Internationalisation impact in shaping Management Control Systems (MCS)

Keywords: Internationalisation, Management Control System MCS, Controller role in MCS design and implementation

1.0 Introduction

1.1 Research Background

. Globalisation has changed the business environment and today organisations are facing a global socio-economic context through increased competition and constant change (Internationalisation impact in shaping Management Control Systems (MCS)). The complex and dynamic operating environment have influenced management control system because of changes in structure, size and processes in the organisation (Chetty, Johanson and Martin, 2014).

Moreover, Fletcher, Harris and Richey (2013) added that company administrative complexities increase with the internationalisation of its operations and the new geographical scope demands new-sophisticated control systems. Internationalisation prompts the need to expand the scope of financial and human resources control system at home as well as in the subsidiary.

Hitt, Ireland and Hoskisson (2012) stated that “Internationalisation of company affects the management control system (MCS)”. In globalised context, organisation operating challenges and complexities increases and thus, new systems are required to deal with the new scope of business. To achieve objectives of the company and success in the foreign market, it is imperative for the international company that their management control systems respond to a global strategy.

The effect of internationalisation makes it difficult for organisation to forecast the future accurately and therefore, the role of MCS is to evaluate the outcome of alternatives and develops the capacity to manage the consequences of changes (Hitt, Ireland and Hoskisson, 2012). Internationalisation impact in shaping Management Control Systems (MCS)

1.2 Research Context

1.2.1 Literature Gap

The goal of this research is to explore the impact of the internationalisation on Management control systems and contribution of controller in the design and implementation of MCS in organisation. Previous studies explore internationalisation impact on management control systems (Ruigrok and Wagner, 2003; Chiva, Ghaurii and Alegre, 2014; Prange and Verdier, 2011; Morsing and Oswald, 2009).

While other studies explore the role of a controller (Goretzki, Strauss and Weber, 2013; Windeck, Weber and Strauss, 2015; Brito and Oliveira, 2014), but there is a lack of correlated studies (Taylor and Jack, 2012). Therefore, there is little knowledge and research gap exist in context of relationship between internationalisation impact on MCS and controller role towards the evolution of MCS.

1.2.2 Research purpose — ABC (AR) context

ABC is the world leader in ‘Cork Flooring products manufacturing’ and is part of the holding company of ‘Corticeira Amorim’ which is the world’s largest producer of cork solutions. Company marks its position as market leader among Portuguese companies and in the international markets.

The motivation of study is researcher position to the company as a controller in AR’s sale unit in Switzerland and thus, wanted to explore (1) changes in the MCS due to the internationalisation and (2) analyse the role of the controller in the design and implementation of MCS in AR. Furthermore, the research is aimed to address the gap between the controller role at the parent and subsidiary company, as well as their contribution towards the evolution of MCS.

1.3 Theoretical context for this research

1.3.1 Internationalisation effect on System dynamic of organisation

Wallis (2009) elaborated that organisational change defines the transition effect from which an organisation is going through, whereas internationalisation is the period of transition. Internationalisation involves adapting to the international environment through increased experience of the foreign market.

Figure 1 enclosed the system dynamic of organisation. The three important perspectives are structure, function as well as processes of the organisation. Organisation structure includes fiscal parameters along with control systems. The structure of organisation reflects the function of organisation and its units. These changes include the creation of new department and changes in processes and structure of existing business unit to support the business activity or employing international employees for subsidiary (Batra, 2011).

Arjalies and Mundy (2013) evaluated that in internationalised companies, structures, roles and processes transformed because of evolutionary change, which is explained by ‘Stage theory’. The stage theory elaborates the increased involvement in overseas activities, company moves from one stage to another as it gains knowledge of the foreign market. Moreover, foreign knowledge affects the control system and decision-making in the organisation.

The acquisition and integration of knowledge about international market and its operations result in a continuous change in the organisation. The fit between the organisation and its environment is critical in achieving the objective. Organisational expansion through internationalisation result changes in structure, processes and function of the organisation (Hatch and Cunliffe, 2013).

1.3.2 Control system in subsidiary

The subsidiary competences exploitation refers to the adaptation of product and services for foreign market needs and production condition to generate and develop new technologies and knowledge. Therefore, these innovations have become valuable sources for the multinational as a whole. Organisation processes are concerned with how the systems generate knowledge.

Organisational configuration directly influences the system dynamics and role of the controllers. The management and organisational profile elaborate the changes in an organisation. The structural changes in processes and departments have high importance for stability and control (Wolf et al., 2015).

1.4 Management Control systems (MCS) in ABC

Straub and Zecher (2013) stated that “MCS is a system, which gathers and analyse information to evaluate the performance of organisational financial and human resources to influence behaviours and implement strategies”. Brenner and Ambos (2013) added that internationalisation makes the control mechanism a complex phenomenon in multinational organisation (figure 2). For example, the structural and functional dimension (marketing and production, product line and geographical context) and need for local adaptation directly influences the design of control system in the organisation.

Other factors concern is the transfer price and the high asymmetry of information. Information asymmetry involves the interaction between the stakeholders and organisation to understand the environment, where risk, taste and regulations have a big impact. The high information asymmetry limits the ability of the organisation to use the action controls because of difficulty in defining the adequate judgement. (Information asymmetry defines controllers’ role in ABC).

Another reason for the complexity of the control mechanism is the languages, distances and time zone, which can lead to a less involvement of management in the foreign subsidiary. The last concerned factor is exchange rate problem (This is a problem for the subsidiary of ABC in Switzerland).

Figure 2: Control Mechanism in ABC

1.5 Research Aim and questions

The aim of this research is to explore the impact of internationalisation on ABC’ (AR) structure, processes and functions and how the controller has contributed towards the evolution of management control system (MCS). The research questions for this study are:

  • What is the impact of internationalisation on the ABC system dynamic and its implications for management control systems (MCS)?
  • How controllers in Portugal and in the subsidiaries have contributed towards the evolution and implementation of a more sophisticated management control system (MCS)?

1.5.1 Research objectives

  • To explore the impact of internationalisation on the structure, processes and functions at ABC and the effect on its MCS.
  • To analyses the relationship between MCS and the controllers from the parent and subsidiaries perspective.
  • To determine the contribution of the controllers in Portugal and in the subsidiaries towards design and implementation of MCS.

Figure 3: Research Framework

1.6 Structure of dissertation

This dissertation is based on five chapters. The first chapter of study includes the research purpose, background, theoretical context as well as research questions of the study. The second chapter of study enclosed the literature review to explore the Impact of internationalisation on organisational systems and controller contribution in the evolution of management control systems. The third chapter of study elaborated the research methodology selection and discussion for the suitability of selected research approach. The fourth chapter of study present the case study for ABC and the fifth chapter of study draw the conclusion.

2.0 Literature review

This chapter of study enclosed the literature review to explore the Impact of internationalisation on organisational system dynamics and controller contribution in the evolution of management control systems. The literature has structured into three sections. The section A analyses how internationalisation affects system dynamics of organisation and MCS importance in the context of internationalisation. The section B of study evaluates the MCS control framework evolution and subsidiary impact on the MCS. Section C evaluates the role of controller and contribution towards the MCS.

Figure 4: Structure of Literature Review

Section A – Internationalisation and MCS importance

2.1 Internationalisation

Casillas, Barbero and Sapienza (2015) stated that Internationalisation is a process through which company increases influence and awareness of international activities to conduct transactions across borders. Organisation adaptation in international market is managed through small incremental steps. Knight and Liesch (2016) highlighted that internationalisation of firm is not limited to output factors but involve input factors to generate value through value chain”.

Internationalisation is a continuous process and company increases its influence across border by going beyond traditional exporting and starts production, marketing and selling in the foreign market through whole value chain.

2.2 Characteristic and control context in multinational companies

Kretschmer (2011) elaborated that “internationalization was associated with exploitation of the ownership advantage for adaptation of existing product and processes to foreign market conditions”. However, this paradigm has shifted towards creating investments through the acquisition of new skills and competencies. The role of subsidiary has shifted from adaptation and technology transfer to value creation and development of knowledge competencies.

The autonomy of subsidiary is an important influencing factor and information-processing theory elaborates that organisation processes in MNC occur because of intermediation. The role of the parent company is to enforce control and integration across all units through hierarchical control of the geographically dispersed units (Mahlendorf et al., 2012).

2.3 Management Control System (MCS)

According to Fayol (1949), control is the fundamental task of managers and management control system (MCS) is useful for “controlling and administrating activities and processes in the organisation”. Managers need a framework to determine, analyse and control performance. Management control system (MCS) is a process through which controllers ensures that organisational resources are deployed in the effective and efficient manner to achieve the objectives of the organisation (Grabner and Moers, 2013).

MCS is a system, which gathers and analyse information to evaluate the performance of organisational financial and human resources to influence behaviours and implement strategies.

Straub and Zecher (2013) stated that traditionally, “MCS was associated with achieving operational efficiency through evaluating the performance of employees”. However, in today’s competitive world, managerial control systems enable managers to implement practices, which deliver competitive advantage.

Management control is a combination of process and tools, which influence the behaviours within the organisation to achieve the goals of the organisation. Management control system consists of system and devices that used by managers to ensure that decision and behaviour of employees which are consistent with objectives of the organisation. Moreover, MCS is an integrated system, which develops organisation systems to control stakeholder’s behaviour (King and Clarkson, 2015).

2.4 Empirical literature – Management control system (MCS)

Anthony (1965) proposed and developed foundation for MCS while subsequent scholarly studies advance the earlier MCS concept or proposed their own concept (Simons, 1995; Harrison and McKinnon, 1999; Otley, 1999; Hoque, 2003; Otley and Ferreira, 2005; Anthony and Govindarajan, 2007).

Anthony (1965) categorised MCS into three areas, which are management control, strategic planning (goals and strategies) and task control (processes control). The MCS literature revolves around control processes and environment (Chenhall, 2003) and enclosed activities such as planning, feedback and decision-making to control behaviour (Berry et al, 2009).

Hoque (2003) proposed that “management accounting system tools to elaborate operational and strategic control, which integrates personal, organisational and cultural controls in the organisation”. Organisational culture, policies and procedures, structure and governance system are component of control environment and these elements classify responsibilities and flow of information in organisation (Harrison and McKinnon, 1999; Herath, 2007). However, organisation control will not function proper without appropriate control environment (Efferin and Hopper, 2007; Herath, 2007; Zimmerman, 2009).

Control environment involves accounting based formal approach and focus on planning, motivation, budgeting and performance measurement MCS process control facilitates the control environment in organisation (Macintosh, 1994; Otley et al, 1995).

2.4.1 Criticism of earlier MCS literature

Barrett and Dyt (2010) criticise on earlier MCS literature is that it uses quantifiable approach but does not deal with non-quantifiable perspective of organisation. The rapid socio-economic development has changed the operating environment of business and quantifiable approach has limited MCS perspective.

Therefore, earlier management literature is less concerned with behaviour and social perspective (Horngren et al, 2005; Herath, 2007; Davila and Foster, 2009). Moreover, Van der Stede (2007) proposed ‘object of control model’ to integrate the behaviour aspect (Contingent factors) The MCS typology variables includes action control and cultural control.

2.4.2 Evolution of MCS as package

Simons (1995) proposed “MCS typology integrating organisational economic and social aspect and elaborate control concept through beliefs, boundary and diagnostic control system for strategic control and performance management”. However, (Henri, 2006; Langfield-Smith, 2007) criticised model for shortcoming, that it does not elaborate administrative and process control.

Thus, (Collier, 2005; Herath 2007) proposed deeper understanding of control system incorporating culture, structure and strategy. However, this model becomes more ambiguous as it overemphasized rules, regulation, and information system.

Malmi and Brown (2008) developed an inclusive framework ‘MCS as Package’, which addresses the limitation of earlier models. MCS as Package framework offers integrated approach and adopt five approaches, which are planning, cybernetic, incentive system, administrative and culture control.

However, Efferin and Hopper (2007) criticise MCS as a package for three reasons. The first problem is that this model does not weight the importance of vision and information flow neither in implicit nor explicit manner. Secondly, this model does not address the intrinsic motivation and incentives, which is critical for social setting. The third limitation associated with this model is this model lack empirical validations, which questions its practicality.

2.4.3 Control of subsidiary

Fang et al (2013) added that organisation adds value through effective resource allocation and well-designed MCS are critical for long-term win-win strategy between the parent and subsidiary. The parent companies make efforts to enhance the performance of subsidiary. The synergies in the group generated through information asymmetry and control systems are used to control an action of subsidiary managers. (Drogendijk and Holm, 2012).

The flow of information and decision-making in subsidiary involves complex economic, social and cultural challenges. The structure and function are influenced because of environment differences and selection of strategy in the subsidiary. In such diverse environment, the flow of information influences the degree of control exercised by the parent company. Cultural distance increases the transaction cost associated with both behaviour and output control (Hoque and Chia, 2012).

2.5 Internationalisation and importance of MCS

Malmi (2013) stated that “management control literature gives similar focus to the control of the multinational companies”. The control system in international companies is similar to home companies but they are designed in the global context. In the global context, cultural differences have influenced the way information is generated and used.

The strategy adopted by the organisation enables to manage international operations and thus, allows achieving the objective through determining success factors, which are relevant to its strategy. The determination of these factors decides the degree of autonomy and management system to design control system for the operations.

Casillas, Barbero and Sapienza (2015) added, “Management processes adaptation in the global environment is slow and complex”. The multinational companies are influenced by local government and global competitors, which forces to integrate management systems at both local and global level.

The global business environment complexity and multidimensional changes the organisational structure and processes for decision-making. Management control is based on the gradual process of changes in the people as well as the relationship with processes rather formal restructuring (Lasserre, 2012).

2.6 Conclusion – Section A — Contribution towards the research

To conclude, the section A of study analyses and elaborates the internationalisation and control context in an organisation. Moreover, it analyses the evolution of MCS and empirical context of design and implementation of the control system. The empirical literature has allowed to critically assessing the wide range of studies to develop an understanding on the MCS.

The criticism of traditional MCS approach and evaluation MCS as the package has allowed in selecting the appropriate theory and theory used to achieve the objectives of this study. Moreover, this section provides an understanding of the control context of the subsidiary as well as the importance of MCS design and implementation in the internationalisation perspective.

Figure 5: Section A — Contribution towards the research

Section B – MCS framework evolution – theories and models

2.7 Contingency Theory and MCS design

Drury, 2008 added that control is defined as “mechanism or sum of activities deploys to obtain information about the behaviour and decision in an organisation”. Contingency theory elaborates multiple aspects and combination of control system   to enhance performance. The theory suggests the design and use of control systems are influenced by range of factors, which are internal (strategy), and external factors (environment) relevant to organisation.

Contingency theory added that organisation cannot remain static with respect to internal environment (size and technology change) as well as neither it can function in isolation with external environment (level of uncertainty). The changes in the internal and external factors affect the redesign of aspect of control system design (Otley, Merchant and Emmanuel, 2013).

The strength of contingency theory is that it focuses on the organisational systems and structure, which are contingent in existing environment of the organisation. Moreover, theory acknowledges the environment of the business from both scientific as well as behaviour management perspective. It recognises multiple approaches in managing the organisation and highlights the importance of organisational structure, processes and functions to adapt to the external environment (Battilana and Casciaro, 2012).

2.8 Simons Control Framework

Simons (1995, 2000) suggested four levels of control framework, which are interactive control systems, diagnostic control systems, boundary systems and belief systems. The control system is developed and implemented through integrating these levels of control. These factors create complexity between the goals of organisation. The complexity requires the managers to learn how to exercise high degree of control and learning (innovation).

Organisational changes affect the relationship between department and employees. The control perspectives encourage desired behaviours and outcomes. The purpose of control system is to regulate the activities and operation of organisation to achieve outcomes in accordance with the objectives and expectation of the controller (Simons, 2013).

Simons Control Framework

2.8.1 Belief systems

According to Simons (2000), “beliefs systems enclosed the explicit set of organisational characterization, which is communicated by the managers to highlight the purpose, value as well as a direction of the organisation”. Employees in an organisation may adapt behaviour, which results in dysfunctional behaviour, and thus belief system gives principles and direction. Beliefs systems define the values and direction articulate for years and managers, want their employees to embrace.

Behaviour controls are control designed and deployed through monitoring the subordinate’s behaviours. Belief system develops capacity in an organisation, which elaborate employee position in the business to address direction and control issue (Bedford and Malmi, 2015).

2.8.2 Boundary System

According to Simons (2000), BDS enclosed the “rules and limits which define the sanctions and threat of punishment”. In the modern organisation, boundaries systems (BDS) are embedded standards, which enclosed code of conduct and ethical behaviour. Managers are faced with new challenges and opportunities to create value and overcome the obstacles.

Human nature is incentives and employee autonomy fuelled with performance reward might result in dysfunctional behaviour. The boundary controls are implementing in the organisation through internal controls which enclosed the policies and procedures to ensure accounting information is reliable and safeguard the assets of the company (Tessier and Otley, 2012).

2.8.3 Diagnostic control system

Diagnostic control systems (DCS) enclosed the formal system of information for the managers to monitor the outcome and take corrective actions against pre-defined performance standards. In diagnostic control context, managers report variance information by evaluating critical performance variables. Diagnostic control focuses on the efficiency and control system.

The important goal of implementation of DCS is strategic implementation and reviews the critical performance variables for strategy, which result in the success of the business. The shortcomings of DCS are that alone these systems cannot ascertain whether employees are working in best interest of organisation and thus requires addition control to avoid dysfunctional behaviour (Chapman, Hopwood and Shields, 2011).

2.8.4 Interactive control system

Davila, Epstein and Manzoni (2014) stated that “interactive control system facilitates the managers to involve themselves in personal and regular decisions of subordinates”. The formal performance management system in an organisation includes budgeting, cost accounting and balance scorecards. Interactive control system focuses on the strategic uncertainties (emerging threats and opportunities) faced by the business and seek to answer how assumption which could hinder the vision of the organisation.

Managers are constantly involved and frequent attention is given by managers through personal involvement. Interactive control system involves both learning and control and senior managers use it as catalyst for information management and develop action plans (Davila and Foster, 2009).

2.9 Conclusion and Application of Simons Control Framework to AR

Simons proposed MCS typology integrating organisational economic and social aspect and elaborate control concept through beliefs, boundary and diagnostic control system for strategic control. Interactive and diagnostic control system interact and work together to implement the strategy as well as position itself for changing business environment.

For example, Kaplan and Norton (2001) proposed the balance scorecard as an interactive control system. In addition, diagnosis systems are internal controls but do not align organisation and strategy. Therefore, it is important to set the strategy first and then implement the control actions and initiatives to accomplish goals of the organisation.

The application of Simon’s model for this study is useful to understand the social and behaviour aspect of the control system in the organisation. This provides the guideline to explore the boundary and belief system of AR as well as how MCS design and implemented through interactive and diagnostic control system.

2.10 Internationalisation and management control systems

Boussebaa (2015) stated that “Internationalisation expand company operations across borders, the focus shift control mechanism of multinational company including its subsidiary”. The figure 7 shows the management control system in an organisation. The operational control is concerned with operational activities; administrative control elaborates the structural governance system of organisation. Cultural control highlights beliefs and values of organisation, which affect the structure and system of organisation (Bedford and Malmi, 2015).

management control practices

Figure 7: Management control practices

2.10.1 Process Control — Interactive and diagnostic control system

Yadav and Sagar (2013) analysed that the “process control in an organisation is based on ‘results control’ and it involves a mechanism for integration of policies, rules and procedures to manage the operations and activities of the organisation”. The control mechanism under this context includes planning and budgeting, performance management, incentives and reward system.

Planning is known as determination of course of actions to achieve the specific purpose. Planning enables to define employee behaviours and achieve goal congruence. A planning could be short-terms (actions plans) as well as long-term (strategic planning) enclosing future activities of the organisation. Furthermore, plan action includes planning budget, which forecasts financial performance of organisation and analyses variance (Wolf and Floyd, 2013).

Bureaucratic control reduces direct involvement of head office into operation of organisation through impersonal method, which replaces active controls and objective explicit delineation. It uses extensive set of rules and procedures to restrict and limit subsidiary authorities and management activities.

Performance measurement (PM) is a measurement of financial and non-financial result through evaluating the performance of organisation in relation to plans, critical success factors (CSF) and strategies. The purpose of PM is to establish policies and processes and communicate standards with elements impersonally specified (Cerasoli, Nicklin and Ford, 2014).

Incentive and rewards motivate the employees to act in a particular way through offering financial and non-financial benefits and achieve goal congruence. The two types of rewards offered are intrinsic and extrinsic rewards. The intrinsic reward is the psychological satisfaction (recognition and fairness) and extrinsic rewards are the financial rewards. The MCS literature shows that organisation largely used an extrinsic rewards system.

In addition, the flow of information ensures knowledge sharing and communication (horizontal and vertical) and develops indispensable control mechanism. In MCS literature, information flows allow to determine the results and provide feedback for corrective actions (Merchant and Stede, 2016).

Micheli and Mari (2014) evaluated that “output control is associated with performance evaluation of the subsidiary through performance reporting”. Output control when compared with behaviour and bureaucratic control, it offers flexibility and to deliver targeted results. However, problem of this approach is dysfunctional behaviour and in particular, in ‘distinct culture environment’ (subsidiary), this approach is less attractive. The strength of process control is relatively simple to control technique and offer great decentralisation. The weakness of this control technique is that it restricts operational flexibility and adaptiveness (Zairi, 2012).

Process Control -- Interactive and diagnostic control system

Figure 8: Process Control — Interactive and diagnostic control system

2.10.2 Administrative control – Boundary System

Herath (2007) elaborated that “administrative control is associated with structure and governance of organisation”. It involves defining the roles and responsibilities to define the governance mechanism. The first stage involved is mission statement, which set the direction of the organisation. The mission statement defines the relationship with stakeholders and provides guidelines.

However, in MCS context mission does not measure the success of organisation but provide guidelines for communication. The organisation structure determines the roles and responsibilities and depends upon the contingent factors. The objective of administrative control is operations which are carried out within defined policies and hierarchy of organisation (Macintosh and Quattrone, 2010).

Otley and Soin (2014) added that “governance system determines the agent-principle relationship and ensures that agent delivers in the best interest of principal”. Governance refers to the system through which organisations are directed and controlled through defining horizontal and vertical responsibilities and activities.

The objective of the governance system is to manage socio-economic and cultural context in an organisation. In MCS context, governance and structure address activities and operations of organisation in socio-cultural and economic context. The organisation structure is most important component of internal controls in an organisation and in conjunction with policies it defines employee behaviour. The environment changes such as customer need, technology and employee attitude requires MCS practices to meet the changing requirement. Therefore, the introduction of new product, technology or structure requires changes to MCS (Busco and Scapens, 2011).

Administrative control - Boundary System

Figure 9: Administrative control – Boundary System

2.10.3 Cultural Control – Belief System

According to Hofstede (1980), “culture is collective programming of minds based on tradition and norms shared in the society”. In addition, organisation and management are influenced by socio-cultural context, and for coordination, it is important to develop an understanding of belief, values and expressions. Corporate culture enclosed norms, values and beliefs shared among the member of the organisation. These patterns provide a framework to regulate and an adaptive mechanism to guide the existing behaviour along with explicit rules of organisation (Hofstede, 1980).

Trueba, Jacobs and Kirton (2014) discussed  that “cultural norms shape up the MCS of organisation and it allows the organisation to develop own sub-culture for goal congruence between organisation and employee”. Cultural control is useful in a situation when it is difficult to specify and monitor behaviour and output. Organisation induces these norms and values and expects that internal stakeholder’s act in the interest of the company.

Culture is a complex phenomenon and difficult to understand and thus, there are three types of cultural control in an organisation which are; 1) belief and value control, 2)  clan control, and 3) symbol-based control. Clan control emerges in an organisation through boundaries and division and informal relationship. Clan control is established through the sense of social belonging.

In addition, belief and value cultural control defines enclosed explicit organisation values, which are communicated in a formal manner and refines the direction, value and purpose in a systematic manner. Furthermore, symbol control refers to the physical expression and environment of organisation such as dress code and artefacts, which influence the behaviour of employees. In MCS context, cultural control affects the design and implementation of the control system (Stix, 2013)

Cultural Control – Belief System

Figure 10: Cultural Control – Belief System

2.11 Conceptualisation of MCS in Subsidiary

In a multinational organisation, interpersonal interaction plays the pivotal role for knowledge sharing and operational coordination. The organisation adaptability with the internal and external environment is managed through interaction and behaviour controls and managed in two ways. The first is interaction and cooperation between parent and subsidiary manager and second are between managers of different subsidiaries (Langevin and Mendoza, 2013).

The interaction and information sharing facilitate the decision-making. The control in-group organisation is divided into three categories. This includes decentralisation of decision-making, vertical communication by the subsidiary control as well as horizontal communication between managers in different subsidiaries. Decision-making decentralisation occurs through task allocation and communication occurs in the decision convey process (Arjalies and Mundy, 2013).

2.12 Benefit and shortcoming — Management control system

De Waal (2013) highlighted the “benefits offered by strong management control system is that it detects the errors and deters fraud”. The objective of the MCS is to improve control environment, eliminate the error and fraud and minimising the probability of error.  The identification of financial misconduct and illegal activities are identified through MCS, which reduces financial loss for the organisation.

The reliable MCS increase the financial and human resource efficiency and effectiveness in an organisation and increase the competitiveness of internal and external service provision. MCS allows in deploying operational infrastructure, which increases the reliability of financial statement and increases productivity. In addition, the compliance cost and dysfunctional behaviour are eliminated, which delivers resource efficiency and quality of output.

The problem associated with MCS is the adoption of design, which is adequate for the environment of the organisation. The poor MCS design and implementation fails to identify malpractices and encourage dysfunctional behaviour. The poorly design MCS reduce innovation, makes operation inefficient while limiting the employee creativity and flexibility (Sinha, 2009).

2.13 Conclusion – Section B — Contribution towards the research

This section of study allowed analysis of control framework and assessing their suitability and application for AR. The analysis of Simons (1995, 2000) MCS typology elaborate control concept through beliefs, boundary and diagnostic control system for strategic control in organisation. Interactive and diagnostic control system interact and work together to implement the strategy as well as position itself for changing business environment.

This provides the framework to explore the boundary and belief system of AR as well as how MCS design and implemented through interactive and diagnostic control system. Moreover, elaboration of management control practices provides an insight how control practices facilitate the MCS design and implementation in AR.

Section C – Role of controller and contribution towards the MCS

2.14 Defining Controller

The senior manager of division in the large organisation is called controller and division is managed under the leadership of controller. The controller is responsible for the flow of information, financial and non-financial elements, which supports planning and control system within an organisation.

The role of the controller is to support the competitive decision of business through information gathering and evaluation and influence business operations and strategy. Controller has become a strategic business partner by providing information to management, which influence and shape the business decision and thus, has become an integral part of the management process (Nurdin, 2011).

2.14.1 Nature and drivers of Change in controller role

According to Hyvonen, Jarvinen and Pellinen (2015), the “new type of role for an accountant is acting like modern business orientated accountant; internal business consultant (Bogt, Helden and Kolk, 2016); hybrid accountant (Ndiweni and Verhoeven, 2014); controller and business partner” (Weibenberger et al., 2012).

In the modern business environment, less emphasis is needed for traditional accounting skills but the focus is the integration of non-financial information. Controller is involved in strategic decision-making and provides support throughout the business on both operational and strategic matter (Paulsson, 2012).

The drivers of change are based on the economic and technological change. The development such as globalisation of markets, internationalisation of firm, new information and production technology, horizontal structure and focus towards the relationship management (Bogt, Helden and Kolk, 2016).

These exogenous changes highlighted by contingency theory have highlighted the complexity of business operating environment. The adaptive pressure because of globalisation and competition has resulted in exploring information and using tools, which increase business performance. The development of communication technologies and cost-efficient information is repulsive drivers and replacing traditional roles (Lippolis and Romanazzi, 2012).

2.15 Role of Controller in MCS design and implementation

Tihanyi, Devinney and Pedersen (2012) stated that “learning theory elaborates that employee knowledge and expertise is an important asset to achieve the objective of the organisation”. Controllers manage the business unit without control of external clusters, which result in the divergence in goals and rising control problems. Controllers actively participate in group decision-making as well as strengthen the relationship between parent and subsidiary.

Learning theory assumes that management is required to make decisions based on limited knowledge and information in the limited capacity of information processing. Controllers’ knowledge and experience gained during the internationalisation allow avoiding outcomes that hinder in the achievement of objectives of the organisation.

Controllers contribute towards business competitiveness through collecting, analysing and communicating information to help the management for planning, monitoring and evaluation of the structure and processes (Wolf et al., 2015).

In such dynamic business context, controller’s role is to provide information in wider and varied context, enclosing both internal and external information to management for decision-making (Hyvonen, Jarvinen and Pellinen, 2015).

The data analysis tools such as target costing, value-based management, and the theory of constraint and e-supply chains have evolved the role of controllers. The new linear structures, multifunctional team, technological development as well as automation of processes have increased the flow of information and prompt need for efficiency through MCS (Thukaram, 2007).

2.16 Controller Role and responsibilities

Leonard and Trusty (2015) elaborated that “role of controller changed the business approach through life cycle costing, balance scorecard, customer and product profitability analysis, six-sigma”. The implementation of new tools and techniques improve business efficiency and increase productivity. The real-time data analysis has made controller as value-chain to stream the activities and foundation of business processes.

The role of controller has evolved from traditional historian accountant to provide internal accounting information for decision-making. The role of controller is to support the decision making to achieve goals.

Weibenberger et al (2012) added that controller provides simple support to the organisation for both strategic and operational management. The role of the controller has become the business partner and has the direct contribution towards supporting the management in decision-making.

In modern management, controllers create value for the business through effective management of human and financial resources and apply management accounting tools and techniques to analyse and evaluate business performance (Weber, 2011).

Controller Role and responsibilities

Figure 12: Controller Role and responsibilities

2.17 Controller and value creation

Ndiweni and Verhoeven (2014) added that “Internationalisation changes the information, need of business and role of controller is important to create value through effective and efficient resource management”. Controller focuses on creating value through quality, cost reduction and time-based information for timely decision. In addition, controller focuses that operations are efficient, availability of information for internal and external stakeholders, financial reporting and cost control for effective and efficient operation management. Thus, controller ensures support for strategic decision of business through collecting, analysing and communicating information for control (Quinn, 2014; Paulsson, 2012).

Table 1: Role of Controller and Value creation

Strategic FocusPerformance Management
Controller gathers and evaluates information to facilitate corporate strategy. Moreover, the controller creates linkage between operations and strategy. In addition, controller pursues the objectives of organisation and implements the strategy.Controller is directly involved in performance management through information gathering and using output control system. The focus is on objective achievement and motivation of employee and ensures goal congruence through feedback and performance rewards.
Risk ManagementRelationship Management
Controller ensures risk management procedures and processes are deployed. The objective is to identify the risk, its measurement and evaluation as well as communication risk. Moreover, controller ensures risk mitigation strategy in place to minimise the adverse impact.Controller ensures relationship with vendors and customers managed effectively. The understanding of customer needs and suppliers engagement allows the business to maintain strong support systems.
System ManagementChange Management
Controller involved in structuring, development and design of the control system through providing timely information. The information analysis and feedback allow continuous evolution of system.Controller leads the change from the front through communicating company values, motivating employees, communicating need for change and creating urgency for change.

2.18 Conclusion

This chapter of study systematically analysed the literature review on the internationalisation impact on the functional, structure and processes of the organisation. Moreover, empirical literature is analysed to understand the design, the implementation of MCS in the internationalisation context and evolution of MCS is explored to select appropriate control models for this study.

To explore the impact of internationalisation on ABC’ (AR) structure processes and functions and how the controller has contributed towards the evolution of management control system (MCS), Simon’s framework is used. Furthermore, chapter allows developing MCS framework deployed for this study to explore the MCS design and implementation in AR. Finally, the role of the controller is analysed in terms of MCS design and implementation and value creation for the business.

3.0 Research Methodology

Creswell (2013) explains that research is a systematic process of investigating and inquiring problem. Research theories and methodologies are not wrong or right but research method selection is dependent upon the need of researchers and objective of the research. The researcher can select an appropriate method to achieve the outcome of research and the design of research defines the success of the research.

The research design is condition and arrangement used for data collection and analysis to achieve the objective of the research. This chapter evaluates the research philosophies and approach, research design and strategy along with research instrument (Flick, 2015).

3.1 Purpose of research

Gliner, Morgan and Leech (2011) stated that the research purpose is explanatory, exploratory or descriptive and these categories are not mutually exclusive. Exploratory research is used to explore a social phenomenon or setting and beginning with exploration. It is useful to provide background information for further research either descriptive or explanatory.

The usefulness of exploratory research is that it helps to develop a better understanding of the problem and thus, the focus of research is broad. The exploratory research aims to identify variables and issues to provide ground for what and how scenario (Neelankavil, 2015).

Descriptive research is useful to collect information in a systematic manner about social phenomena. The researcher starts without a hypothesis but likely to develop a research hypothesis after data collection. A careful selection of variables and unit of measurement is required for each variable.

The purpose of this approach is to provide an accurate description of phenomena and describe basic information at a particular point of time. Explanatory research starts with possible causes of social phenomenon and researcher develops the hypothesis before collecting any data (Mertens, 2009).

3.2 Introduction and Advantage of Case studies

According to Yin (2013), case study approach to research enables the researcher to explore the phenomenon from a context of multiple data sources. The problem of exploration through multiple lenses increases the validity of results as well as ensures multiple dimensions are sightsaw and understood. Case study design is useful to answer the research question based on ‘how’ and ‘what’ context and researcher has no influence or cannot manipulate the behaviour of respondents. Moreover, case study is useful in situation when boundaries are unclear between the context and phenomenon (Woodside, 2010).

Case study offers flexibility to understand the scenario in social context that allows developing holistic perspective of a real-life event. Case study is based on constructivist paradigm, which claims that truth is relative, but the subjective human nature gives meaning. The notion of objectivity is not rejected and it presents a premise of social construction of reality.

Therefore, case studies are able to explore and evaluate the real-life contemporary phenomena and provide a description of situations. The advantage of case study approach is that it focuses on specific cases and collaborations between participants and researchers that enable a better understanding of the actions and facts (Farquhar, 2012).

3.3 Reliability and validity of Case study for this study

According to Yin (2013), case study is useful for in-depth analysis of particular scenario and narrow down the border perspective to present holistic view. Case studies are a reliable tool to explore the relationship among the key variables and it is useful to explore the impact of internationalisation on the system dynamic of AR and controller contribution in design and implementation of MCS.

Moreover, qualitative approach best fits with the case study and allows validating the results through exploring multiple sources of information and develop the holistic perspective for multiple variables. A case study is useful to validate the result through exploring and examining models and theories in social context and for this study, Simon’s framework is used to examine the MCS variables geographically and control the context of AR.

3.4 Suitability and motivation – ABC case study

The aim of this research is to explore the impact of internationalisation on ABC’ (AR) structure, processes and functions and how the controller has contributed towards the evolution of management control system (MCS). The goal of study is to evaluate the impact of internationalisation on system dynamic through exploring strategy involves examining of the geographical scope and controller contribution in design and implementation of MCS.

Qualitative research requires timely and accurate approach and for AR, case study approach is useful to access and evaluate relevant data. Case study is useful to explore the multi-dimension context for internationalisation, MCS and controller role through exploring qualitative data collected through unstructured interviews. AR Global presence and market leader position provides motivation to examine the both MCS literature and how role of controller in design and implementation of MCS.

3.5 Data Collection

The information collected for this report was gathered through researcher job experience within ABC in their Swiss subsidiary and also with an unscripted discussion with the head of management control and finance department. Through this experience, researcher was able to analyse firstly how the management and control department work in Portugal and secondly how the sale units adapted to the management and control systems and processes.

The primary data collected through unstructured interview of two controllers to depict clear knowledge on internationalisation and MCS design in AR. However, due to competitive nature and privacy issues no personal or confidential company information was collected or presented in this report.

Figure 13: Research Approach

4.0 Case study: How internationalization impacted MCS at ABC

This chapter of study investigates the impact of internationalisation on the structure, processes and functions of ABC (AR) and evaluates how controller contributed towards the evolution of MCS. The findings present evolution of MCS is explored in terms of design and implementation over the years for both parent and subsidiary.

Therefore, a correlated approach is taken to address the research gap. Firstly, implication for MCS is examined through changes in system dynamics and secondly, controller contribution is reviewed to manage these changes in ABC context.

4.1 Corticeira Amorim – Company profile and internationalisation

Corticeira Amorim is the world’s largest producer of cork solutions and the most international of Portuguese companies, leading the whole sector. The figure 14 below shows the different companies that are part the group.

Figure 14: Organigram of Corticeira Amorim

The company had annual turnover of 605M € and invested 7,5M € in R&D and innovation in 2015. It sells 4,2 billion cork stoppers annually and possesses 84 companies and 29 industrial units. The picture below shows the company geographical as oak forests in Europe and northern Africa. The forests extend to 7 different countries: Portugal, Spain, France, Italy, Morocco, Algeria and Tunisia.

4.2 Internationalisation impact and controller in shaping MCS at ABC  (AR)

4.2.1 — 2003 and first waves of changes

Prior to 2003, MCS in AR were managed through budgeting and variance analysis. This traditional MCS approach was based on the perspective involving output control and measuring these results against expectation for corrective actions (Process control). However, functional changes (Wallis, 2009) took place in the AR in 2003, through implementation of ‘Balance Scorecard’ (BSC).

The goal was to achieve strategic alignment between the departments and functions of the international business units. Kaplan and Norton (2001) proposed the balance scorecard (combining dignostic controls) and interactive control system and controllers implemented BSC to increase the business efficiency and increased productivity in AR (Leonard and Trusty, 2015).

4.2.2 — 2005 and extension of BSC implementation

Organisational changes occur through internationalisation involving processes and structural changes. The new paradigm requires values creation at both parent and subsidiary through knowledge companies (Mahlendorf et al., 2012). The strategic review process in AR was extended to a large number of departments and stakeholders. After the implementation of the BSC in all subsidiaries, the controllers facilitated the implementation of strategic maps in an analytical way across all subsiaires.

BSC was designed through the integration of different objectives to achieve the range of strategic initiatives in all business units. The implementation of strategic maps and BSC have highlighted the need of controller as a business partner (Nurdin, 2011) and controller integrated the financial and non-financial information flow to support the structure and function for timely decision-making and achieve strategic alignment between Parent and subsidairies (Subsidiary control).

The analysis conducted by the controllers were of the utmost importance for executives to base their decisions therefore, they were important to achieve the strategy proposed in the first place.

4.2.3 — 2009 and impact of global financial crisis on AR system dynamics

The global financial crisis of 2009 affected severely many European companies and AR was no exception and evident a decline in its financial performance. BSC was an excellent measure but was only useful for mid to long-term objectives. To tackle the  phenomenal environmental changes and process control there was immediate need of tools and actions.

Yadav and Sagar (2013) analysed that the process control in an organisation is based on ‘results control’ and it involves a mechanism for integration of policies, rules and procedures to manage the operations and activities of the organisation. In such diverse environment, the flow of information influences the degree of control exercised by the parent company.

In this situation controllers had to draw a map to identify all the areas of the business where resources could be better allocated without affecting the core business of the company. With analysis of business drivers it was made easier to monitor and control graphically what needs to happen and change to reach the proposed objectives despite the weak financial situation at the time (Arjalies and Mundy, 2013).

4.2.4 MCS and restructuring of 2009

The changes in priorities and customers of AR in 2009 have resulted in structural and governance system changes. Batra (2011) stated that organisation structure includes the fiscal parameters and reflects function of organisation and unit. Customer profitability analysis (Leonard and Trusty, 2015) gives us the clear idea that some of AR clients at the time were given too much importance just because they had high sales amounts. In reality, these customers were not as profitable as the «smaller» customers that gave AR higher margins and better net results (boundry control).

The controllers on the Management Control department advised executives for this situation and this resulted in changes in the customers’ portfolio of the company and the focus was shifted to attract and retain high value customers. This highlights the role of the controller that has evolved from traditional historian accountant to provide internal accounting information for decision-making (Bhimani and Bromwich, 2009).

Also at this time, administrative control changes occurred in AR which re-shaped the structure and governance in the company. These changes included lower autonomy for the sales unit as well as central sales management designed in Portugal for timely response to needs and demands of internal stakeholders of the entire company.

Busco and Scapens (2011) stated that organisation structure is the most important component of internal control in an organisation and in conjunction with policies it defines employee behaviour (boundary systems). Thus, the management director of each sale unit is lower in hierarchy than the financial director in Portugal and has to follow his rules and respond to his demands and requests.

Finally, the management control department was now very focused on the performance of the subsidiaries and results were evaluated on monthly basis. The role of controller for value creation involves design of the control system through providing timely information (Weibenberger et al., 2012) which has allowed comparing and analysing information on monthly basis in AR. For example, financial data has allowed investigating low margins, logistic costs, employee turnover and expenses as well as evaluating the credit control of clients abroad.

4.2.5 — 2014 and new business vision for AR

Strategic planning is an important component of MCS (Berry et al, 2009) and in 2014 AR redefines its strategic direction through planning and implementing ‘Ambition 2020’ (belief control). This included positioning the company as an innovative company in the flooring business, focused in the northern hemisphere while achieving higher profitability than the market average by 2020.

To design and implement the Ambition 2020, AR made a number of functional and processes changes. Wolf et al (2015) added that organisation processes are concerned with how the systems of an organisation translate into knowledge. Organisational configuration directly influences the system dynamics and role of the controllers. This affects the information asymmetry in AR and thus requires the knowledge and techniques to achieve the objectives of an organisation.

Controllers evaluated the financial and human resources to influence behaviour and implement ‘Ambition 2020’ (Straub and Zecher, 2013) (belief and boundry systems). The design and implementation of ‘New management model’ includes new tools and techniques which increased efficiency and effectiveness of processes. The table below summarised the functional and processes changes at AR.

Table 2: New business vision for AR

4.2.6 Implication of Ambition 2020 and restructuring on system dynamics and controller contribution

Ambition 2020 program of the restructuring at the company represented operational and strategic changes for AR, always with international-focus. Stocks, April and Lynton (2012) highlighted that culture is a complex phenomenon and thus, belief and value cultural control enclose explicit organisation values, which are communicated in a formal manner.

As always every new norm that is created in a multinational company needs to be promptly put into action by all the subsidiaries otherwise it could pose a problem of lack of efficient implementation New norms at AR make it difficult to apply system and process in subsidiaries (belief system).

Information systems need to be adapted not only in Portugal but also on the sale units. Strategic identity involves the consensus between parent and subsidiary based on the asymmetry of information to implement the strategy (Forsgren, 2015).

Before diminishing the autonomy of the subsidiary companies, AR faced a big problem of product offering. AR wants to mainly sell to those companies its own articles produced in Portugal, but since the subsidiaries were at the time very autonomous and only concerned with profit maximization, they were offering a wide range and variety of products, sometimes even from competitive companies.

Therefore, role of controller is to manage the horizontal and vertical communication for timely decision making. Controller analyses the financial and non-financial information for business unit to ensure business objectives are achieved. Here the management control department had to make an analysis of what is the minimum threshold of products that have to be sold that are produced in the factories in Portugal. Only if that quota is guaranteed, the sale united freely offer other lines of products.

Controllers create value in an organisation through system and change management through effective and efficient resource management (Paulsson, 2012). In AR after the implementation of Ambition 2020 and company restructuring, video conferences are conducted every month to identify the problems and share information with the head of MCS department in Portugal and the management director of each international business unit.

Controller contribution towards MCS through feedback and monitoring of threats and opportunities consequently allows for evaluation of problems in real-time and proposed solutions for effective management control. The information analysis include sales amounts analysis, deviations from the proposed objectives, sales margins analysis, stock and client provisions examination and balance sheet breakdown.

4.2.7 Management Control system (MCS) challenges and shortcoming

The existing challenges for AR are mainly the conflicts between the sales units and the business in Portugal. The differences in priorities and capacity constraints hinder the performance of the company. For example, head office wants to sell different products but subsidiaries tend to plan sales for different items, based on their own analysis of the country and local needs.

This disruption requires analysing and implementation of a strategy to access how each of those items could contribute and in what scale (an analysis to be done by the Management Control Department) to the objective proposed by the executives in Portugal. Also, controllers in Portugal provide systematic analysis for transport and logistic costs for the international businesses. This is still a big problem for AR as the costs of these operations tend to be extremely high due to the nature of the products sold. Currently, MCD is trying to achieve an efficient point between transport and warehousing costs, to hinder the burden of logistic costs.

4.2.8 Evolution of the management control system and controllers

Controllers have transformed MCS in AR which has resulted in significant changes in functional and processes of the company. There are number of management accounting tools and techniques used for information analysis which allows real-time tracking and monitoring of data. For example, ERP system enables the real-time evolution of sales by producing daily, weekly and monthly reports.

Moreover, the information allows monitoring product line, stock availability and cost control. Also, by establishing goals and objectives, forecasting resource needs, organization alignment, performance evaluation, budgeting and variance analysis basically makes the controllers and the head of the Management Control Department the right arms of the CEO and financial director of the head office in Portugal.

5.0 Conclusion

The aim of this study was to investigate the impact of internationalisation on system dynamics of AR and how the controller contributes to the design and implementation of MCS. To analyse the information in AR context, unstructured interviews were conducted. However, due to competitive nature and privacy issues no personal or confidential company information was collected or presented in this report.

The data analysis shows that the company has experienced a number of changes in structure, processes and functions over the years and controller has contributed to MCS evolution through information sharing for timely decision-making and updated routine ‘checklists’ homogenized (process control) in both Portugal and international subsidiaries.

AR implemented the balance scorecard in 2003 to achieve strategic alignment between the departments and functions of business units and enabled controllers in Portugal and all subsidiaries to manage the functional changes and implement the BSC to increase the business efficiency and productivity in AR. Moreover, internationalisation and expansion thought that the different companies has resulted in extending the implementation of BSC across the business units (subsidiaries) which changed the structures and processes control in AR.

The controllers have now to integrate financial and non-financial information flow to support the structure and function for timely decision-making and achieve strategic alignment not only in Portugal but also in all the subsidiaries.

The global financial crisis prompted the need to manage the decline financial performance, a corporate restructuring took place and the ‘Management Control Department’ aligned with the business itself played an important role by providing thorough analysis and information that enabled AR to achieve its business objectives. The corporate restructuring resulted in structural and governance system and controllers contributed towards the design and implementation of central sales department in AR for timely response to needs and demands of internal and external stakeholders.

Finally, in 2014, AR implemented Ambition 2020, which was a program to redefine the vision of company. All international companies had to define their strategy to achieve the goals set out by 2020. With this event, the control department and the controllers behaviour in all companies were homogenized which presented challenges for AR in Portugal as well as in the subsidiaries themselves.

Changes in processes and routine behaviours had to be adapted to meet the wanted criteria as well as eliminate the asymmetry of information that was a constant occurrence at the time (belief and boundary system). Internationalisation and emerging scenarios affected the control systems and controllers facilitated implementation of series of management control tools and techniques to evolve the MCS in AR.


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