fore, obj ect i ve per f or mance measur es for such
tasks are not available; and ( 2) Managers i n
charge of bui l d uni t s face great er envi r onment al
uncer t ai nt y t han do manager s i n charge of har-
vest uni t s and t hat st rat egy i mpl ement at i on
unde r condi t i ons of great er uncer t ai nt y r equi r es
a mor e subj ect i ve appr oach t owards t he det er-
mi nat i on of t he i ncent i ve bonus.
At t he SBU level, per f or mance al ong most
l ong- t er m cri t eri a ( pr oduct devel opment , mar-
ket devel opment , per s onnel devel opment , polit-
i cal / publ i c affairs, et c. ) is cl earl y less amendabl e
to obj ect i ve meas ur ement t han is per f or mance
al ong most shor t - t er m cri t eri a ( cash flow, r et ur n
on i nvest ment , profits, profi t margi ns, etc.).
Si nce bui l d manager s - - i n cont r ast to harvest
manager s - - need t o focus mor e on t he l ong
r at her t han short -run, it fol l ows t hat bui l d mana-
gers shoul d be eval uat ed mor e subj ect i vel y t han
harvest managers. Salter ( 1973) used very simi-
lar logic t o argue t hat t he great er t he need t o
opt i mi ze an SBU's per f or mance over t he l ong
rat her t han short -run, t he gr eat er shoul d be t he
ext ent of r el i ance on subj ect i ve as opposed to
formul a-based appr oaches t o det er mi ne t he SBU
manager ' s i ncent i ve bonus. As mi ght be
expect ed, his ar gument has be e n that perfor-
mance al ong many l ong- r un cri t eri a cannot usu-
ally be measur ed i n obj ect i ve, quant i t at i ve
terms.
Fur t her suppor t t o t he pr edi ct i on t hat subj ec-
t i ve bonus det er mi nat i on appr oaches wi l l be
mor e benefi ci al for bui l d t han for harvest uni t s is
pr ovi ded by t he expect at i on t hat bui l d uni t s face
great er envi r onment al uncer t ai nt y t han do har-
vest units. Such an expect at i on is based upon t he
fol l owi ng reasons: ( 1 ) As Hofer ( 1975 ), Hofer &
Schendel ( 1978, pp. 102- 104) and Hambr i ck et
LINKING CONTROL SYSTEMS TO BUSINESS UNIT STRATEGY 55
aL (1982) have argued, build strategies are typi-
cally undertaken in the growt h stage of the pro-
duct life cycle (PLC) whereas harvest strategies
are typically undertaken in the mature/decline
stage of the PLC; and that factors such as technol-
ogy, product design, process design, market
demand, number of compet i t ors and competi-
tive structure change more rapidly and are more
upredictable in the growt h rather than the
mature/decline stage of the PLC; (2) Since the
total market share of all firms in an industry
woul d always be 100%, a build mission, signify-
ing a desire to increase market share pits an SBU
into greater "conflict" with its compet i t ors than
does a harvest mission. Further, to increase mar-
ket share, it is not sufficient to merely increase
the demand for one' s products; one must also
increase the volume of product i on and, thus, the
input resources (raw materials, labor, capital,
etc.) by correspondi ng amounts. Thus, on both
the out put and the input sides, a build manager
faces greater "dependencies" than does a har-
vest manager. As Pfeffer & Salancik ( 1978, p. 68)
and Thompson ( 1967) have argued, the greater
the external conflict and dependencies facing an
organization, the greater woul d be the uncer-
tainty confront ed by it; and ( 3) Since build SBUs
are typically in new and evolving industries as
compared to harvest SBUs, build managers'
experience in their industries is likely to be less;
this woul d again cont ri but e to the greater uncer-
tainty faced by build managers in dealing with
external constituencies. As Keely ( 1977) has
argued, the more uncertain the environment,
the less reliable predictions about future perfor-
mance are likely to be thus requiring a greater
reliance on subjective bonus determination
approaches.
The t wo sets of arguments advanced above
yield the following proposition regarding lin-
kages bet ween SBU strategy, formula vs subjec-
tive approaches towards bonus determination,
and SBU effectiveness:
P3: Great er rel i ance on subj ect i ve (non-formul a)
approaches t owards t he det ermi nat i on of t he SBU general
manager' s i ncent i ve bonus wi l l have a st ronger positive
i mpact on effectiveness in the case of SBUs at t he "build"
end of t he strategy spect rum than in t he case of SBUs at t he
"harvest" end.
METHOD
Sample
Data were collected from general managers of
SBUs in diversified firms. Previous studies (e.g.,
Rumelt, 1974) have indicated that more than
80% of the largest 500 industrial firms in the
United States (i.e., the Fortune 500) are diver-
sifted into more than one business and have
adopted a profit center structure for the manage-
ment of their numerous businesses. Thus, eight
Fortune 500 diversified firms with headquarters
in Massachusetts, Connect i cut and New York
were selected. The need to obtain access and
constraints of time and funding prevent ed the
use of a random sample either from the entire
Fortune 500 or from the entire subset of firms
headquartered in the Northeast. Given, how-
ever, their size range (in 1980 sales, from about
$500 million to about $10 billion) and the diver-
sity in industries in whi ch they operate (con-
sumer products, industrial machinery, chemi-
cals, electronic component s, electronic equip-
ment, etc.), there is no prima facie reason to
expect any systematic bias in the findings from
SBUs within these firms.
Within each firm, the senior-most corporat e
executive in charge of strategic planning (usu-
ally the Vice President for Planning) and one or
more senior line executives (usually a Group
Vice President) were interviewed. During the
interviews, agreement was obtained from the
planning executive that he woul d send a ques-
tionnaire instrument to four or more SBU gen-
eral managers within his firm making sure that a
mix of businesses along the spect rum from
"pure build" to "pure harvest" woul d be
covered so as to provide the needed strategic
diversity. The cover letter to the questionnaire
guaranteed that individual responses woul d not
be communi cat ed to anybody within or outside
the firm, and that only summary data from the
total responses from several business unit heads
woul d be published. A preaddressed stamped
envelope was also enclosed with each question-
naire to enable the respondents to mail these
directly back to the researchers wi t hout any risk
of perusal by others in their firms. Our primary
56 v. GOVINDARAJAN and ANIL K. GUPTA
c o n t a c t s - - t h e c o r p o r a t e - l e v e l e x e c u t i v e s - -
d i s t r i b u t e d t h e s e q u e s t i o n n a i r e s t o t h e g e n e r a l
ma n a g e r s o f 7 0 SBUs. A t o t a l o f 5 8 u s a b l e
r e s p o n s e s we r e r e c e i v e d . B e c a u s e o f t h e h i g h
r e s p o n s e ( 8 2 %) , n o t e s t s f o r n o n - r e s p o n s e b i a s
we r e c o n s i d e r e d n e c e s s a r y .
T h e 5 8 r e s p o n d e n t s we r e a l s o a s k e d t o i n d i -
c a t e t h e e x t e n t o f ma x i mu m b o n u s ( a s a p e r c e n -
t a g e o f b a s i c s a l a r y ) t h a t t h e y we r e e l i g i b l e t o
r e c e i v e . S i n c e l i n k a g e s b e t we e n s t r a t e g y , i n c e n -
t i v e b o n u s s y s t e m, a n d e f f e c t i v e n e s s wo u l d n o t
b e v e r y me a n i n g f u l i n t h o s e s i t u a t i o n s wh e r e t h e
ma x i mu m e a r n a b l e b o n u s wa s r e l a t i v e l y s ma l l
( s e e , e. g. , P r i t c h a r d & Cu r t s , 1 9 7 3 ) , f o r t h e p u r -
p o s e o f t h i s s t u d y , i t wa s d e c i d e d t o f o c u s o n l y
o n t h o s e 4 6 SBUs wh e r e t h e ma x i mu m e a r n a b l e
b o n u s wa s g r e a t e r t h a n 2 0 % o f b a s i c s a l a r y. F o r
t h e s e 4 6 SBUs, t h e ma x i mu m e a r n a b l e b o n u s ( a s
a p e r c e n t a g e o f b a s i c s a l a r y ) a v e r a g e d 3 9 . 3 %.
Vari abl es meas ur ed
Busi ness uni t st rat egy ( X 1 ), P r e l i mi n a r y i n t e r -
v i e ws wi t h f o u r SBU ma n a g e r s i n o n e f i r m h a d
r e v e a l e d - - as e x p e c t e d - - t h a t a l t h o u g h t h e
t e r ms b u i l d , h o l d , h a r v e s t a n d d i v e s t c a n b e
a p p l i e d t o t h e b u s i n e s s u n i t as a wh o l e , e a c h SBU
u s u a l l y c o n s i s t s o f s e v e r a l p r o d u c t s wh i c h
t o g e t h e r f o r m o n e o r mo r e c l o s e l y r e l a t e d p r o -
d u c t l i n e s , t h u s c o n s t i t u t i n g a s i n g l e b u s i n e s s . As
s u c h , s t r a t e g y f o r t h e SBU as a wh o l e n e e d e d t o
b e r e g a r d e d as a n a g g r e g a t e o f t h e s t r a t e g i e s o f
i t s p r o d u c t s . Ba s e d o n t h i s l o g i c , t h e f o l l o wi n g
q u e s t i o n wa s p o s e d t o t h e SBU ma n a g e r :
Given bel ow are descri pt i ons of several alternative
strategies. Dependi ng upon t he cont ext , each of t hese
descri pt i ons may r epr esent t he strategy for all or onl y a
fraction or none of a business unit' s products. Please
i ndi cat e bel ow what percent age of your business unit' s
cur r ent total sales is account ed for by pr oduct s represent -
ed by each of t hese strategy descriptions. Your answers
shoul d total 100%.
Increase sales and market share, be willing to accept low
r et ur ns on i nvest ment in t he short -t o-medi um term, if
necessary ~ , 6
Maintain market share and obt ai n reasonable r et ur n on
i nvest ment ~ %
Maximize profitability and cash flow in t he short-to-
medi um term, be willing to sacrifice market share if
necessary ~ %
Prepare for sale or liquidation ~ %
None of t he above (pl ease specify) ~ . %
Total 100%
I n d e s c e n d i n g o r d e r , t h e s t r a t e g y d e s c r i p t i o n s
g i v e n i n t h i s q u e s t i o n we r e i n t e n d e d t o s i g n i f y
t h e f o l l o wi n g s t r a t e g i e s : b u i l d , h o l d , h a r v e s t ,
d i v e s t , a n d o t h e r . Al l r e s p o n d e n t s e n t e r e d 0 %
u n d e r " n o n e o f t h e a b o v e " . On l y 12 o u t o f t h e 5 8
r e s p o n d e n t s e n t e r e d a n y t h i n g o t h e r t h a n z e r o
f o r t h e d i v e s t s t r a t e g y - - e v e n h e r e , t h e p e r c e n -
t a g e r a n g e d f r o m 2 % t o 1 3 %. T h u s , a t t h e l e v e l
o f t h e SBU as a whol e, al l 5 8 SBUs h a v e s t r a t e g i e s
t h a t c a n b e c h a r a c t e r i z e d as f a l l i n g s o me wh e r e
a l o n g t h e c o n t i n u u m f r o m " p u r e b u i l d " t o " p u r e
h a r v e s t " .
T h e s t r a t e g y me a s u r e wa s d e r i v e d as f o l l o ws .
A v a l u e o f + 1 wa s a t t a c h e d t o a b u i l d s t r a t e g y , a
0 t o a h o l d s t r a t e g y , a - 1 t o a h a r v e s t s t r a t e g y
a n d a - 2 t o a d i v e s t s t r a t e g y . T h e p e r c e n t a g e
b r e a k d o wn p r o v i d e d b y t h e SBU ma n a g e r wa s
t h e n u s e d t o a r r i v e a t a we i g h t e d a v e r a g e
s t r a t e g y i n d e x f o r t h e SBU. S u mma r y d a t a o n t h i s
me a s u r e a r e i n c l u d e d i n E x h i b i t 1.
EXHIBIT 1. Summary statistics on all variables under st udy ( n = 4 6 SBUs)
Standard
Variable Mi ni mum Maximum Mean Deviation Median
Effectiveness(Y) 1.463 4.800 3.241 0. 699 3.280
Strategy ( X l ) - 1.000 1.000 0.018 0.478 0.000
Ext ent of t he i ncent i ve
system' s rel i ance on:
Long-run or i ent ed
cri t eri a ( X 2) 7.000 20.000 9.951 2.985 9. 017
Short-run or i ent ed
cri t eri a (X~) 5.000 15.000 9. 696 2.547 9.125
Subjective (as opposed
t o formula-based)
approaches (X4) 0. 000 100.000 29.876 34.708 20.500
LINKING CONTROL SYSTEMS TO BUSINESS UNIT STRATEGY 57
Th e c o n s t r u c t va l i di t y o f t hi s s t r a t e g y i n d e x
wa s a s s e s s e d b y as ki ng e a c h r e s p o n d e n t t o pr o-
v i d e da t a o n t h e current ma r k e t s ha r e o f t h e
SBU' s p r i n c i p a l p r o d u c t s , a " f act ual " r a t h e r t ha n
" p e r c e p t u a l " i t e m o f i nf or ma t i on. I t wa s ant i ci -
p a t e d t hat , i n ge ne r a l , t h e p r o b a b i l i t y o f an SBU
wa n t i n g t o i n c r e a s e ma r k e t s ha r e f u r t h e r ( i . e. , a
" b u i l d " mi s s i o n ) wo u l d b e g r e a t e r wh e n i t s c ur -
r e n t ma r k e t s ha r e is l o w as c o mp a r e d t o wh e n i t
i s hi gh; t hus, i f t h e s t r a t e g y i n d e x i s val i d, o n e
s h o u l d e x p e c t a n e g a t i v e c o r r e l a t i o n b e t we e n
s t r a t e g y a n d c u r r e n t ma r k e t s har e. Th e n e g a t i v e
c o r r e l a t i o n ( P e a r s o n r = - 0 . 2 3 , p < 0 . 0 5 ) be t -
we e n t h e t wo va r i a bl e s b e a r s o u t t h e s e e x p e c t a -
t i ons.
To t e s t f or r e s p o n s e c o n s i s t e n c y ( a s u r r o g a t e
f or i n t e r n a l r e l i a bi l i t y) , e a c h r e s p o n d e n t wa s
al s o a s ke d t o i n d i c a t e wh e t h e r ( s ) h e expected
t h e ma r k e t s ha r e o f t h e SBU' s p r i n c i p a l p r o d u c t s
t o d e c l i n e r a p i d l y ( = 1 ) , d e c l i n e s l o wl y ( = 2 ) ,
r e ma i n at t h e c u r r e n t l e ve l ( = 3 ) , i n c r e a s e
s l o wl y ( = 4) , o r i n c r e a s e r a p i d l y ( --- 5 ). As ant i ci -
p a t e d , t h e s t r a t e g y i n d e x c o r r e l a t e s p o s i t i v e l y
wi t h e x p e c t a t i o n s o f an i n c r e a s e i n ma r k e t s ha r e
( P e a r s o n r = 0. 49, p < O. 0 0 1 ).
Effectiveness ( Y) . Thi s s t u d y c h o s e not t o us e
o b j e c t i v e me a s u r e s o f p e r f o r ma n c e s i n c e ma n y
p e r f o r ma n c e d i me n s i o n s c r i t i c a l t o t h e s u c c e s s
o f a " b u i l d " s t r a t e g y ( f o r i ns t a nc e : n e w p r o d u c t
d e v e l o p me n t , ma r k e t d e v e l o p me n t , R&D, a nd
p e r s o n n e l d e v e l o p me n t ) a r e n o t a me n d a b l e t o
o b j e c t i v e , q u a n t i t a t i v e me a s u r e me n t . Thus, t h e
us e o f o b j e c t i v e me a s u r e s ( s u c h as o p e r a t i n g
pr of i t s , c a s h f l ows , a n d r e t u r n o n i n v e s t me n t ) t o
e v a l u a t e t h e p e r f o r ma n c e of every SBU di s r e-
g a r d i n g i t s s t r a t e g i c mi s s i o n wo u l d ha ve v i o l a t e d
o n e o f t h e f u n d a me n t a l a x i o ms u n d e r l y i n g t hi s
r e s e a r c h . I n ut i l i z i ng a s u b j e c t i v e a p p r o a c h , i t
wa s al so d e c i d e d ( 1 ) t o u n d e r t a k e p e r f o r ma n c e
a s s e s s me n t a l o n g a mu l t i p l i c i t y o f d i me n s i o n s
r a t h e r t ha n o n a ny s i ngl e d i me n s i o n , a n d ( 2 ) t o
we i g h t t h e v a r i o u s p e r f o r ma n c e d i me n s i o n s i n
t e r ms o f t h e i r r e l a t i ve i mp o r t a n c e f or t h e SBU. I n
a d d i t i o n t o t h e g e n e r a l a r g u me n t s a d v a n c e d b y
St e e r s ( 1 9 7 5 ) , s u c h a mu l t i v a r i a t e a p p r o a c h
wi t h c r i t e r i o n we i g h t s wa s s e e n as p a r t i c u l a r l y
a p p r o p r i a t e i n a c o n t e x t wh e r e , b y de f i ni t i on,
di f f e r e nt s t r a t e g i c mi s s i o n s i mp l y q u i t e different
s et s o f pr i or i t i e s . Fi nal l y, gi ve n t hi s s t u d y ' s f oc us
o n i mpl ement at i on, i t wa s d e e me d e s s e nt i a l t o
c o n t r o l f or t h e ef f ect s o f t h e c h o s e n s t r a t e g y
i t s el f o n SBU p e r f o r ma n c e ( Po r t e r , 1980; Lenz,
1981 ). Thus, e f f e c t i ve ne s s wa s me a s u r e d i n t h e
f or m o f a compari son b e t we e n a c t u a l pe r f or -
ma n c e a nd a-priori e x p e c t a t i o n s r a t h e r t ha n o n
an absolute scal e. Si nce ma n a g e r s ' a-priori
e x p e c t a t i o n s o f b u s i n e s s uni t p e r f o r ma n c e a r e
l i kel y t o t a ke i nt o a c c o u n t t h e a n t i c i p a t e d
i mp a c t o f t h e s t r a t e g y i t sel f, i t wa s a n t i c i p a t e d
t hat s uc h an a p p r o a c h wo u l d i n d i r e c t l y c o n t r o l
f or t h e ef f ect s o f s t r a t e g i c c h o i c e o n pe r f or -
ma n c e .
Each r e s p o n d e n t wa s a s ke d t o r a t e e a c h o f
t we l v e p e r f o r ma n c e d i me n s i o n s o n a 5 - p o i n t
Li ker t t y p e s c a l e ( r a n g i n g f r o m " o f l i t t l e i mp o r -
t a n c e " t o " e x t r e me l y i mp o r t a n t " ) i n d i c a t i n g t h e
d e g r e e o f i mp o r t a n c e a t t a c h e d b y s u p e r i o r s t o
t h e SBU' s p e r f o r ma n c e o n t ha t d i me n s i o n . Th e
t we l v e d i me n s i o n s i n c l u d e d f i na nc i a l as we l l as
nonf i na nc i a l c r i t e r i a : s al es g r o wt h r at e, ma r k e t
s har e, o p e r a t i n g pr of i t s , p r o f i t t o s al es r at i o, c a s h
f l ow f r om o p e r a t i o n s , r e t u r n o n i n v e s t me n t , n e w
p r o d u c t d e v e l o p me n t , ma r k e t d e v e l o p me n t ,
R&D, c o s t r e d u c t i o n p r o g r a ms , p e r s o n n e l
d e v e l o p me n t a nd p o l i t i c a l / p u b l i c affairs. Each
r e s p o n d e n t wa s al s o a s ke d t o r a t e o n e a c h o f t he
t we l v e p e r f o r ma n c e d i me n s i o n s SBU' s pe r f or -
ma n c e as c o mp a r e d wi t h h i s / h e r a s s e s s me n t o f
s u p e r i o r s ' e x p e c t a t i o n s f r o m t h e SBU a l o n g t ha t
d i me n s i o n . Aga i n a 5 - p o i n t Li ker t t y p e s c a l e
( r a n g i n g f r om " n o t at al l s a t i s f a c t or y" t o " out -
s t a n d i n g " ) wa s us e d. Us i ng t h e da t a o n d i me n -
s i onal i mp o r t a n c e o b t a i n e d i n t h e f i r st q u e s t i o n
as we i ght s , a we i g h t e d a v e r a g e p e r f o r ma n c e
i n d e x wa s o b t a i n e d f or e a c h SBU. Su mma r y da t a
o n t hi s e f f e c t i ve ne s s me a s u r e a r e gi ve n i n
Ex h i b i t 2. As t hi s e x h i b i t i ndi c a t e s , t h e ef f ect i ve-
ne s s i n d e x d o e s n o t c o r r e l a t e wi t h s t r a t e g y - -
e i t h e r f or t h e o v e r a l l s t r a t e g y i n d e x ( r - - O. 01,
n. s. ) o r f or e a c h o f t h e 12 p e r f o r ma n c e d i me n -
s i ons e x a mi n e d s e p a r a t e l y - - an i n d i c a t i o n t hat
t h e i mp a c t o f s t r a t e g y o n SBU e f f e c t i ve ne s s has
b e e n a d e q u a t e l y c o n t r o l l e d .
Gi v e n t h e e x c l u s i v e r e l i a n c e o n sel f - assess-
me n t t o me a s u r e e f f e c t i ve ne s s , t h e r e a d e r i s
u r g e d t o r e g a r d t hi s me a s u r e wi t h s o me c a ut i on.
58 V. GOVINDARAJAN and ANIL K. GUPTA
EXHIBIT 2. Response st ruct ure: effectiveness along various performance criteria ( n =46 SBUs)
Performance
cri t eri a
Effectiveness along
performance criteria
Range
Mi ni mum Maximum
Strategy vs
effectiveness
Standard al ong
Mean devi at i on cri t eri on
Pearson pr oduct - moment
correl at i ons
Impact of
performance
cri t eri on on t he
SBU general
manager' s
i ncent i ve bonus
vs effectiveness
along cri t eri on
Sales gr owt h
rat e 2
Market share 2
Operat i ng
profits 1
Profit
margins 1
Cash flow 1
Ret urn on
i nvest ment 1
New pr oduct
devel opment 1
Market
devel opment 1
Research &
devel opment 1
COst r educt i on
programs 1
Personnel
devel opment 1
Political
publ i c affairs 1
"Aggregate"
effectiveness
( awei ght ed
average of
effectiveness
response wi t h
cri t eri on
i mpor t ance
serving as
wei ght s) 1.463
5 3.356 0.933 0.23 0.05
5 3.419 0.932 0. 08 0.15
5 3.220 1.255 - 0 . 0 9 0.19
5 3.318 1.177 - 0 . 0 4 - 0 . 0 4
5 3.152 1.121 - 0 . 0 3 - 0 . 0 4
5 3.455 1.130 0.05 0.00
5 3.163 0.974 - 0 . 0 6 0.09
5 3.098 0.831 - 0. 06 O. 19
4 2,833 0. 986 - 0. 22 o. 19
5 3.024 0.975 0. 18 0.21
5 3.238 1.031 - 0. 04 0. 17
5 3.222 0. 929 o. 13 0.34*
4.800 3.241 0.699 0.01
*one-tail p<O. 05
No t wi t h s t a n d i n g t h i s c a v e a t , h o we v e r , t h e f ol -
l o wi n g e v i d e n c e / a r g u me n t s mi g h t b e n o t e d i n
s u p p o r t o f t h i s me a s u r e ' s v a l i d i t y : ( 1 ) as E x h i b i t
2 i n d i c a t e s , o n v i r t u a l l y al l p e r f o r ma n c e d i me n -
s i o n s , r e s p o n s e s p e r t a i n i n g t o e f f e c t i v e n e s s
r a n g e d f r o m " n o t a t al l s a t i s f a c t o r y " t o " o u t -
s t a n d i n g " ; l o o k i n g a l s o a t t h e d a t a o n me a n s a n d
s t a n d a r d d e v i a t i o n s , t h e r e s p o n d e n t s , as a c l a s s ,
c a n n o t b e c h a r a c t e r i z e d as h a v i n g b e e n l e n i e n t
i n a s s e s s i n g t h e p e r f o r ma n c e o f t h e i r o wn SBUs ;
( 2 ) t h e q u e s t i o n n a i r e wa s p r e t e s t e d wi t h f o u r
SBUs - - t wo i n e a c h o f t wo d i v i s i o n s i n o n e f i r m;
e a c h s u p e r i o r wa s a s k e d t o i n d i c a t e wh i c h o f t h e
t wo SBUs u n d e r h i m wa s mo r e e f f e c t i v e a t i mp l e -
me n t i n g i t s s t r a t e g i c mi s s i o n ; i n b o t h d i v i s i o n s ,
t h e s e l f - r a t i n g s we r e c o n s i s t e n t wi t h s u p e r i o r
LINKING CONTROL SYSTEMS TO BUSINESS UNIT STRATEGY 59
a s s e s s me n t s o f t h e mo r e a n d l es s e f f e c t i ve SBUs;
wh i l e a t e s t wi t h j us t f our SBUs c l e a r l y c ons t i -
t ut e s i ns uf f i c i e nt e v i d e n c e i n s u p p o r t f or t h e val -
i di t y o f t h e e f f e c t i v e n e s s me a s u r e , t a k e n a l o n g
wi t h o t h e r e v i d e n c e / a r g u me n t s , i t mi g h t c o n t r i -
b u t e t o an i n c r e a s e d c o n f i d e n c e i n i t ; and, ( 3 ) i n
an e a r l i e r e mp i r i c a l s t udy, He n e ma n ( 1 9 7 4 ) h a d
r e p o r t e d a v e r y hi gh c o r r e l a t i o n b e t we e n
s u p e r i o r a n d s el f - r at i ngs i n s i t ua t i ons wh e r e t h e
s u b o r d i n a t e i s g u a r a n t e e d a n o n y mi t y a n d u n d e r -
s t a n d s t ha t t h e o b j e c t i v e o f d a t a c o l l e c t i o n is sci -
e nt i f i c r e s e a r c h a n d n o t hi s p e r s o n a l e v a l u a t i o n
f r o m t h e o r g a n i z a t i o n ' s p e r s p e c t i v e ; He n e ma n ' s
c o n d i t i o n s we r e me t f ul l y i n t hi s s t udy.
Relative importance of performance criteria
f or bonus determination (X2, X3). Each r e s p o n -
d e n t wa s a s ke d t o r a t e o n a 3 - p o i n t Li ke r t - t ype
s c a l e ( 1 = " l i t t l e o r n o i mp a c t " ; 2 = " h i g h i mp a c t " ;
3 = " g r e a t e r i mp a c t " ) t h e d e g r e e o f i mp a c t t ha t
s u p e r i o r s ' e v a l u a t i o n o f t h e SBU' s p e r f o r ma n c e
a l o n g e a c h o f t we l v e d i me n s i o n s has o n de c i -
s i ons r e g a r d i n g h i s / h e r i n c e n t i v e b o n u s . Th e
t we l v e d i me n s i o n s we r e t h e s a me as t h o s e u s e d
e a r l i e r t o me a s u r e e f f e c t i ve ne s s . Th e s u m o f t h e
r e s p o n s e s t o s e v e n o f t h e s e p e r f o r ma n c e c r i t e r i a
s al es g r o wt h r at e, ma r k e t s ha r e , n e w p r o d u c t
d e v e l o p me n t , ma r k e t d e v e l o p me n t , R&D, pe r -
s o n n e l d e v e l o p me n t a n d p o l i t i c a l / p u b l i c affai rs
wa s i n t e r p r e t e d as " e x t e n t o f t h e i n c e n t i v e
s y s t e m' s r e l i a n c e o n long-run o r i e n t e d c r i t e r i a
f or b o n u s d e t e r mi n a t i o n " (X2). Th e i n t e r - i t e m
r e l i a b i l i t y e s t i ma t e f or t hi s me a s u r e is: Coef f i -
c i e n t oc =0. 82. Si mi l ar l y, t h e s u m o f t h e
r e s p o n s e s o n t h e r e ma i n i n g f i ve p e r f o r ma n c e
c r i t e r i a n o p e r a t i n g pr of i t s , p r o f i t t o s al es r at i o,
c a s h f l ow f r om o p e r a t i o n s , r e t u r n o n i nves t -
me nt , a n d c o s t r e d u c t i o n p r o g r a ms - - wa s i nt e r -
p r e t e d as " e x t e n t o f t h e i n c e n t i v e s y s t e m' s
r e l i a n c e o n short-run o r i e n t e d c r i t e r i a f or b o n u s
d e t e r mi n a t i o n " (X3). Th e i n t e r - i t e m r e l i a bi l i t y
e s t i ma t e f or t hi s me a s u r e is: Coe f f i c i e nt oc = 0. 74.
Su mma r y d a t a o n t h e va r i a bl e s X 2 a nd X 3 a r e
g i v e n i n Ex h i b i t 1.
As a c h e c k f or r e l i a bi l i t y, f or e a c h pe r f or -
ma n c e c r i t e r i o n , c o r r e l a t i o n wa s c o mp u t e d be t -
we e n i mp o r t a n c e o f t h e c r i t e r i o n f or b o n u s pur -
p o s e s a n d g e n e r a l ma n a g e r s ' r e s p o n s e s o n c r i t e r -
i on i mp o r t a n c e o b t a i n e d e a r l i e r t o g e n e r a t e
c r i t e r i o n we i g h t s f or d e v e l o p i n g t h e ef f ect i ve-
ne s s me a s u r e . I t wa s a n t i c i p a t e d t ha t c o r r e l a -
t i ons b e t we e n t h e s e t wo va r i a bl e s wo u l d b e
p o s i t i v e a n d s i gni f i c a nt s i n c e SBU ma n a g e r s
wo u l d t e n d t o p l a c e h i g h e r i mp o r t a n c e o n t h o s e
c r i t e r i a t ha t t h e i r s u p e r i o r s r e l y mo r e h e a v i l y o n
f or b o n u s d e t e r mi n a t i o n . As e x p e c t e d , 11 o u t o f
t h e s e 12 c o r r e l a t i o n s a r e p o s i t i v e a nd s i gni f i c a nt
a t p < O. 0 5 .
Si nc e t h e 12 i t e ms u s e d f or a s s e s s i ng t h e r el a-
t i ve i mp o r t a n c e o f b o n u s c r i t e r i a a nd t h o s e u s e d
f or c o mp u t i n g t h e e f f e c t i ve ne s s me a s u r e a r e t h e
s ame, i t wa s d e e me d n e c e s s a r y t o al so t e s t f or
t h e e x i s t e n c e o f " c i r c ul a r i t y, " i.e., t o s e e i f SBU
ma n a g e r s t e n d e d t o r a t e t h e i r e f f e c t i v e n e s s
h i g h e r o n t h o s e c r i t e r i a t ha t t h e y p e r c e i v e d as
mo r e i mp o r t a n t f or b o n u s d e t e r mi n a t i o n . As c a n
b e s e e n f r o m Ex h i b i t 2, c o r r e l a t i o n s b e t we e n t h e
i mp o r t a n c e o f p e r f o r ma n c e c r i t e r i o n f or b o n u s
d e t e r mi n a t i o n a n d e f f e c t i v e n e s s r a t i ngs o n t ha t
c r i t e r i o n a r e p o s i t i v e a n d s i gni f i c a nt f or o n l y 1
o u t o f t h e 12 c r i t e r i a . Thus , t h e d a t a c a n b e
r e g a r d e d as r e l a t i v e l y f r ee f r om p r o b l e ms o f " c i r -
c ul a r i t y. "
Reliance on f ormul a vs subjective (non-for-
mul a) approaches towards the determination
of incentive bonus (X4). Ea c h r e s p o n d e n t wa s
a s ke d t o i n d i c a t e wh e t h e r , i n d e t e r mi n i n g hi s/
h e r b o n u s , s u p e r i o r s r e l i e d t o t a l l y o n a f or mul a -
b a s e d a p p r o a c h , o r t o t a l l y o n a s u b j e c t i v e ( n o n -
f o r mu l a ) a p p r o a c h , o r p a r t l y o n a f o r mu l a - b a s e d
a p p r o a c h a n d p a r t l y o n a s u b j e c t i v e ( n o n - f o r -
mu l a ) a p p r o a c h i ndi c a t i ng, i n t h e l ast cas e, t h e
p e r c e n t a g e b r e a k d o wn f or t h e t wo a p p r o a c h e s .
Su mma r y da t a o n t hi s v a r i a b l e a r e gi ve n i n
Ex h i b i t 1.
RESULTS
Test of propositions
Data analysis technique. Al l t h r e e p r o p o s i -
t i ons t o b e t e s t e d i n t hi s s t u d y a r e o f t h e f ol l ow-
i ng f or m: t h e p o s i t i v e i mp a c t o f $1 o n Y wi l l b e
s t r o n g e r wh e n $2 i s hi gh ( l o w) as c o mp a r e d t o
wh e n S z i s l o w ( h i g h ) . F o l l o wi n g t h e a r g u me n t s
o f Al l i s on ( 1 9 7 7 ) a nd S o u t h wo o d ( 1 9 7 8 ) a n d
s i mi l a r t o t h e a p p r o a c h e s t a k e n b y Ar g o t e
60 v. GOVINDARAJAN and ANIL K. GUPTA
( 1 9 8 2 ) , Br o wn e l l ( 1 9 8 2 ) a n d S c h o o n h o v e n
( 1981 ), t h e mo s t a p p r o p r i a t e a na l yt i c a l me t h o d
t o t e s t s u c h a h y p o t h e s i s i s t o r u n t h e t wo r e gr e s -
s i o n e q u a t i o n s g i v e n b e l o w:
Y = ca + a~S~+
a2S2 + ~1 ( 1 )
Y= c2 + blSI + be
$2 + b~S1S2 + % ( 2 )
I f t h e u n s t a n d a r d i z e d r e g r e s s i o n c o e f f i c i e n t b 3
is posi t i ve and significant, o n e c a n c o n c l u d e
t ha t t h e p o s i t i v e i mp a c t o f S~ o n Y is i n d e e d
s t r o n g e r f or h i g h e r as c o mp a r e d t o l o we r va l ue s
of S 2. Al t e r n a t i v e l y , a negative and si gni f i cant b 3
wo u l d l e a d t o t h e c o n c l u s i o n t ha t t h e p o s i t i v e
i mp a c t o f Sl o n Y is s t r o n g e r f or l o we r r a t h e r
t ha n h i g h e r v a l u e s o f S 2. Fi nal l y, i f b 3 i s not sig-
ni f i cant l y di f f erent f r om zero, o n e wo u l d c on-
c l u d e t ha t S 2 d o e s n o t ha ve a ny c o n t i n g e n c y
ef f ect o n t h e r e l a t i o n s h i p b e t we e n S~ a n d Y.
S o u t h wo o d ' s ( 1 9 7 8 ) ma t h e ma t i c a l a na l ys i s
al s o p o i n t s o u t a f e w o t h e r i mp o r t a n t c h a r a c -
t e r i s t i c s o f e q u a t i o n ( 2 ) - - al l o f wh i c h h a v e
b e e n c o mp u t a t i o n a l l y c r o s s c h e c k e d a n d c on-
f i r me d t o b e t r u e b y t h e p r e s e n t a ut hor s . IfS~ a n d
$2 a r e i n t e r v a l ( b u t n o t r a t i o ) s c a l e va r i a bl e s ,
t h e n t h e i r p o i n t s o f o r i g i n a r e t o t a l l y a r bi t r a r y. As
S o u t h wo o d i l l us t r a t e s , i f t h e s e o r i g i n p o i n t s a r e
c h a n g e d ( i . e. , i f S 1 a nd $2 are r e p l a c e d b y S~ + k l
a nd S2+k 2 r e s p e c t i v e l y ) , t h e n i n e q u a t i o n ( 2 )
t h e f o l l o wi n g al s o c h a n g e : t h e u n s t a n d a r d i z e d
r e g r e s s i o n c o e f f i c i e n t s b~ and/ 92, t h e i r s t a n d a r d
e r r or s , t h e i r l e ve l s o f s i gni f i c a nc e , e v e n t h e st an-
d a r d i z e d c o u n t e r p a r t s ( f ~ a n d lgz) o f t h e s e
r e g r e s s i o n c oe f f i c i e nt s , and, o f c o u r s e , t h e c on-
s t a nt c2. Wh i l e t h e s t a n d a r d i z e d r e g r e s s i o n coef -
f i c i e nt (Ig3) o f t h e c r o s s p r o d u c t t e r m al s o
c ha nge s , wh a t r e ma i n i nva r i a nt a r e t h e f ol l ow-
i ng: t h e u n s t a n d a r d i z e d r e g r e s s i o n c o e f f i c i e n t
b3, i t s s t a n d a r d e r r o r , i t s l e ve l o f s i gni f i c a nc e a nd
t h e R 2 a nd F- r a t i o f or t h e wh o l e e q u a t i o n i t sel f.
I n f act , wi t h a s u i t a b l e c h o i c e o f o r i g i n p o i n t s f or
S~ a nd $2, t h e c o e f f i c i e n t s b~ a n d b 2 c a n b e
r e d u c e d t o z e r o l e a v i n g o n l y t h e c r o s s p r o d u c t
t e r m wi t h i t s u n c h a n g e d c o e f f i c i e n t b 3 i n t h e
e q u a t i o n . Th e n e t c o n c l u s i o n i s t ha t t h e o n l y
ut i l i t y o f e q u a t i o n ( 2 ) i s t o l e a r n a b o u t t h e si g-
n i f i c a n c e a nd n a t u r e o f t h e i mp a c t o f i n t e r a c t i o n
b e t we e n S~ a n d S 2 o n Ya n d not a b o u t t h e n a t u r e
o f t h e i r ma i n ef f ect s. I f o n e i s i n t e r e s t e d i n l ear n-
i ng a b o u t t he ma i n ef f ect s o f S~ a n d / o r $2 o n Y, i t
i s e q u a t i o n ( 1 ) t ha t c a n b e o f s o me val ue.
Th r e e pa i r s o f r e g r e s s i o n e q u a t i o n s we r e
d e v e l o p e d f or t h e p u r p o s e s o f t e s t i n g Pr opos i -
t i ons 1, 2, a nd 3. Th e r e s u l t s o f t h e s e e q u a t i o n s
a r e p r e s e n t e d i n Ex h i b i t 3.
Th e r e s u l t s - - s e e r e g r e s s i o n e q u a t i o n s ( 3 ) ,
( 5 ) a nd ( 7 ) i n Ex h i b i t 3 - - i n d i c a t e t ha t n o n e o f
t h e i n d e p e n d e n t v a r i a b l e s - - Xl , X2, X 3 o r X 4 - -
h a v e a ny s t a t i s t i c a l l y s i gni f i c a nt direct i mp a c t o n
e f f e c t i ve ne s s . At t e n t i o n was, t h e r e f o r e , t u r n e d
t o an e x a mi n a t i o n o f P r o p o s i t i o n s 1, 2 a nd 3
wh i c h p r e d i c t e d t h e e x i s t e n c e o f c o n t i n g e n c y
r e l a t i o n s h i p s b e t we e n SBU s t r a t e gy, i n c e n t i v e
b o n u s s y s t e m a nd SBU e f f e c t i ve ne s s .
Test of propositions. The r e s ul t s o f r e g r e s s i o n
e q u a t i o n ( 4 ) p r o v i d e c l e a r a nd s t r o n g s u p p o r t t o
P r o p o s i t i o n 1. Th e u n s t a n d a r d i z e d r e g r e s s i o n
c o e f f i c i e n t o f t h e c r o s s p r o d u c t t e r m (X~X2) is
p o s i t i v e a n d s i gni f i c a nt ( p < o . 0 5 ) .
An e x a mi n a t i o n o f t h e r e s u l t s o f t h e r e g r e s s i o n
e q u a t i o n ( 6 ) r e v e a l s t ha t t h e u n s t a n d a r d i z e d
c o e f f i c i e n t f or t h e c r o s s p r o d u c t t e r m (X~X3) is
ne ga t i ve , as h y p o t h e s i z e d b u t n o t s t a t i s t i c a l l y
s i gni f i cant . Thus, t h e e x p e c t a t i o n o f P r o p o s i t i o n
2 t ha t t h e r e l i a n c e o n s h o r t - r u n o r i e n t e d c r i t e r i a
f or b o n u s d e t e r mi n a t i o n wo u l d ma k e a g r e a t e r
c o n t r i b u t i o n t o SBU e f f e c t i v e n e s s i n t h e c a s e o f
h a r v e s t r a t h e r t ha n b u i l d SBUs is n o t s u p p o r t e d
b y t h e dat a. I n o t h e r wo r d s , an e mp h a s i s o n
s h o r t - r u n o r i e n t e d c r i t e r i a s e e ms t o b e equal l y
r e l e v a n t f or all SBUs i r r e s p e c t i v e o f d i f f e r e n c e s
i n t h e i r s t r a t e gi e s . On e e x p l a n a t i o n f or s u c h a
f i ndi ng mi g h t b e t hat wh e r e a s an e mp h a s i s o n
s h o r t - r u n o b j e c t i v e s ma y n o t a l wa ys i mp l y an
e mp h a s i s al s o o n l o n g - r u n o b j e c t i v e s , an
e mp h a s i s o n l o n g - r u n o b j e c t i v e s ma y a l wa ys
i mp l y an e mp h a s i s o n s h o r t - r u n o b j e c t i v e s al so.
Co n c e i v a b l y , t h e r e f o r e , ma n a g e r s at t h e b u i l d
e n d o f t h e s t r a t e g y s p e c t r u m f ace a g r e a t e r mul -
t i p l i c i t y o f o b j e c t i v e s t ha n d o ma n a g e r s at t h e
h a r v e s t e n d o f t h e s t r a t e g y s p e c t r u m.
F r o m t h e r e s u l t s o f t h e r e g r e s s i o n e q u a t i o n
( 8 ) , i t c a n b e s e e n t ha t t h e u n s t a n d a r d i z e d coef f i -
LI NKI NG CONTROL SY STEMS TO BUSI NESS UNI T STRATEGY 61
~t
,a
-a
.o
Z ,
r ~
4 4 -
~4 , 4
. o
a "
%
, - .
r . ~
, g
e q ~ 0
, S
t-- ,".
t'~l ~ t'4 .-. t'~l
~ ~ ,' 6
=-~ ~
.. ~ ,~.~
e g = -~
~ ~ ~.-
z ,. =
~rg ~ 7
~~ ~ ~
~~ ~ ~
~ .~ ~_ ~
z
~ 8
. ~ ~
8 , /
g
~ ~ .-~
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5
V
m,
0
=
62 V. GOVINDARAJAN and ANIL K. GUPTA
c i e n t f or t h e c r o s s p r o d u c t t e r m ( Xj X 4) is pos i -
t i ve a n d s i gni f i c a nt ( p < o . o 1 ) . P r o p o s i t i o n 3 is,
t h e r e f o r e , s t r o n g l y s u p p o r t e d b y t h e dat a.
Tests f or the presence or absence of monot oni c-
ity
Wh i l e e q u a t i o n ( 2 ) i s a s uf f i c i e nt t e s t o f t h e
h y p o t h e s i z e d c o n t i n g e n c y i mp a c t o f S 2 o n t h e
r e l a t i o n s h i p b e t we e n S~ a n d Y, i n i t s c u r r e n t
f or m, i t p r o v i d e s n o i n f o r ma t i o n o n wh e t h e r t h e
l a t t e r r e l a t i o n s h i p i s mo n o t o n i c o r non-
mo n o t o n i c . As d e mo n s t r a t e d b y S c h o o n h o v e n
( 1 9 8 1 ) , S o u t h wo o d ( 1 9 7 8 ) a n d Ke r l i n g e r &
P e d h a z u r ( 1 9 7 3 ) , s u c h i n f o r ma t i o n c a n b e
o b t a i n e d b y e x a mi n i n g t h e p a r t i a l d e r i v a t i v e o f
t hi s e q u a t i o n o v e r Sl , as i n d i c a t e d b e l o w:
O Y/OSl =bl + b3S2. ( 9 )
A g r a p h i c a l p l o t wi t h OY/OS~ o n t h e v e r t i c a l
axi s a nd S 2 o n t h e h o r i z o n t a l axi s d r a wn o v e r t h e
e n t i r e o b s e r v e d r a n g e of S 2 c a n i n d i c a t e wh e t h e r
t h e r e l a t i o n s h i p b e t we e n Y a n d S~ i s mo n o t o n i c
o r n o n mo n o t o n i c . I f t h e va l ue o f OY/aS 1 i s a l wa ys
p o s i t i v e o r a l wa ys n e g a t i v e o v e r t h e e n t i r e r a n g e
o f Sz, t h e n t h e r e l a t i o n s h i p b e t we e n Y a n d S~
wo u l d b e r e g a r d e d as mo n o t o n i c . Al t e r na t i ve l y,
i f OY/OS~ c r o s s e s t h e h o r i z o n t a l axi s at a ny p o i n t ,
t h e n t h e r e l a t i o n s h i p wo u l d b e r e g a r d e d as non-
mo n o t o n i c . For e a c h o f t h e p r o p o s i t i o n s s up-
p o r t e d b y t h e d a t a - - i.e., P r o p o s i t i o n s 1 a n d 3
b u t n o t P r o p o s i t i o n 2 - - t h e a na l ys i s was , t h e r e -
f or e, p u s h e d t o a s e c o n d s t a ge i n o r d e r t o y i e l d
i n f o r ma t i o n o n t h e p r e s e n c e o r a b s e n c e o f
mo n o t o n i c i t y i n t h e i mp a c t o f t h e c o n t i n g e n c y
r e l a t i o n s h i p s o n SBU e f f e c t i ve ne s s .
Th e p a r t i a l d e r i v a t i v e o f t h e o r i g i n a l r e gr e s -
s i on e q u a t i o n ( 4 ) f r o m Ex h i b i t 3 y i e l d s t h e fol -
l owi ng:
O( Y)/O( X3 )= - - 0 . 0 3 8 + 0 . 1 2 2 X, (lO)
Fi g u r e 1 p l o t s t h e a b o v e pa r t i a l d e r i v a t i v e
o v e r t h e e n t i r e r a n g e o f SBU s t r a t e g y ( X 1 ). F r o m
t h e p l o t t e d l i ne, i t c a n b e s e e n t ha t t h e ef f ect o f
X 2 o n e f f e c t i v e n e s s i s p o s i t i v e i n t h e s t r a t e g y
r a n g e a b o v e 0. 311 a n d n e g a t i v e i n i t s r a n g e
b e l o w t h e va l ue of O. 311. Thus Fig. 1 r e v e a l s t h e
0y (Ef f ect i veness)
ox 5 (ReLiance on subj ect i ve -
approaches)
0.015
0.010
0.005
I 0
- I D0 /
( "Pur e harvest ")
/
-(~0 05
-0.010
/ -0.015
(- 1. 00, -0. 016)
St r at egy

L00
( "Pur e bui l d" )
Fig. 1. The effect of st rat egy on t he rel at i onshi p bet ween t he
i ncent i ve syst em' s rel i ance on long-run or i ent ed cri t eri a and
effectiveness.
f o l l o wi n g nonmonot i c r e l a t i o n s h i p s :
For SBUs at t h e b u i l d e n d o f t h e s t r a t e g y s pe c -
t r um, g r e a t e r r e l i a n c e o n l o n g - r u n c r i t e r i a f or
b o n u s d e t e r mi n a t i o n has a p o s i t i v e i n f l u e n c e
o n e f f e c t i ve ne s s .
For SBUs at t h e h a r v e s t e n d o f t h e s t r a t e g y
s p e c t r u m, g r e a t e r r e l i a n c e o n l o n g - r u n
c r i t e r i a f or b o n u s d e t e r mi n a t i o n has a neg-
a t i ve i n f l u e n c e o n e f f e c t i ve ne s s .
Th e p a r t i a l d e r i v a t i v e o f t h e or i gi na l r e gr e s -
s i on e q u a t i o n ( 8 ) f r o m Ex h i b i t 3 y i e l d s t h e fol -
l owi ng:
O( Y)/O(X s)dbO.O00 + 0. 016 X, (11)
Fi g u r e 2 p l o t s t h e a b o v e p a r t i a l d e r i v a t i v e
o v e r t h e e n t i r e r a n g e o f SBU s t r a t e g y (X~). As c a n
b e s e e n f r o m Fig. 2, t h e i mp a c t o f X 4 o n ef f ect i ve-
ne s s is al s o nonmonot oni c o v e r t h e r a n g e o f
s t r a t e gy, wi t h t h e i n f l e c t i o n p o i n t o f t h e s l o p e
f al l i ng e x a c t l y at s t r a t e g y -- O. Thus, g r e a t e r
r e l i a n c e o n s u b j e c t i v e ( n o n - f o r mu l a )
a p p r o a c h e s f or d e t e r mi n i n g t h e b o n u s c o n t r i -
b u t e s t o e f f e c t i v e n e s s i n t h e c a s e o f b u i l d SBUs
but h a mp e r s i t i n t h e c a s e o f h a r v e s t SBUs.
LINKING CONTROL SYSTEMS TO BUSINESS UNIT STRATEGY 63
a y ( E f f e c t i v e n e s s )
-~-~ ( Re Uo n c e o n l o n g - r u n o r i e n t e d -
c r i t e r i o )
0.o0 ~ -
0 . 0 8 L - ( , . 0 0 , 0 . 0 8 4 )
ooo /
0. 04 -
0.02 -
/
St rat egy
I / ( 0 3 1 1 , 0 ) r
- t . O0 0 / 1.00
( P u r e h a r v e s t ) 0 0 2 J ( " P u r e bul t . d )
/
- 0 . 0 4 , - -
- 0. 12 -
/
( - 1 0 0 , - 0 . 1 6 0 )
Fig. 2. The effect of s t r at egy o n t he r el at i ons hi p b e t we e n t he
i nc e nt i ve s y s t e m' s r el i ance o n s ubj e c t i ve ( as o p p o s e d t o for-
mul a - ba s e d) a ppr oa c he s and ef f ect i veness.
DISCUSSION
There is now increasing recognition in the
account i ng literature of the need to utilize con-
tingency approaches towards the design of plan-
ning and control systems in organizations (e.g.,
Dermer, 1977; Ansari, 1977, 1979; Gordon etal.,
1978; Waterhouse & Tiessen, 1978; Otley, 1980;
Ewusi-Mensah, 1981 ). While previous empirical
studies (e.g., Bruns & Waterhouse, 1975; Hayes,
1977; Merchant, 1981) had examined con-
tingency relationships bet ween organizational
cont rol mechanisms and variables such as envi-
ronment, size, and technology, this study has
explored the utility of relating control systems
to strategy. In particular, it has provided empiri-
cal support for the idea that, in terms of SBU
effectiveness, the utility of any particular incen-
tive bonus system empl oyed in an attempt to
influence the SBU general manager' s behavior is
cont i ngent upon the strategy of the focal SBU.
The results of this study can be summarized as
follows: ( 1 ) greater reliance on long-run criteria
as well as greater reliance on subjective (non-
formula) approaches for determining the SBU
general managers' bonus contributes to effec-
tiveness in the case of build SBUs but hampers it
in the case of harvest SBUs, and ( 2) the relation-
ship bet ween the extent of bonus system' s
reliance on short-run criteria and SBU effective-
ness is virtually i ndependent of SBU strategy.
At the level of practice, these findings hold the
greatest relevance for those executives respon-
sible for the design and implementation of con-
trol systems in diversified corporations, espe-
cially in terms of helping them differentiate the
incentive systems according to variations in SBU
strategy. On the ot her hand, at the level of
theory, the primary relevance of this study lies in
its demonstration of st rat egy as a source of con-
tingency for the design of cont rol systems as
well as in its extension of the cont i ngency
t heory of organization from the i nt erf i rm to the
i nt raf i rm context. Thus, future cont i ngency
research on a variety of SBU-level strategic and
organizational variables (including but not
limited to incentive bonus systems) not
examined in this study can be expect ed to yield
fruitful results. The design of future research in
this area might also benefit from the following
examination of the key limitations in the present
study.
An obvious limitation of this study has been its
exclusive reliance on self-report measures par-
ticularly for the t wo kep variables - - "strategy"
and "effectiveness". While the authors believe
that the results of validity and reliability tests
carried out and discussed in the "met hod" sec-
tion argue for sufficient confidence in these mea-
sures, a similar study with multimethod, multi-
rater measurements should undoubt edl y yield
more powerful results.
A second limitation of this study has to do with
the establishment of causality. Although all
hypotheses were stated in associational terms,
the logic behind t hem implies that interaction
bet ween strategy and incentive bonus systems is
not just associated with but causes greater effec-
tiveness. The cross-sectional and snapshot
64 v. GOVINDARAJAN and ANIL K_ GUPTA
nat ur e of t he dat a i n this st udy has pr event ed any
tests for such causality. Nonet hel ess, on an a-
p r i o r i basis, t he resul t s of this st udy do l end
pr omi se to t he frui t ful ness of l ongi t udi nal
st udi es under t aken specifically for t he exami na-
t i on of casual linkages.
Arguabl y t he most si gni fi cant l i mi t at i on of this
st udy has been its focus on onl y a few vari abl es
per t ai ni ng to bot h st rat egy and cont r ol systems.
Strategies of busi ness uni t s wi t hi n di versi fi ed
firms differ not j ust i n t er ms of t he "st rat egi c mis-
si on" but also i n t er ms of t he "compet i t i ve post -
ure" (e.g., cost l eadershi p vs di f f er ent i at i on)
adopt ed by a busi ness uni t rel at i ve to ot her firms
i n its i ndust r y (Port er, 1980). For i nst ance, bot h
Texas I ns t r ument s and Hewl et t -Packard are
di versi fi ed firms wi t h a busi ness uni t i n each firm
compet i ng i n t he per sonal c omput e r i ndust ry.
However, t he compet i t i ve post ur e of t he Texas
I ns t r ument s SBU appears to be "l ow pr i ce"
wher eas t hat adopt ed by t he Hewl et t -Packard
SBU appears t o be "pr oduct feat ures and perfor-
mance rat her t han l ow pri ce". It is not i ncon-
cei vabl e t hat an SBU t ryi ng to achi eve a l ow cost
posi t i on mi ght r equi r e di fferent cont r ol syst ems
as compar ed to an SBU whose pr i mar y c onc e r n
is upgr adi ng of pr oduct f eat ur es/ per f or mance
rat her t han cost r educt i on. Ot her di mens i ons
al ong whi ch SBU st rat egi es can be di fferent i at ed
mi ght also exi st - - for i nst ance, t he degr ee of ' i n-
t er connect ednes s ' bet ween t he focal SBU and
ot her SBUs wi t hi n t he same cor por at i on
(Rumel t , 1974).
Similarly, mat chi ng i ncent i ve bonus syst ems
to st rat egy is onl y one - - al bei t a si gni fi cant one
- - of t he cont r ol mechani sms used by cor por at e
l evel execut i ves to ensur e effective i mpl ement a-
t i on of SBU strategies. Ot her i mpor t ant cont r ol
mechani sms whose rel at i onshi p to SBU st rat egy
mi ght be wor t hy of i nvest i gat i on i ncl ude: use of
admi ni st r at i ve cont r ol vs i nt er per sonal cont r ol
( Br uns & Wat er house, 1975), degr ee of decen-
t ral i zat i on wi t h regard to t he pr epar at i on of
l ong- r ange pl ans as wel l as annual budget s, lin-
kages bet ween l ong-range pl ans and budget s,
hur dl e rates used i n capital i nves t ment analysis,
nat ur e of data i ncl uded in i nt er nal r epor t s (e.g.,
fi nanci al vs non-fi nanci al data, hi st ori cal vs infla-
t i on adj ust ed data, i nt er nal vs ext er nal envi r on-
ment al data), etc.
Finally, it is wor t h not i ng t hat t he focus of t he
pr esent st udy as wel l as of vi rt ual l y all pr evi ous
l i t erat ure deal i ng wi t h l i nkages bet weeen
st rat egy and cont r ol syst ems has been on t he
i mpl i cat i ons of mat chi ng st rat egy and cont r ol
syst ems for onl y an "organi zat i onal " out come
viz., effectiveness. Gi ven t he nor mal l y hi gh
degr ee of i nt er act i on bet ween per sonal and
organi zat i onal out comes, research on t he impli-
cat i ons of mat chi ng st rat egy and cont r ol syst ems
for manageri al j ob i nvol vement and j ob satisfac-
t i on woul d seem to be of at least equal signifi-
cance.
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