Strategies are Importent in today's highly compe: titive environments, Businesses as well as public- sector organisations need a unifying logle, which emerges out of dialogues among its members and ‘guides their actions. The organisation's Control System has potential to become a key to this, and Itself a source of competitiveness. Controling for Competitiveness describes how mo agement control is crucial in. mobilizing, using and communicating the knowledge and skills of ma> rnagers and employees. Controllers should design situation-spectfic control systems, assuring that ac- tions willbe based on appropriate information and incentives. Enterprise Systems faclitate coordina- tion and information exchange, thus enabling the development ofa consistent ancl congruent stctegy throughout the organisation. The involvement a all i Business School Press levels of management a In this process creates mi tothe organisatan's ra The authors under cine ey = CONTROLLING FOR ous examples of now: pee — COMPETITIVENESS Inadeltion tothe autor : PCE Manel and consultancy, the — Strate ves th 3 ea Rt gee cu konto private and public sect these and other ovgarls Copenhagen fa, Liber y a Seesmer i i i i CONTROLLING FOR COMPETITIVENESS ~ Strategy Formulation and Implementation . through Management Control Fredrik Nilsson Nils-Géran Olve Anders Parment Liber Translated by: Copenhagen Business School Press Marion SoderstrmControing for Comoetitveness Isa 978-91-47-09010-8 ISBN Rest ofthe wore 978-87-620-0040-4 (© 2011 by the authors and Liber AB Ecitors: Mis jung nel Asa Sterner Pblisher Ola Hikarsson “Transating: Mavion Sidersitmn Copyeiting: Peter Conigan Cover and graphic design: Pec andr Diagrams: Jonny Halbag Eston 121 “Typesetting: Lunda AB Printing: Graphycems,Spanian 2011 ‘This works protected by copyright. No pat of his book may be reproduced in sry ‘manner whatsoever otter than by teacher who have the ig to photocopy for eica- tional purposes under tho BONUS agreement. The BONUS aeement has boon drawn up between copyright orpmisaions and the prinspae of education providers such as local ‘xthorties and universities. Ary braach of te law may raul in prosocution and a fre or imprisonment for we years as wel as an oblgation to pay compensation tothe authors! copyniht holder Ler AB, 205 10 Maine To +46 40-25 85 00; fax +46 40.07 05 50 worbarse Customer Service: Te: 140 8-690 8.0; fox 446 8-600 0301 Contents Preface . eee Introduction wnrsnnnnansne Background and intended readership. Key concepts. a oe : Strategic management control and management control tools ‘Management control and other forms of control The central role of the controler. ‘The seructure of this book. Part |. Organisation and management control Chapter. The new context of management control ‘The fll and vise of management control Hs management control become more relevant? Trends which influence management control. ‘The significance of tends forthe controller. Summary a : Chapter 2. Organisation, strategy and the control mix ‘The concepts af economies and management control The organisation a a household. ‘Management control as commausication. Several conttols together: the control mix. a ‘The interplay between organisational structure and control Governance, management contra design and the controller Summary Part Il. Designing strategy and control... Chapter 3. Management control in the strategy formulation process. Formulating strategies. ince “The role of control in creating strategie co The controller’ responsibilty for strategy formulation wm Summary eee Chapter 4. Strategies for achieving success. Why do organisations need strategies? “The foundations for the strategy : ‘The content of suategy and views on sttey. Levels of strategy and strategie onngruence. ‘The controller’ responsibilty for content of strategies 47 Ds 130 132 BB 139 145 158 161 170Chapter 5. Realising strategies through control ~metri and responsibilities ‘The controller’ respansibility for visualising the strategy. Decision Responsibilities. : “Mettics, decisions, esponsibilties and effects on behaviour Summary. ions 173 178 189 192 195 203 Part Ill Management control content and implementation 205 Chapter 6. Designing and using Strategic Management ContrOlwmsnm ‘The interaction between different control tools, Designing and using control tools. Some control situations of high stratogic importance a. Summary ee = ‘Chapter 7.The controller and the enterprise system in control design and use. ‘The contrller’ role. ‘The enterprise system’ role. ‘Summary. : Conclusion. : 7 ‘What we hoped for and shat wo found . Implementstion problems. ‘Current trends in management con “Towards suategie management control Appendix: Methodological considerations... References Index an 207 208 212 231 239 2a 242 261 204. 216 2 284 287 290 297 304 36 inteooucrion Pi Garver: ae aiieteil ats =| 2 Orginition, strategy andthe control mie eee FFs teatsngstateges Fame through controt—metics, [Pe sections and responce Inthe sbtegy formation 4 Seetgeor Seeing es SARE le ier Socnmgensuing | OT areca nd Seed nape theenteprtesyam [I canal" Bea icone Figure 2.The structure of the book strategicaly-oriented management control system, At the same time, we found others with « more traditional view of how management control should be designed and used, which can result in its potential not being fully realised, ‘We identify some global trends whose importance for management control ‘we will attempt to pin down. Chapter 2 looks at che fact -hatall organisations are established with the aim of economising on resourees in the pursuit of a goal, by which we mean that the concept of economy permeates their activities; being competent in man- list EXPart | Organisatien and management 1. The new context of management control 2. Organisation, strategy and the control mix en)The fall and ris Gees Henne eee iar ial Meee es ot: a The new context of management control ie: new context of management control is today’s intensively com l petitive society. Competiticn for customers, employees and capital is increasing, and the offerngs organisations make are being more closely scrutinised by the various stakeholders. Consequently, management must always ensure that resources are being used in the best way possible. Goals and strategies must follow the demands of the market, and the organi- sation must fulfill the needs and wisves of the customer. Companies in both the private and public sectors have become more dependent on theie suppliers snow that key parts of the business are being cutsourced. Irrespective whether such collaborations concern development, production or marker channels, they may over time have a fundamental influence on strategy. In today’s highly ‘competitive society, itis essential to identify and act on new business opportu nities quickly, while atthe same time limiting the organisation’ risk exposure [Identifying and analysing risk ~ creating transparency and maintaining control have become critical If they are to be able to address all these challenges, managers and other employees must have access to bot general and specific information. As « result, 2 growing number of organisstions are taking the decision to invest in26 the latest enterprise systems solutions. In this chapter, we discuss how certain clearly idemtifible trends ae infuenciag management control. We begin by biiefy outlining how trends in management control theory an practice have developed over the lst wenty years. We then discuss these trends and their implications for management control today and inthe future. The fall and cise of management control Daring the 199s, the subject of management control flourished. A surge of books, essays ani! models atracted much attention and contributed to high- lighting the potential of the contol system for developing an organisation’ ‘lfciency and competitiveness. There is no question that the acceptance, pplication and influence of management control spread. On important rea~ son for the rise in interest was that American management contol practice, ‘hich hs always been influential, rerched a dead-end towards the end ofthe 1980s. Its fierces critics were ‘Thomas Johnson and Robert Kaplan (1987) in Relevance Lest: Tie Rise ond Fal of Management Accounting. This is what they ‘wrote abowt the consequences of short-term managemeit controk ‘There is no doube thet ROT [Return on Investment) control and the profit centerform of organization were not only greatly useful but like- Iymecessaty ‘or the growth and prosperity of large, hierarchical orgeni- ‘ations during the past snty years, Nevertheless, despite the successes, problems associated with short-term performance measures sich ay ROL have b:come painfully evident in recent years. The problems likely arise fom an excessive focus on achieving short-term financial Performance. Many articles and books have criticized U.S. excentives for their narrow, short-term outlook aid their overeliance on financial ‘tansactions 0 achieve immediate profitability objectives. (p. 195) ‘Their criticism ws directed at che actual design of models and methods and at hhow they were beng sed, ‘We consider, for example, that using traditional methods for allocating overhead costs in order to arrive at a product’ fll cos snot in isl right or ‘wrong, not even fora particular rype of decision. What i important is how the mark-up is designed, what the initial data is and how the calculated cost is interpreted and used. In practice, however, much of the so-alled relevance debate during the 1990s consisted of auempts hy both academies and prac- titioners to improve management control models and inethods. Researchers and textbook writers have an important part to play in developing and sprend- ing new models and methods but they are often one step behind, since they sim to pot practial developments into perspective, Manegement consultants ar in particular have often beén responsible for introducing new practices, since they need to market new, specific odels, This may explain why a feesh way of thinking is often expressed as “yet another three letter abbreviation” and launched as analernative to older tools, Pu stply, the new, modified models that were suggested can be divided into two categories: ‘+ Models which are founded on a traditional, monetary snd accounting based system of management control but supplemented with other financial metrics, often based on seasoning around market value and share prices. These measures foeas on a financial analysis of present and future conditions, using economie theory, rather than historical secounsing numbers, During the 199%, there were several proposals that such market-based and current-value numbers should replace traditional accounting for control purposes. One well-known example of this is Economic Vilue Added (EVA), Scandinavian practitioners often noted that this was not so different from he alewlated (pto-fortma) profit frequently used in larger firms, ‘+ Models of ¢ management controlsystem which is close to the business and strategically oriented, where “he measurements are generally non- financial, Such standards are often already used by those responsible for ‘marketing, personnel, production and quality, with the result that che management control system is elcsely Linked to other types of contro. ‘One example of this is Balanced Scorecards (BSC). EVA is « modified form of a long-established performance metric, Resideal Income (see, for instance, Stewart 1971). EVA sa calculated nec profit, where cost allocations may deviate from the principles applied to the organisation’ accounting. Using EVA, the selection, valuation and timing of relevant costs has to be reconsidered. For example, in EVA, certain intangible expenditures, such as major marketing campaigns or reorganisation, which are normally ‘treated as overhead costs, are instead seen as investments, resulting in annual costs for depreciation in the EVA calculations for the following years even ‘hough the corresponding asset was already expensed in the firm’ financial report. EVA is distinctive in that it wes financial analysis models which look into the future and is not bound by the conventions of financial accounting. Such conventions are needed for external reporting and for making compari sons between organisations, but the proponents of EVA claim that the tradi- tional accounting methods on which older performance mettics are based can Jead to management making the wrong decisions. They would also prefer to base external assessments of the organisation on EVA, which they claim pro- ‘duces better forecasts of share price development. Management control should28 continue to be based on financial metrics, bur metries and principles should reflect the business intentions ofthe organisation, e.g, how long an intangible astets expected to prosiuce benefits. In other words, EVA represents a change of direction, frem more conservative accounting values to values which are closer to the marke. ‘The balanced scorecard, the best-known example from the second category ‘of model above, was launched by Kaplan and Norton (1992) as the solution to the organisational control needs of the time, Decision-making and deci- sion-rationalizing, coordination and self-monitoring are some of the areas in ‘hich the scorecard can be used (ee, for instance, Wiersma 2009) It wakes its starting point inthe organisetion’s strategies, which are reflected in a number of financial and non-financial key metrics, EVA and other modified financial rmettics are sometimes used as part ofthe scorecard. This model has aroused such interest song both practitioners and researchers (Ole et al. 199%, 2003). ‘The literature on this subject, froma the end ofthe 1980s and ubrowgh the 19%s, contains many other new or modified models. Several of these take their starting pcint in traditional, financial, accounting-based management control, One example was the introduction of Activity-Based Costing (ABC), which at the time was a new form of activity-based cost calculation aimed at analysing the indirect costs more correctly. By identifying what “actually” leads to an inditect cost, it is posible ro be more precise in evaluating the rnmeumprion of sesources. This chould reduce the risk that the organisation makes the wroug strategic decisions and puts time and money into products ‘Which appeay, incorrectly, to be more profitable than che alternatives (Cooper and Kaplan 19888, 1988b, Kaplan 1988). A number of practitioners and researchers chose instead to warn against ‘certain elements of traditional management control, Some Scandinavian cot- panies, such as Svenska Handelsbanken and Borealis, atracted international anention for abalishing budgets (Hope and Fraser 2003), The criticism lev- elled by proponeats of "beyond budgeting” included the poine that the more ‘uncertain the environment, the more diffcale it isto budget (cE Wallander 1999), and that i is precisely when that uncertaingy exists that forecasting tools are essential, There i a risk that the budget will constrain managers and other employees so that they only focus on planning, when they should jastead be more epen and look for way forward Another trend was the robustly growing interest in the accounting and con ‘ol of intangible assets, which are not generally shown in traditional man- agement contro. In a society where creating value in an organisation stems largely from the facts found in databases, methods and suchlike, traditional 29 secounting methods are not enoug. An alternative form of information is inceded to show how intangible assets ereate value; one which is closer to the ‘business, for example in the form ofa balanced scorecard (se, for instance, Edvinsson and Sullivan 1996, Stewart 1997). (On the whole, management control experienced a period of robust develop ment and belief inthe fature in the 1990s, Even chough the criticism was not as strong in Furope asin the USA, s great deal of effort went into raising the relevance of management control here too (Bromwich and Bhimani 1994) [New classifications and categorisatioas and interesting encounters with other points of view were inevitable consequences ofthis development (Otley 1999, Nilsson and Olve 2001). This period was characterised largely by an interest jn making management control a sigifieant suppore during strategic work, and the interest shown by practitioners was palpable, Conferences, articles and books which were aimed not only at researchers but also at practitioners ‘were important channels in the spreading of new ideas (Ax and Bjornenak 2005). This led, among, other things. to the concept of management contra being widened to include information which was close to the business, yet non-financial Has management control become more relevant? “Twenty years on from the debate about relevance, there are good reasons to ask. ‘whether management control has become mare relevant. In all probability the _majorty of practitioners and researcters wonld answer yes. At the same time, the discipline of management control appears to have moved into a consolida- tion phase. Iris along time since a nsw management control model received ‘any significant attention. Conlerence organisers have dficlty finding excit- ing new themes, and audiences are dwindling. Practitioners and researchers seetn to be focusing on testing and evaluating the models and approaches which were introduced during the 1990. European research is focusing more ‘on increasing understanding of how and why management control is ebang- ing, and less interest is being directed towards developing new management control models (cf, Granlund and Medell 2005). lis easy, however, to overestimate “he importance and impact of new ideas. Inasurvey of how BSCs are designed and used in the Swedish mamufaecuring industry, 20 per cent suid they had never heard of scorecards and a further 30, per cent that they had not eonsidered whether to introduce thera (Olve and Potti 2004), The respondents were 2ontrollers who voluntarily answered a sarvey on BSC-use, so we expected shem to have some familiarity with the concept ~ after all it had been discussed at practitioner conferences and weit ten about in journals and best-selling books for more than a decade.30 ‘Many new erent i the field of management control seean to be manage- iment trends which are being reshaped, rejected or sometimes introduced in ‘another form than was the original intention. Revik (2010) likens them to a virus which infects organisations. Just as with vical infections, concepts such as scorecards or A3C can lie dormant before breaking outata later date. They can be transmieted via agents who are not themselves infected (which here means ‘other organisations who did not introduce, for example, balanced scorecards ‘themselves yet spread the idea to others). They ean mutate into new forms in those infected so that those who came up with the eoncept hardly recognise their original idea. Some organisations seem eo develop a resistance to new {ideas of any kind, Rovik aims to highlight the mechanisms behind new trends in how organisations are le, rather than reject any specific methods, For most peoole a virus implies something negative. Revi point is not to avoid the risk of infeetion but to increase understanding of how new “trends and ideas” (pant of the ttle of Revik 2008) originate and spread. He wants to show how changes in management are often not the result of a conscious search for new cools or ways of working; or even, for that matter, connected to strategic chal enges which necessitate new forms of control. We ae slightly ‘concerned thar nimber ofthe controllers we have met, even in the most sic cessful organisations, describe finance and control as a world in its own right, and do not seer to have much contact with questions of strategy. In many cases, they do not even understand ehat they should Strategy? Tl lnve w have a look and see what the board sys aboot it 1k§ not something Took at every day. @ngineering compan) “To be hcnest, we haven’ discussed stategy for acverl years .. but of couse the CEO wil tll you differenti: acumting od fencial Te mene te oudnow mre sour comptes ‘don. Caginering company) Some people experience a problem of legitimacy when it comes to making a contribution outside @ fairly narrowly-defined ares of responsibility, There’ 2 tendency ~ not fea during a recession ~ to spend most of the time and resources available on refining and developing the traditional aceounting- based management control systems at the expense of taking the oppostunity to look: more closely at questions to do with strategy and the competitive situ- “To be honest, the balanced scorecard was just for show .. Iewasn't an integrated part of our strategie work. @Beverages produce) In one sense, management contro is weaker now, We used to have the “four eyes principle”, in other words, we had s controller and an 31 engineer at every level. Now the engineess have more power; there always used to be a controller as well. (gincering company) ‘So are there any grounds for optimsm or pessimism regarding the develop- ‘ment and fotare of management control? Has management control in general regained its relevance, and if so will t maintain i? We have no definite answer to these questions, but we have good reason to be encouraged. There is a high level of activity among our fellow researchers (Gee, for instanee, Granfund and Medell 2005). Within the English-speaking ‘world, there are now so many books and research essays on management con- trol that tis dificult to obtain a comprehensive overview (ef. Merchant and Otley 2007). Whether this developrieat should be seen as purely postive is another matter, A significant number of the constant stream of publications is aimed at students, and their purpose is to describe rather than develop what is already well-established. A similar tendency is often atrbuted to the re- search being conducted. Although the field of management sontrol now appeats to be in a consoida- tion phase, atleast compared to the 1990s, we anticipate a positive develop- sent. Many interesting research results have been presented during the 20005 ‘Geveral examples of which are presented in Nixon and Burns 2005), "The con- trollers we have met appear to be competent and up-to-date when it comes to understanding the advantages and disadvantages of traditional management control. Line managers’ knowledge of and attitde to financial concepts have Jmproved considerably in the last decades. Developments in TT have had a ‘postive effect on the design of modern and efficient management control ys tems. However, the controllers we have interviewed are not always so positive about the way in which management control and theic own roles have devel- ‘oped. Some of the conversations appcar to suggest that management control in the 2000s has reverted to a more specialised and narrow role than before. It is te that che traditional control tos which are used have been refined and ‘new information technologies, nota yin the form of modem enterprise sys- ‘tems, are providing new opportunities to ereate x more relevant management control system (cf. Lindvall and Nilson 2009 a/t). The role of management control continues to be an important support function, but there are signs that itis mainly concerned with pushing through managerial objectives rather than contributing to developing organisational strategy. Could it be that the demands of today’s complex and highly competitive environment have led to cconerollers attempting to limit ther role to what they are good at: traditional management control? ‘Those of us who believe that management control as sn increasingly im portant role to play are now faced wit the challenge of revitalising both the32 steategy formulation strategie evel ost ages management contr Tuctcal evel steep onaion ask cont) operatenstewe!| Figure 1. The reltionship between strategy formulation, management control and task ‘contro. (Source: Anthony and Govindarjan 2007.7; modified dizer) actual debate acound the subject and the academic discussion, in particular with regard to what should be the primary focus when training controllers. Even early definitions of the concept of management control reflected the high expectations concerning its potential, Robert N, Anthony's (1965) classic definition of management control’ propounds the theory that the main pur- pose of a management contro! system isto implement seategies: Management control is the process by which managers asare that resources are obtained and use effectively and effciendy inthe accom- plishment ofthe oxguniztion’s objectives (p. 27) ‘From this quotation, itis apparent that Anthony’ original definition saw man- agement contrcls role as implementing strategies which had already been agreed. According 10 Anthony, formulating strategies is an activity which is far too unsystematic to be formalised in a management control system. At an ‘operational eve, the activities are so routine chatno advanced control isneces- sary. Figure 1. shows how Anthony sees the role of management contzol snd its link with steategy formulation and task control. ‘Very few people today agree with Anthony about the strict division into strategy formulsion, management control and task control as describe Figure 1.1. Otley (1994, 1998), for example, considers that the differences be~ tween the level in the control system that Anthony defined will soon have dlsappeared. rere is also a risk chat dividing up dhe organisation’ control will lead to the development of a gep berween controllers andthe operational 5 See Chapter? fora discussion of the concept of Management Control 93, activities. Some of the controllers we met were sceptical of employees who are not trained experts in business and control. Ie can be difficult to reconcile this etude with the demands made by a stronger commitment to organisa- tional strategic direction concerning cooperation, flexibility, eeam spirit, and ‘customer orientation. HRs more ofa sideshow. They reer, they deal with problems, com- petence and training, FIR costs SEK 35 milion a year and what kind of help do they give, relly? Ie not ay if they sit there and do our audministration; we do ovr own personnel ministration, (Engimering compan) ‘The engineers want to have tke server flashing away behind them, bot we controllers see 1 machine whieh is only used 10 per eent ofthe time. The engineers want to see it flsshings we controllers coulda't care ess, (decom company) We believe that today’s society needs an integrative and broad view of mane ‘ment control, When concepts such as outsourcing and competitive bidding, are applied, the core which remains needs to be able to utilise the opportuni- ties afforded by management control to create a focus and a sense of partici- potion. In the following section, we look at three trends which we expect will have a strong influence on management control in the future. We are frmaly ‘convinced that any organisation which eares about its competitiveness will not ‘only have to be aware of these trends but will also have to be able to manage them. Trends which influence manogement control Good strategic management control reflects the state of the organisation, 0 it is important to keep up withthe lstest developments. What is required in ‘order to be competitive? What are the tends in today’s society? It takes time to change the control system, and ideally it should always be one step ahead, This has implications forthe controler. Back in Figure 1 in the introduction to this book, we described how the controller is both influenced by, and ean influence, strategy. ‘The three trends we describe in the following section are generic and itis reasonable to assume that they are important forthe majority of organisations. When we chose them, we studied other suggestions for trends which were important for management control. Lindvall 2001 p. 15), Swedish manage- iment scholar, highlighted: © increasing globalisation © new information technology34 + comporate governance ‘+ the emergence of knowledge work. Tris easy to eee how the first three trends interrelate and bring a growing need for transparency. We have the technology to make it possible, the own rs demand itand itis motivated by increasingly diverse and complex organi- savional structures with a growing dependence on customers, suppliers and comperitars. ‘The trend wherehy work content demands greater knowledge is closely re- Jnted to developments in TT and globalisation. Physics] production is being ‘moved to other countries and industrial systems are tied together by IT. Success factors for businesses which remain are often more difficult to pin down with financial metres, Competence and reputation, for example, may be ‘more important chan physical sites. Another se of trends comes from a Norwegian researcher, Rovik (2008). In 4 Targe namber of books and articles from the turn of te millennium, comple- ‘mented by interviews with managers, he identified the following main trends ‘© less bureaueraey process orientation * fom management to control ~ increased managerial power * economist - the company as a role model for ather sectors of society ‘+ the increased importance of reputation Rovilés first four trends all have important implications for management con- tol. They describe a rougher, more centralist leadership where inevitable financial demands are balanced with an ambition for well-designed processes. Reputation, or eing evaluated positively by others, indicates that eastomer ‘experiences and media image increasingly seem more important than objec- tively ascertained performance. ‘As we can see, trends can affect both the environment with which the organ= ‘sation interats and its inner world of relationships and behaviours. To give one example: today’ employees have a higher level of eduction an different expectations thas previous generations (Parment and Dye 2009). Trends can also, to varying degrees, be explicit or obvioss. Some are expressed in laws and formal demands from customers, while others wil provide a competitive edge to those who pic them up in time, ‘This is linked -o the difference between what must be done, e.g preparing Sttucory accouns, and what sbould be done, eg, following up nonefinancial performance, This is where the difference between mative and proactive man- 35 agement control lies. The reactive contoller waits until measures must be taken, while the proactive controller dentifies external events and trends, and the employees then act accordingly. Our hope is of course, thet controllers will adopt, and reclaim, a proactive role In the light of our interviews and the discussions which have been conduct ced by researchers, including Lindvall och Rovik, and by management contzal practitionets in the lst ten years, we can identity three overall trends which wwe believe are important for management control in all types of orginisa- sions «increasing exposure to competition and requirements for customer orientation clearer and more numerous demands (transparency and control) ‘+ developments in IT, which are chenging the conditions for control ‘These trends permeate the view of menagement control which we will present in later chapters, and we will return to them in the final chaprer. But frst, we present each of them below. Figure 1.2 illustrates how each of the three influences Strategy, Management coatrol and Enterprise systems. We have ompetitionand ‘astomerorenttion lester and more sumerous demands ~ ‘ranepar ‘snd ented ITaevelopment, which changes the condktons for contrat Figure 12. Tends in the highly competitive society and ther effects on organisational strategy, management contol and entrpiie systems.a 36 not included people in this diagram, other chan the controller, but naturally ‘they, in interaction with each other, society andthe existing structures, affect the organisational suategies and how the control and enterprise systems are designed and tse. Ii also the people who are touched and influenced by the ‘wends, As we have already mentioned, Rovik (2010) likens these to virus, to ‘which the *infcted" person is more or less susceptible, He uses terms such as resistance, mation and incubation period, Competition and customer orientation “The majority cf companies have always had external competitors, but for many years the basic internal model was 2 planned economy. When moze highly developed models of management control were first introduced at the begin- ning of che twentieth century, the main focus was on scientific management. ‘The young Soviet Union’ fist five-year plans were apparently based on those of lorge American companties.§ ‘The development of markets chat had varying degrees of competition and freedom of choice inside organisetions began as early as the mid-1900s, Even when internal gorchasing is practised, itis often compulsory to use suppliers Within the group or company; choosing an external supplier is not allowed. ‘Towards the end ofthe last century, the idea that external suppliers should per- form everything excep the strategic core funetions began to spread. Since then, the degree of competition has grown and the same idea is ko being applied by sxates, monicipelitics and local authorities, Operations which were previously conducted exchsively as public services, eg. schools, care ofthe elderly and primary health care, have been subjecced to competition. Even where educa tion is funded by taxes, schools that do not attract students will not receive any funding ard may have co close down, NPM (New Public Manageraent) zesearch attempis to capture the consequences of such increased demands on financial efficieney and exposure to competition in the public sector (Hood 1995, Gualmini 2008). ‘There ste several reasons why competition is mow seen asa natural element jn many sector: of society. Since the early 1900s, when the “scientifically” opei- ‘mised major compeny had its heyday, there has been «trend towards compe tion, flexibility and market solotions, albeit with elements of increased centeal power during certain periods. We see two main reasons for this. One is that it is essential to be flexible and to adapt to circumstances. The other is that em- ployees are no longer expected to simply be small cogs in a big machine, but to {6 Drucker (1979) describes how Ford around the yar 1920 wa single profit entre ‘throughout the value chs, fem the mine to the finished ear depayed inthe showroom, 37 think for themselves and contribute towards creating value for the organisa- sion, Taken together, the resale is that a business focus has become important forall employees, both externally and internally. Controllers in progressive smajor companies in the 1910s partcpeted in a centralised technical optimi~ sation of the entize company. Taxa, 2s we argue in this book, the controller should promote commitment and independent thinking. An awareness of the ‘competition, both external and internal, will then be of key importance. “There are, however, other reasons. One ofthese is that deregulation of the markets has long been 2 major political project where the EU is a driving force in increasing free competition. Another is that new ways of commun- cating, for exemple via the Internet, have led to greater freedom of choice for the consumer, As service and informtion, rather than physical flows, become more and more important for succes, businesses become less and less bound by geography, which increases competition. The Internet has also led to to- day’ companies buying services from other parts of the worl, "That the customer focus has increased ean also he soon in the almost ex- cessive measurement of customer satisfaction. There are very few companies today, including government agencies, who do not measure customer satisfc- tion, noc simply for servies where the enstomer has freedom of choice but ‘even, to give just one example, when passengers pass through passport control, at Bejing Aiepore “The growing level of competition hs led to customers and supplies placing higher demands on each othes. There is also a cultural element in thio: ie hae become increasingly acceptable to test alternatives and not remain loyal (ef ‘Bennett and Rundle-Thiele 2005, Mascarenhas etal. 2006, Parmentt 2009s). ‘The dectine in customer loyalty is cavsing problems for many organisations, particularly those who have been used to a stable market. Loyalty has also fallen in the labour market, leading to a similar effect to that which arises, ‘when municipalities and county comcils introduce models for competitive bidding; market forces increasingly drive the business, so it becomes as im- portant to work actively with costs ani customer satisfaction as with employee autitudes to ensure the survival ofthe organisation. Being subjected to competition requires organisations to measure pecform- ace accurately and to ensure that strategies for recruitment and reward are well-thought out, Even universities are experiencing competition ‘Competition! You're chasing key researchers — fatove stars that you do a deal with: you can have this job and SEK 1-1,$ million a year in research grants ... but you have to Keep producing, that’ the way its going. If you carry on for five years, you can have another fve, lotherwise you won't get any more. Salaries have also become more38, performance-oriented. The Vice-Chancellor has made it increasingly clear that isthe strongest and the best who will be rewarded. (Large university, ‘This quotation shows that there a clear move away from seniority and formal ‘merit towards an emphasis on performance inthe way employees are assessed, This snot, however entirely new. ‘The above example is from Sweden, but we believe thie ie «trend in many parts of the world, The Swedish public sector began to differentiate salaries in the 1980s, sbandoning salary tables based on rank and length of service in favour of awarding performance-based salary rises, a development which is related to the emergence of NPM, Salaries fr teachers and nurses who grad ated in the same year, who work fr the same employer, and who have followed similar career paths can currently vary by 20-25 per cent. Its not uncozmmon, for a thiny-five-year-old to earn more than a sixty-year-old colleague with similar qualifications. ‘The claim tat management control plays 2 particularly important role when competition is intense is hardly controversial. The economic criss has demonsteated that large companies have an advantage. However this depends ‘on their achieving something which agile, market-adapted small companies cannot do. Goed control is pre-requisite for this. Organisations must be dif= {etentiated; in other words, they must have something unique to offer custom- «8, oF uniquely low costs Its often argued that cost control is not compatible with aucuspis wo realise 9 differentiated, unique business strategy (ct. Porter 1980, 1985). Saccessful organisations generally either have clear leadership ‘when it comes to costs, eg. Ryanair, or they offer something unigue but at a higher ptice, eg: exclusive premium brands. When customers experience products as unique, cost effectiveness, if ot unimportant, is clearly second- sty to the aim of differentiation, Companies such as Bentley, Gucci and Louis ‘Vuitton belong to this category. Slightly less exclusive brands, such as BMW, the London Sclool of Eeonomies, and Scania, can still be clearly differentiated from the mass market, and o are hardly exceptions to the very obvious pres- sure on organisations: to be cost-effective while at the some time being aware of their compettive advantages (ef. Parment 2008). This type of argument is of interest not only to private companies but also %o county counsils and municipalities where what wore once internal trans- actions, for example purchasing places on a management training course ot jn a retirement home, are now matters of procurement. In both these cases, the purchase might now be made from 2 neighbouring county council if their terms and conditions are better. Courses in marketing atract participants who are not only marketing and product managers, but also smunicipal and county 39 ‘eouneil school principals and unit managers. As 2 result of the exposure to ‘competition, they know they have to be able to answer the all-insportant ques- tion: “If, as citizen, consumer or client, I have a choice, why should I choose jo organisation?” Clearer and more numerous demancs ~ transparency and control ‘Onur second trend is an increased demand for insight on the part of various stakeholders, who want information about both ethical considerations (eg. hhow the product is sourced) and the commercial circumstances concerning the business model, stock levels and costs, These demands are motivated by a number of changes. Many people fel ehey are experiencing a faster rate of change and thereby greater risks. It has also become more dificult to under stand what determines success wisen experiences and reputation influence the customer more than measurable preduce charactersties. What do manage- ‘ment and the employees need to know? Increased competition end customer ‘orientation encourage closer links berween customer and supplier, with both parties demanding information aboutwhat is happeting in the oher organisa tion, This is necessary for the timely identification of significant events, but it docs not always lead to messures being taken, It is often more aboat being involved in what is going on, or simply avoiding the eritcism that might ensue {for not having known about it. In major corporate groups, itis often the analy- sis of financial metrics which has become more intensive, as is shown in the following case: ‘We use scorecards, We have five financial goals in our BSC: EBIT, sales, administrative expenses, gras profitin new sales, and geass profit in backlog. The budget targets are set per business area, then we do the budgets. Ie bottom up, everything comes together from the indi- vidual’ costs and eost centre. There ae targets onal eves which con- verge. Here, every cos is include, there's really no point in inflating ‘or distorting the budget. ‘They'd find out and then they'd eat i; its ‘examined fifteen times, ‘Then yox see where you can haggle, ‘There's slays bit of an incentive to have a permissive budget, butts hard to prociuce one because global management won't accept it. The organi~ sation i very competent and analytical when it comes tothe financial targets. Bngineering campy) 1s public sector organisations, there area number of other erteria which must bemet. ‘Woods (2009) describes how Birmiagham City Council uses a system it has designed for measuring and managing risk and which appears to focus stong 'y om the risks which threaten the ciys overall goals and strategies, a result40 ‘hich might sem surprising since i is easy to pat the main emphasis on op- eratonal acivties. The following quote froin the Large university shows that there are many areas whic management thinks should be followed up « the requirements governing procurement~ you get better and better at procurement, you have to follow all ehe laws and there's more and. ‘more clos serutiny:exteenal demands, suppliers’ demands, have we got ‘master agreements with Adobe? Are we following them? Have we got deals we'rs not supposed to have? That’ the point of electronic systems ~ if you buy something els, you have to pay for it yoursel®: When you. agree to the purchase, they're the cheapest, next day someone else is better: Demands for transparency, external soppliersinterestin how we do business, which means we have ta try and behave as we'te supposed to. We have to check what the emplayees are doing, Ifwe don't comply with the agreement on photocopying we'll ct a nice big fine. You nan the risk 0° getting caught. There’ more interest from the press, the ‘media. What documents come in and go ont ... the Vice-Chancellor's entertainment budget how much isit...? Some of the information we produce because we have to, not because we're interested init ‘The trend of focusing on transparency and control bas also led to risk manage iment strategies becoming more essential and more widespread. Ibis a question of identifying, enalysing and being prepared fora range of outcomes, likely 03, well a es likely. The automobile industry isan example of how rapid changes in the environment can transform a whole industay. One of us has taken part 25. consultant in many conferences where ayents seivy built Saab al Oped have listened to presentations where risk diversification has been included as an argument for tke benefits of applying a portfolio approach and selling several brands, Suddenly, in 2009, both brands became insolvent. What had earlier been a strategic option — taking in several brands in order to spread the risk ~ had become a very teal operational risk component. Increased risk awareness alo brings greater demands for transparency and control to business units and other functions that have a decentralised respon- sibility for profi. What the unit itself does nor see, group management and its executive teams must discover: Our owner in Germany is always on our backs wanting information about everything. We are extremely transparent towards Germany. Cagincering espany) ‘Many controllers are inconvenienced by having to report, often and accurately, ‘numerous facts concerning the business. However, centelisation ean be practi- ‘cal when ic comes to handling certain types of risk, such as financial, operation- al, or currency-rlated, This is demonstrated not least by a nomber of notable a corporate scandals atthe beginning of the 2000s which led to new laws and ‘voluntary undertakings in some courtries, expressed as codes of conduct that ‘companies agree to comply with. In Sweden, one result was the Swedish Code ‘of Corporate Governance (Svensie ked for bolagsstyring 2010). The version which came into effect on 1 February 2010 includes the following (section 14}: ‘The Boards to ensure thatthe company has adequate internal controls and formalised routines to ensore that approved principles for finan- cial reporting and internal control are applied ancl char the company’s ‘financial reports are produced in accordance with legislation, applicable accounting standards, and other requirements for listed companies. For companies that da not have a separate internal audit fonction, the Board of Directors isto evaluate the need for such «function anni” ally and to justify its decision in its report on internal controls in the ‘company’s corporate povernance report. In other words, there is close link Letween the internal control and internal tudit, with the emphasis being clearly on the link between internal controls ‘nd financial reporting; For banks, for example, the Basel Ik regulations gov- ming capital cover mean that @ well-developed system for measuring: and managing risk to protect against fimncial and operational risks reduces the demand for eapital cover. ‘The framework has a strong focus on avoiding ris (Wahlstrm 2009), ‘This focus is not surprising, given the importance of the Taking seein for fauioniny ep al nate In the inital version of the Code sbove, there was also a requirement that fnnual reports from publily liseeé firms should include information on internal control and risk managemen: In 2009, these were integrated into the Swedish Annual Accounts Act (Arsredovisningslagen 2010; Section 6.6.2): ‘The corporate governance repor: shall include information on .. the ‘most important components of te company’s system for internal con- sol and rsk management in connection with its finaneial reporting. However, risks do not necessarily have to involve financial resources in order to have financial consequences. The reports for a given period will reflect altered future prospects through reserves and forecasts “In connection with? ‘can be interpreted as saying that internal control and risk management should apply to many internal and external circumstances which are important for the foture of the organisation. What happens, for example, when an organise- tion is dependent on a single major eustomer who finds himself in trouble, or thas problems with his own quality control, where mistakes ean lead to a bad reputation and falling sales, or with his treatment of his workforce inthe third42 ‘world? On top ofall this, there are more obvious financial risks, e.g, inefficient routines for cllecting payment from customers, or opportunities for disloyal ‘employees to profit. Even chougt governance, internal control and risk management are areas Which arouse alot of interest, the actual meaning of the concepts and their re- lationship with management control have noe been clearly investigated in the Fnerature (cf. Bhimani 2009). For some researchers and practitioners, internal control includes all or most of the organisation’ management control. When, in this case, the board makes a statement about “the company’s system for {internal contro!” in order to comply with the Annual Accounts Act, ie shoald ‘noc only be confident that che rsk of fraud and suchlike is low, butalso thatthe ‘organisation’ resources ae being appropriately managed and ditected; failure t0 do so would mean that the members of the board are not falling their obligations vis-i-vis the owners ‘The board abo hes responsibilities towards other stakeholders, at least in- directly, since dissatisfaction can threaten the success of the orgunisation, ‘The transparency therefore works both internally and out towards society Employees may advance constructive criticism out of concern that the organi- sation’ resources are being used inappropriately. Heavy media coverage, stake- holders who lobby for influence and ambitious goals set by the corporation itself as part of 1s investor relation activities jointly drive increased transpar- cency, which Corporate Social Responsibility (CSR; ef. Kotler and Lee 2005, Porter and Kramer 2006, Blowfeld end Murcay 2008) has also contributed eo. (Organisations which not only care about malkng a profit but also take social responsibility have received alot of attention during the 2000s, and there are few companies tay who do not work actively with CSR. This approach has {grown as a reaction to a strong focus on financial results and the creation of shareholder valve. The growing interest in these questions can also be seen in the fact chat several leading acaclemic journals have waitten about the topic (Gee, for instance, Maignan etal. 1999, Maignan and Ferrell 2001). All of this narwrlly has a great influence on the information processes which we described ar the begianing of the book asthe essence of management con- trol and the work of the controller. The right person must receive the right information, sy it, and understand i These growing demands ex asistthe controller in histher work of taking the business in the tight direction ~ the strategic management control we discuss in our book. However they can also shife the focus to compliance with formal rules and regulations, rather than encourage explotation of what is strategically important control information, 7 Te should also be noted here that stadents and young people in work value CSR highly in lee choice of employer See Pament ad Dyhre 2058), a3 ‘This depends on, among other things, how the organisetion manages risk and ‘on the cooperation between controllers and employees in other positions who are affected by this work, e.g. isk exxerts and internal auditors, Developments in IT are changing the conditions of contrat Developments in TT have had a huge impact atseveral of the organisations we have visited. There has been noticeable entralisation and standardisation: the sim is to use the same system throughout the organisation. This often requires a great deal of work, not least because employees, departments and specialises may oppose change, Ic brings a synckronisation of bath working processes and the way in which systems interface with external purchasers. There are several advantages to the integrated solutions ~ enterprise systems ~ that increasing numbers of organisations are using. The processes of measucing, following. up and forecesting can all be done in a more sophisticated way and with less ‘manual work than previously. Lindvall and Nilsson (2009a p. 114) conclude their discussion om how enterprise systems can be expected to ease the transi- tion froma traditional toa strategic form of management control thus: As far back as the end of the 1980s, the so-called relevance debate stressed that traditional management control is based on information rhc is often too late and too agzregated and capnot therefore be used in forward-looking decision masing (¢f, Johnson and Kaplan 1987) It is now possible to reduce these problems with a modetn enterprise system. Integration and real-tim: orientation solve the tlme problemi, the integration and drillsdown functionality the problem of aggrega- tion, and atthe same time, muct of the problem of irrelevance ean be reduced by the flexibility and broader contral made possible by data base management and modulisacon. Tes therefore possible to develop 1 strategie management control system whieh is fast, exible and rel- “More sophisticated systems and greater centralisation also bring synergies and ‘economies of scale, although there is risk that local conditions are not taken {nto account. tis by no means alas true that « centralised system is bette, ‘thought which we will develop im te next chapter; however, could it be that ‘management and controllers feel more confident when controlling through the use of standardised metrics which ean be analysed centrally? Our impression, not least foun the interviews, is thaemany more people stess the potential of stach systems for analysis and centreisation than their equally great potential for distributed information and decentralisation, The debate on these double ‘apubilities is nothing new, and corsidering the trend for transparency dis- cussed in the previous chapter, in addition co Revikschougihts on the increased44 power of managers, it would not be surprising if TT fed toa strong central con ‘col, This is nct compatible with the need for the flexibility o respond to even small changes inthe environmentif necessary, something which, until recently, ‘was an importint theme, ‘We don'thave a tool for BI (Busines Inteligencel. We mainly follow the final elements of she strategie work Alor ofthe sot inir- snation is deat with lower down in the organisation, If you take the ‘workshop, the important thing there is that they have information shone the sie, bur he contr doe ed tht inna. erally T don’t hin that you ean run a company with BT But you can gta fling for where you are in the compu, Yo cat pickup i nals about where we're going. You have to havea beter understanding of whae th: euscomers want You don't need sn accounting system, yOu need an information system. (bide menuficurn) Even the most sophisticated systems will never eliminate the risk ofthe wrong ‘things being measured, or of the measuring process being based on incorrect ‘or dubious assumptions. Centalisation has a farther disadvantage: ic, it can reduce the presence of controllers out in companies, Lindvall (2009) points ‘out this risk-and stresses the increased importance of the physical space and the personal encouncer, knoviledge that is “situated” Much of the knowledge tha s important forthe company develops locally. Atte sme tine, acer to new IT ccetes ge adeancages through the face that many previous geographical ants Hmie fon be removed. One important aspect ofthis is being able to ase IT to disseminate focaly-developed knowledge throughout the company, But, despite good intentions and good eeehnical support, much ofthe company’ considerable knowledge is still no being trmed into objets thet can ail be transferred new environments. A large share of this knowledge exis, for example, in the form of so-called tacicknow'- ‘edge held by individual employees. Notros and experiences at group level can ako be important forthe development and use of knowlege ‘The speci site is therefore often critical for what can be done. (pp. 128-129) Developments ia IT as a whole, which have led among other things to more customer contaes and cooperation over the Tntemet, the growing importance of information as service, and for consumption and new forms of socialising among the young are changing the strategic conditions for many types of busi- ness, something which ean be seen in management control. How, for example, should a controler use IT to distribute information to employees who have {grown up with txt messaging and who share fils and family photos over the Internet i thei fee tiene? 45, The significance of trends for the controller ‘We have chosen to discuss three tends, although we could have identified many more, and they also overlap, Concepts such as competition, transparen= ‘gy 11 and centralisation appear in the descriptions ofall three trends. Having. the righe information about an expected change is a common denominator, ‘This means both threats and opportunities, or we could say risks if we assign, the word both a positive and s negative connotation. Information and control are obvious associations. How can the controller and the rranagement control system handle these? ‘There re risks on the strategic, racceal and operational levels, and each must bb identified and dealt with. Management control offers several tools which ‘ean help with this, both for anslysing strategie choices and for quickly identi {ying and assessing business and financial risks through so-called early warn- ing systems. However, itis not clear what consequences new forms of management con- ‘rol will have for the organisation. Researchers have been trying for a long. ‘ime to understand how change processes work (see, for instance, Busco, Quattrone and Riccaboni 2007), Practitioners, too, ae showing great interest in these questions. ‘In Sweden’ leading business dally, the heads ~f the largest white-collar union and a lage state-financed research foundation expressed their concern over how a “management trend is threatening the Swedish model” (Krantz and Eriksson 2008) Globalisation and strong interstional competition mean that, in the future, having practical managersent sill and knowing how to organ Jse business activities will be crcial for success. This kind of krowl- edge isstrucearal capital, which is hard to imitate and takes along ime toamass. ‘The Swedish management model is «success factor which is based on decenwalisetion, informal ways of working, and collaboration ‘The question is, for how much longer? Many woreplaces are into ducing models and managementconcepis which have been developed in far more formal and hierarctical management traditions than the Swedish management tradition, ‘The above quotation showts how methods of management and control can constitute part of the competitive srength of an organisation, and how the ‘way in which new trends coming fom outside are handled can determine suc~ cess. It is essential to place theories end models of how the management con- trol system shouldbe formulated and used ina wider concext. This places great ddemends on the controller, whose work includes analysing the way in which46 external changes affect the organisation’ strategies and control systems. The ‘controller mus: master the management control models while at the same time filly understanding how strategies are formulated and implemented, This in {urn means kesping up with the kinds of trends we have been talking about, as ‘well as considering their implications, including how they ean be used for the organisation and the controllers own work. The controller of one major indus- tial enterprise makes the following reflection on how the role ofthe controller has changed and on the consequences of the latest recession: ‘The contalles have gained 2 stronger position in the lst fifteen to rene yes This company has alot of engineer, br they are wling ¢o listen tothe controllers as long as they can sec they have the figures under control mind Eeanuae Ifyou look at the trend over the past year, chings have been shaken ‘up in a postive way: Now the importance of the balance sheet, cash flow, and the credit market are being stressed much more than before. Forecasting has worked well during this period, even if we coulda’e imagine that we'd lose so much volume, On the other hand, the fact that we've 2een suecessful and are strongly value-driven has probebly meant that we've been abit slower wo react than many other companies curing the recession Trade cycles, public debate, new organisations’ mindsets, and developments in TT ae all arzas that are important to monitor, Tillmann and Goddard (2008 p. 96) desaribe the demands made of controllers (here called manage- ‘ment accountants) in + urge multi-national company in Germany which was attempting to create a strategic management control system: ‘A managemsnt accountant needed not only to know everything about ‘managemen: and financial accounting, but also to have good incerdis- iplinary knowledge in order to be able to understand the external and internal contexts. Management acoountants thus needed to be capa ble of intetcisciptinary chinking and communication and also needed to be able co understand the complex linkages and interrelaionships inside the company. Consequently, there was a need for an inereased learning and socialisation process that involved exposing new manage- ‘ment accoussants to a diverse ct of situations, eherehy sllowing them to increase their technical as wel as soft skills, There was thus a process of “becoming” a strategic management accountant ‘This brings many demands and challenges which are driven not least by per- sonal and external expectations of how a controller should act. In a study of a successful Australian controller, or CRO, (Mr Smith) the authors declare that his habitus i linked to what others expect of him: 47 “To some extent, as Smith's experieaces demonstrate, the ability tomsin- ‘ain habinas (and continue a well defined way of entering in to a rela- ‘onship with practice) orto changeit (achieving the will to transform habinas in a desired way) is also relationally dependent on the expecta- tions of others engaged with the Seld in which a CFO is participating. As soch, becoming “new” CFO through the enactment of various professional cals for strategic and manageriallyorichted practices is fr ‘more problematic than professional literatures would suggest. Baxter and Cvs 2008 p, 225) Summary In this chapter, we have discussed the new context of management control: the highty competitive society We bean by looking back at how management control theory and practice have developed since the end of the 1980s, What ‘was known asthe relevance debate, which was initiated inthe USA by Johnson and Kaplan’ book Relevance Last, was characterised by blistering criticism of American management control practices. As & result, many researchers and practitioners began to take an interestin developing and refining management control. This led, among other things, to the Economie Valve Added (EVA) profit measurement and Activity-Based Costing (ABC), Other researchers ‘worked on developing models ~ some new, some less so ~ with the aim of widening the scope of management control from a focus on tactial decision~ ‘making to covering both strategic and operational questions. One wel-knowa model, which fis had a great impact, is the Balanced Soorecard (BSC). Alinost twenty years after the relevance debate, most researchers and prac titioners would probably agree that management control has become more relevant. Atthe same time, there are signs that we ae in «consolidation phase ‘Many controllers believe that management control has once again come to ‘mean accounting rather then workisg on developing the organisation and finding new strategies, The role ofthe controller thus risks becoming reactive :nther than proactive, However, there are strong indications that the need for proactive control is greater than ever: In this chapeer, we have discussed trends which, taken together, demand a greater exchange of information, in particular concern- ing different potential courses of eveats. The controller who is not only able to contribute to how the internal disrssions are conducted but also able to ‘monitor what is happening in the environment should be given a strong role in developing the organisation. At the same time, demands for transparency coupled with new technology risk leading to greater internal bureaucracy, ‘which can weaken the organisation’ ability to compete.