Determinants and effects of the diagnostic and interactive use of control systems: an empirical analysis on the use of budgets

Based on Simon’s distinction between diagnostic and interactive control approaches, this study examines the determinants and effects of the use of budgets. Using survey data from German manufacturing firms, the study analyzes a broad set of potential influencing factors. We test a structural equation model which explains a significant part of the variance of the interactive and of the diagnostic use of budgets. The way budgets are used highly matters with respect to controlling business strategy and influencing firm performance. Interactive and diagnostic uses of budgets significantly contribute to the formation of emergent strategies and to the implementation of intended strategies. The study extends contingency research by analyzing different aspects of the external and internal business environment and their influence on the use of budgets. We contribute to the literature in two ways: First, the results on the effects of different influencing factors may be used for theory development, and second, it provides a basis for further empirical investigations which may focus on one particular factor. Copyright Springer-Verlag Berlin Heidelberg 2012