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Environment,
Relationships between culture, and
environment, culture, and management
management control systems
219
Luciane Reginato and Reinaldo Guerreiro
Department of Accounting, University of Sao Paulo, Sao Paulo, Brazil Received 21 February 2011
Revised 8 July 2011
Abstract 18 October 2011
Accepted 29 February 2012
Purpose – The objective of this study is to investigate the relationship between external environment
and organisational culture, and the subsequent relationship of organisational culture with the adoption
of management control systems in large Brazilian companies.
Design/methodology/approach – The research involves 109 of the “Best and Biggest” companies
in Brazil, as designated by the Brazilian financial magazine Exame. Data are collected by a research
questionnaire distributed electronically to senior managers of the sample companies. The data are
analysed by multivariate structural equation modelling.
Findings – The results show that a significant relationship exists between the constructs of “external
environment” and “organisational culture”, thus indicating that the environment exerts a significant
influence on planning, execution, control elements, and managers’ characteristics and skills. The
results also show a significant relationship between the constructs of “organisational culture” and
“management controls”, thus indicating that organisational culture has a strong influence on the
choice of management control systems in practice in the companies.
Originality/value – Although isolated studies have investigated various aspects of the external
business environment, organisational culture, and management control systems, few studies have
explored the relationships among them.
Keywords External environment, Organizational culture, Management control systems, Brazil
Paper type Research paper

1. Introduction
Every business must adapt to its external environment if it is to obtain the resources it
needs to produce goods and services for its customers, and thus maintain itself as a
going concern ( Jones, 1995; Covaleski et al., 1996). However, virtually all of the
variables in the external business environment are characterised by a high degree of
uncertainty, over which the company exerts little or no control. In particular, the
behaviour of the major economic, political, social, technology, and legal variables in the
external environment are often quite unpredictable (Hitt et al., 2008; Wright et al., 2000;
Certo and Peter, 1993; Stoner and Freeman, 1985). Nevertheless, the potential of these
environmental factors to threaten a company’s stability in its chosen market sector
demands that managers make every effort to monitor environmental dynamics
continuously with as much accuracy as it is possible to achieve when dealing with
notoriously unpredictable variables.
Apart from the threat posed by the external business environment, a company’s International Journal of
stability can also be influenced by factors related to its own internal environment Organizational Analysis
Vol. 21 No. 2, 2013
and organisational culture. Because the personal beliefs and values of individual pp. 219-240
organisational members do not always converge, the norms and values of q Emerald Group Publishing Limited
1934-8835
the organisational culture, which are essentially those of the company’s leaders, can DOI 10.1108/IJOA-02-2011-0477
IJOA be vital in inducing concerted action towards a common goal. This organisational
21,2 culture can be the most important internal factor in determining people’s behaviour;
indeed, according to Kotter and Heskett (1992, p. 10), organisational culture is “[. . .]
bigger than all factors most frequently discussed in the business literature [including]
strategy, organisational structure, administrative systems, financial analysis
instruments, leadership, etc.”.
220 These external and internal environmental factors invariably exert a significant
influence on the management controls that a company adopts to guide the
decision-making and performance-assessment procedures within its overall business
management (Anderson et al., 1989). Such management controls include various
instruments to measure process activities, monitor data processing and information
flow, and facilitate the inflow of resources and the outflow of goods and services
(Anderson et al., 1989; Louderback et al., 2000; Chenhall, 2003). In choosing appropriate
management instruments for these purposes, each company must take account of its
needs and goals in the context of its particular internal and external environments.
Against this background, the objective of the present study is to examine:
(1) the influence of external environmental variables on organisational culture; and
(2) the consequent influence of organisational culture on the choice of management
control systems in large Brazilian companies.

Although isolated studies have investigated various aspects of the external business
environment, organisational culture, and management control systems, few studies
have explored the relationships among them. It would seem that no study has
specifically examined the themes addressed in this research in terms of establishing
mutual correlations among variables in business environment, organisational culture,
and management control systems.
Whereas there are few empirical studies that examine associations of the three
analyzed constructs (external environment, organisational culture, and management
control systems), the major contribution of this work is to strengthen the theoretical
knowledge and specialized academic literature on this topic. In addition, these results
contribute more specifically to identify variables that are most important within each
construct when explaining the level of association of the constructs. It is also possible to
recognize the behaviour of each element of the culture featured in the surveyed
companies, at what level these elements are associated with the variables of the external
environment and types of management control systems adopted by them. One should
also consider that this type of study is seminal in the context of Brazilian companies.
The remainder of this paper is organised as follows. The next section provides a
theoretical framework for the study. This is followed by an explanation of the
methodology of the empirical study. The results of the study are then presented. The
paper concludes with a summary of the findings and suggestions for future research.

2. Theoretical framework
2.1 External environment
Hofstede et al. (1990) observes that many studies have addressed the relationship
between organisational culture and industry characteristics. Many other studies have
examined the general relationship between the external business environment and the
internal business environment. One of the first was that of Woodward (1965),
who concluded that the way in which a company acts is largely determined by the Environment,
effect of technology in the external environment. This finding was subsequently culture, and
supported by Thompson (1976), who demonstrated that technology and the
environment in general affect the format of company structure. management
Sisaye (2005) mentions that environmental changes affect organisational systems,
structure, strategy, functions, procedures, and day-to-day activities. Organisations as
systems are bound to be affected by environmental changes. They are always in flux to 221
attain a state of equilibrium to preserve system characteristics. The continued
interaction between an organisation and its environment introduces the idea of
“environmental control”, which requires management to initiate changes or alter goals.
Lawrence and Lorsch (1969) found that business structures are moulded by
variations in the surrounding external environment, and Burns and Stalker (1977)
showed that the pattern of management practice depends on the existence of an
adequate structure for each type of external environment. In a similar vein, Chandler
(1990) found that the market in which a company is operating determines its structure
and the strategies it adopts. Apart from these general studies, several studies have
investigated the relationships between the environment and more specific business
functions. These studies have commonly examined the relationship between
environment and various aspects of business structure, technology, and strategy.
In respect to relationships between the external environment and internal functions,
Ritchie and Marshall’s (1993) show a model for strategic decision based on economic,
social, technological, legal, financial, central and local government, interest groups or
agencies within the community. According to them these variable are important for
analysis of the company’s environment.
In particular, one of the factors that can be directly affected by environment
variables is the organisational culture, which is discussed in greater detail below. With
regard to the relationship between external environment and organisational culture,
Schein (1991) contended that beliefs arise as lessons are learned as a result of a group’s
efforts to survive in its external environment and solve its internal integration
problems. As learned behaviours are found to resolve issues in a reliable and
repeatable way, they are considered valid and worthy of retention.
Hofstede (1980) also studied the influence of external environment on organisational
culture when he applied his dimensions of national culture (distance from power or
hierarchical distance; aversion to uncertainty; individualism/collectivism; and
masculinity/femininity) to comparable organisational cultures.
Kwan and Walker (2004) addressing the insights of Svyantek and DeShon (1993) that
propose organisational culture as having two components – the self-sustaining component
and the adaptive component, observing that an organisation should be externally adaptive
to its contextual environment in order to compete with other organisations.
Zhu (2000) emphasizes the impact of environmental variables on organisational
culture, observing that no culture, from a long-term point of view, can escape from
encounters with others cultures, no culture can remain unchanged in the cultural
ecology, and cultures changes, especially in times of intensive economic growth or fall.
The classification of external variables can be presented in different ways,
considering the revised literature, and the adopted classification is presented next:
.
Economics. This is the crucial variable for most companies, because changing
economic conditions can act as important constraints. They can drive important
IJOA indicators of priorities. This variable incorporates the following: gross national
21,2 product, inflation, employment rates, interest rates, savings rates, trade deficits
or surpluses and budget of the country, exchange rate, among others aspects
(Certo and Peter, 1993; Hitt et al., 2008; Wright et al., 2000; Jones, 1985; Daft and
Macintosh, 1978; Catelli, 2001; Stoner and Freeman, 1985).
.
Social. This variable reflects relevant social characteristics of the environment in
222 which the company operates, incorporating aspects of the educational level and
culture of the population, availability of human resources and appropriate
technical training (Certo and Peter, 1993; Hitt et al., 2008; Catelli, 2001; Stoner and
Freeman, 1985).
.
Legal. This variable concerns the characteristics of current legislation.
Organisations need to cope with federal, state or local, which set several
conditions for the operation of an enterprise (Catelli, 2001; Certo and Peter, 1993).
This variable emphasizes the complexity of legislation and the speed of change.
.
Technology. The technological environment variable includes new approaches to
the production of goods and services, their availability and degree of innovation,
also involving issues related to the administration and information processing
(Jones, 1985; Certo and Peter, 1993; Daft and Macintosh, 1978; Hitt et al., 2008; Catelli,
2001; Barney and Hesterly, 2007; Stoner and Freeman, 1985). Along these lines,
Bissell and Keim (2008) proposed a model for conducting business diagnosis, noting
that one of the main steps to be followed is to understand the company and its
environment, the general goal, and the influence of the culture. It can be seen in
this statement that culture is highlighted as a contributing factor in the business
process.

2.2 Organisational culture

According to Ouchi (1982), organisational culture can be understood as a set of
symbols, ceremonies and myths that communicate the organisation’s values and
underlying beliefs to its collaborators, with rituals materialising what would otherwise
be mere abstract ideas. These values and beliefs are repeatedly transmitted (and
retransmitted) from one organisational member to another, thus constituting a
continuous cycle that reaffirms the organisational culture.
A very large number of studies have examined the concept of organisational culture,
especially since this theme emerged as a popular research topic in the 1980s. Since then,
some of the more important studies on organisational culture have included: Hofstede
(1980), who analyzed international differences in work-related values; Ouchi (1982), who
compared cultural characteristics in American and Japanese companies; Deal and
Kennedy (1982), who explored the influence of values on organisational structure; Peters
and Waterman (1982), who examined the content of beliefs in successful American
companies; Kanter (1983), who studied transformations in individual attitudes in
American companies; and Schein (2004), who went beyond the observation of behaviours
to examine the influence of group learning and cultural factors on particular functions.
Several studies have reported an association between organisational culture and
company success. In a study carried out in American companies, Peters and Waterman
(1982) concluded that what makes a company successful is the degree to which
organisational members share and incorporate the firm’s values, rather than merely
setting organisational goals. In a similar vein, Kanter (1983) concluded that success Environment,
requires a culture of pride, whereby organisational members are committed to culture, and
organisational values; in particular, changing or innovating a company can only be
effective if the organisational culture is conducive to change. Similar conclusions were management
reached by Thévenet (1989, p. 22), who defined strong organisational cultures as being
“[. . .] characterized by having value systems that highly influence behaviors and
management forms”; according to this author, firms with such strong cultures are 223
coherent and original in their decisions and ways of functioning.
According to Schein (1991), organisational culture is a set of basic premises that a
group has invented, discovered, or developed by learning how to deal with the problems
of external adaptation and internal integration. These premises are deemed to have
functioned well enough to be considered valid and thus worthy of being transmitted to
other organisational members as the correct way of perceiving, thinking, and feeling
about particular problems. Schein (2004) subsequently explored various dimensions of
organisational culture (time, space, human nature) with a view to demonstrating that it
is essentially based on how organisational members deal with the issues of external
adaptation and internal integration.
Other authors to have studied organisational culture from the perspective of
different dimensions include Etzioni (1975), who constructed three types of
organisational cultures (coercive, utilitarian, and normative), and Schwartz (1992),
who developed a list of values that can be used to construct scales at both the social
and individual levels to measure cultures. Likert (1975) also alluded to organisational
culture in framing management systems as “authoritarian-strong”, “authoritarian-
benevolent”, “participating-advisory”, and “participating-team”.
Quiros (2009) developed a model of organisational alignment, noting that the internal
organisational culture and structure are variables that retain full interactivity. He
suggested a model, in which the company analyzes the environment, makes the strategy
and formats its internal structure, having the culture as a fundamental factor. In terms of
structure and culture, he based on studies of Burns and Stalker.
Burns and Stalker (1977) typified the organisational structure as organic and
mechanical. The first is characterised by specialization and standardization of tasks,
delineated roles, robust hierarchy, centralized authority, informal power and status,
bureaucratic control. An organic structure present a coordination of cross-functional
teams, mechanisms of integration more elaborate, complex roles continually
remodeled, decentralization and autonomy, based on the technical expertise of
managers, it has fewer bureaucratic controls.
Harrison (1972) classified cultures using the degree of formalization and
centralization as criteria, while Graves (1986) discriminated between cultures based
on the levels of bureaucracy and managerial-ego drive.
Yiing and Ahmad (2009) highlighted the fundamental idea that organisational
culture is generally seen as a set of key values, assumptions, understandings, and
norms that is shared by members of an organisation and taught to new members as
correct. The study on organisation culture can take on a multitude of aspects and can
be assessed along many dimensions, resulting in conceptually different, but
fundamentally similar, models and theories.
It is thus apparent that a very large number of studies have addressed
various aspects of organisational culture. It is obviously not possible to canvass all
IJOA aspects of the wide range of extant research on organisational culture. However,
this brief review has noted some of the more important concepts and
21,2 classifications of organisational culture that relate to management and management
control systems.
First, the Schein’s classification was used with respect to the values of the company.
In this aspect, it is important to mention that from the values that shape the
224 organisational culture and structure. The values, mainly of the leaders of the
company, may be inducers of actions that lead people to converge or not with the same
purpose.
In addition, values influence the formal design of organisation, the type of
information that is important for decision making, the allocation of people in areas, etc.
The leaders have that format, enhance and incorporate the organisation’s values,
spreading them to other individuals (Deal and Kennedy, 1982).
From the mentioned values are established business models to each company.
These models aim to organise and systematize tasks, levels of authority, responsibility
and formality, people management, technology and resources in general, etc. For this,
the company needs a management process that allows the design and control of all
these questions.
The management process, guided by the values of the company, is constituted by
planning, execution and control (Robbins, 1978; Fayol, 1989). This process defines the
objectives and the formal relationships within the company. However, the questions
focused on culture, authority, power, functions, responsibilities, execution, control,
among others, transcend formal and structural settings, also emphasizing the type of
human relationship occurred in the company.
Thus, issues such as characteristics of managers, motivation, leadership, teamwork,
and training are highlighted in the literature on organisational behaviour (Haire, 1974;
McGregor, 1960; Hampton, 1990; Hersey, 1974; Bowditch and Buono, 1992; Herzberg,
1968; Skinner, 2003). Sisaye (2005) emphasizes that culture thereby performs a
functional role by directing instrumental control mechanisms on how best to manage
groups. Culture also can facilitate working relationships among employees,
organisations, and the changing organisational environments.
The study of Kwan and Walker (2004) about organisational culture in Chinese
universities, considered six areas for researching the manifestation of culture:
(1) strategic planning process;
(2) resource allocation process;
(3) implementation of plans;
(4) roles, responsibilities and training of staff;
(5) service delivery; and
(6) management information and systems.

Rashid et al. (2004) realized that culture consists of some combination of artifacts. In
this research we are considering some of these artifacts as presented below:
.
Planning. The characteristics of the planning process of company, its
formalization, disclosure of the selected strategies among the managers,
association between budgeting and planning and the degree of participation of
managers in this process.
 .
Execution. How the planned activities are performed, involving the degree of Environment,
manager autonomy, prioritization of objectives and whether the budget is used culture, and
as parameter for assessing performance.
. Control. How the results are monitored against the planned results, involving
management
understanding of the degree of commitment by management and the
accountability process.
.
Characteristics and skills of managers. The characteristics of academic and
225
professional training of managers and their technical capacity.

2.3 Management control systems

Although some authors, such as Chenhall (2003), have confined the concept of
management accounting to such limited practices as preparation of the company
budget and product costing, other authors have interpreted the concept more widely.
For example, management accounting was defined by Atkinson et al. (2000, p. 67) as:
[. . .] the identification, measurement, accumulation, analysis, preparation, interpretation and
communication process of financial information management [which is used] to plan, assess,
and control [. . .] a company and guarantee the appropriate and responsible use of its resources.
Thus, according to Anderson et al. (1989), management accounting practices and
procedures extend beyond budgeting and costing to include aspects of internal
organisational management and control. These authors were supported in this view by
Louderback et al. (2000), who also included planning and control as an essential
function of management accounting.
According to this wider view, management accounting thus includes management
practices – such as costing systems, performance-assessment systems, and so on –
that provide information for managers at all hierarchical levels to assist in their
decision-making and control of outcomes. However, no management control or
accounting system can be generically applied to all organisations; rather, the choice of
management-control tools and systems must be adapted to each organisation’s needs
in its particular circumstances (Otley, 1980).
There is thus considerable overlap, in terms of the instruments and techniques that
are used, between the concepts of management accounting and management control.
For example, Coad (1999) considered that ABC, balanced scorecard (BSC), and target
costing (among others) all came under “management control”, whereas Hughes and
Gjerde (2003) listed various costing systems (such as ABC, variable costing, and
absorption costing) as being frequently employed techniques in “management
accounting”.
Other classifications have been suggested. For example, Sulaiman et al. (2004)
distinguished between “traditional” systems (such as standard costing, etc.) and
“contemporary” systems (including ABC, target-costing, and BSC). In contrast, Soutes
and Guerreiro (2007) suggested another classification, with variable costing, ABC,
standard costing, and target costing being classed as “costing methods and systems”,
economic value added (EVA) as an “assessment method and performance measure”,
and BSC as a “management philosophy”.
Many different artifacts of organisational culture can play an important role in the
internal environment of business (Schein, 2004), and therefore may influence the choice
of management control systems, facilitating, or hindering its implementation.
IJOA Sisaye (2005) mentions that environmental-induced changes in management control
systems have led to profound cultural changes. The call for change has been largely caused
21,2 by the need to improve the functional performance abilities of management accounting
systems to respond effectively to environmental changes. Recently, the advent of growth in
international competition has given prominence to the importance of cost as a competitive
tool and the need to undertake changes in organisational structures and systems.
226 The idea underlying this study is that the management control systems adopted by
companies depends on the type of organisational culture they have and by other hand,
the organisational culture, as stressed before, depends on the environmental variables.
The present study considers seven instruments or systems under the umbrella of
“management controls”:
(1) variable costing systems;
(2) ABC;
(3) standard costing;
(4) target costing;
(5) BSC;
(6) EVA; and
(7) simulation models.
In brief, these can be characterised as follows.

3. Methodology
3.1 Hypotheses
According to the literature review, many quoted authors emphasize the impact of
environmental variables in the organisational culture. Other authors highlight the
organisational culture’s influence on management tools. Although there are few
empirical studies demonstrating the relationship between external environment and
organisational culture, it was not found any research about the relationship between
organisational culture and management control systems.
The main assumption of this study was about the existence of relationships
between each of the three main constructs (external environment, organisational
culture, and management control systems), as shown in Figure 1. Two hypotheses that
underlie the conceptual design of this research were established, according the
previous text:

Figure 1.
Conceptual design
 H1. There is a significant association between variables of external environment Environment,
and elements of organisational culture. culture, and
H2. There is a significant association between elements of organisational culture management
and management control systems.

3.2 Sample and data collection

The nominal population for the study consisted of the 1,000 largest Brazilian companies, 227
as listed by the magazine Exame, which annually disseminates a list of the “Best and
Biggest” Brazilian companies in the media. From this list of companies from the trade,
manufacturing, and service sectors, a non-random, intentional sample of 190 companies
were contacted; of these, 109 responded (representing a response rate of 57.4 per cent).
The sample size was determined in accordance with Hair et al. (2007), who have
contended the number of respondents in a sample should be at least five times the
number of latent variables to be analyzed.
The respondents were senior managers who had a comprehensive understanding of
the company and its activities (board members, chief executive officers, or, in some
cases, managers in charge of controllership departments).
Research data were collected through a research instrument prepared specifically for
the present study. The instrument was made available online to provide ease of access
for the respondents. The construction of the instrument in the internet environment was
based on business intelligence “dynamic tables” technology. Respondents were asked to
answer on a scale with a range from zero to ten. This scale was chosen to enable a full
expression of the respondents’ opinions and to facilitate the later use of structural
equation modelling (Hair et al., 2007; Henseler et al., 2009). The research was conducted
between June and September 2009.

3.3 Constructs, variables and questionnaire

Theoretical constructs (external environment, organisational culture, and management
control system) were designed specifically for this study from literature review. The
respondents answered about the association of variables of the external environment
with each element of organisational culture, assigning a score from 0 to 10, representing
the degree of association. Moreover, the respondents answered about the degree of
implementation of the management control systems, assigning a score from 0 to 10.
(i) External environment. The impact of external environment variables on
organisational culture was investigated. The variables related to this construct were
comprised by the following items: economic, technology, legal, and social. This construct
was built according to the literature review and was composed of the following assertions.

Economic
EE 1 – degree of association of the economy with the process of business planning.
EE 2 – degree of association of the economy with the implementation of corporate
planning.
EE 3 – degree of association of the economy with the control process of company
results.
EE 4 – degree of association of the economy with the characteristics and skills of
managers of the company.
IJOA Technology
21,2 EE 5 – degree of association of technology with the planning process of the company.
EE 6 – degree of association of technology with the implementation of corporate
planning.
EE 7 – degree of association of technology with control process of the company’s
228 results.
EE 8 – degree of association of technology with the characteristics and skills of
managers of the company.

Legal
EE 9 – degree of association of the legislation with the planning process of the
company.
EE 10 – degree of association of the legislation with the implementation of
corporate planning.
EE 11 – degree of association of legislation with control process of the company’s
results.
EE 12 – degree of association of the legislation with the characteristics and skills of
managers of the company.

Social
EE – 13 degree of association of the social environment with the process of business
planning.
EE – 14 degree of association of the social environment with the implementation of
corporate planning.
EE 15 – degree of association of the social environment with the control process of
company’s results.
EE 16 – degree of association of the social environment with the characteristics and
skills of company managers.

(ii) Organisational culture. The characteristics of management process (planning,

execution, and control) were investigated, as well as manager skills, according to
organisational culture approach. Participants expressed their degree of agreement with
respect to the statements assigning a score from 0 to 10.
This construct was composed of the following statements.

Planning
OC 1 – the process, involving the preparation of strategic planning, is formal and
has clearly established steps and timeline.
OC 2 – all managers are involved in all stages of the preparation of strategic
planning.
OC 3 – the main strategies of the company are disclosed to all their managers.
OC 4 – the budget is prepared in a participatory manner, with the participation of
senior and operational managers.
Execution Environment,
OC 5 – implementation of the actions of managers are driven by the budget. culture, and
OC 6 – managers have full autonomy to make decisions necessary to implement the management
budget in their areas.
OC 7 – decisions that affect the company as a whole are made after prior
consultation with all managers. 229
OC 8 – when implementing the budget, managers always emphasize the central
objectives of the company, even if it means “losses” for their own areas.
OC 9 – the numbers of the budget are used as parameters for evaluating the
performance of managers in the company.

Control
OC 10 – there is strong commitment of managers to monitor and control the
achievement of results considering the planned targets.
OC 11 – managers must justify to their superiors deviations between the planned
and achieved results.
OC 12 – the company holds specific meetings with the participation of managers to
evaluate the results.

Managers’ characteristics and skills

OC 13 – company managers have a graduate course.
OC 14 – the company encourages and supports the training of its employees,
paying for all or part of its implementation.
OC 15 – the company values the ideas of their managers.
OC 16 – the management board explicitly encourages among its senior managers a
pleasant interpersonal relationships.

(iii) Management control. It was examined the management artefacts adopted by

researched companies as costing method, indicators for performance evaluation and
management concepts adopted by companies. Within these groups were used variable
as follows: ABC – activity based costing, standard costing, target costing, BSC,
EVA – EVA, and simulation systems.
In this third construct the objective of the questions was to show the degree of use of
each management control system in the company, based on the following scale:
.
0 – not implemented.
.
10 – fully implemented.

The tested variables were: MC 1 – activity based system; MC 2 – standard costing; MC

3 – target costing; MC 4 – BSC; MC 5 – EVA; MC 6 – simulation system; MC 7 –
direct costing.
The questionnaire was designed according to theoretical constructs: external
environment, organisational culture, and management control systems. The initial
version of the questionnaire was analyzed by seven respondents, who reviewed and
suggested improvements incorporated in its final version. To examine the internal
IJOA consistency of the groups of variables of the questionnaire was considered in calculating
21,2 the compound reliability suggested by structural equation modelling.
The data were analyzed by structural equation modelling and multivariate analysis
that was used to test the hypothesis. The software used for this analysis was
“SmartPLS 2 – partial least squares”.
The analyses of these items and constructs assessed the measurement model and
230 the structural model (Hair et al., 2007; Henseler et al., 2009). The following measures
were utilised for this purpose:
.
Average variance extracted (AVE): greater than 0.5.
.
Compound reliability: index not lower than 0.7 (Henseler et al., 2009).
.
R 2: the higher the R 2, the greater the model’s explanatory power (Henseler et al.,
2009; Cooper and Schindler, 2004).
.
Cronbach’s a (to assess internal consistency of constructs): 0.7 acceptable
minimal parameter (Cozby, 2003).
.
Discriminant validity: correlations between the latent variables lower than the
square root of the AVE; or factor loading of each indicator higher in its latent
variable than in others (Chin, 1998; Mendes-Da-Silva et al., 2008).

Besides the analysis provided by the structural equation model, the collected data were
also analyzed through a qualitative approach. Thus, the discussion of results is carried
out considering both approaches.

4. Results
4.1 General study model
Figure 2 shows the general study model, including the major constructs of “external
environment”, “organisational culture”, and “management control systems”, together
with the items constituting these constructs and their results.
In general it was verified that the relationship between the construct of “external
environment” and that of “organisational culture” was significant, as was that between
“organisational culture” and the construct of “management control systems”. The high
levels of association indicate that the external environment did influence elements in
the organisational culture, which, in turn, influenced management control systems.
In other words, organisational culture in the respondent firms was modified according
to changes in the environment, such that the companies could sustain their positions in
their markets; moreover, these changes in organisational culture were associated with
changes in management controls.
According to Figure 2 the level of influence between external environment and
organisational culture is above 0.5 (0.570), that it shows a high level of association of
theses constructs. Similarly, it is possible to note a level of 0.569 between organisational
culture and management control systems. Furthermore, it is clear that indexes of each
construct were also in 0.7, which demonstrates the significance of variables within their
constructs and between the own constructs.

4.2 Assessment of measurement model

4.2.1 External environment. Table I shows the AVE and compound reliability for
data on the companies’ external environment. In this analysis, the construct of
 Environment,
culture, and
management

231

Figure 2.
Results

Variables AVE Compound reliability

External environment 0.70 0.90

Economic 0.72 0.91 Table I.
Technology 0.76 0.93 AVE and compound
Legal 0.77 0.93 reliability of the “external
Social 0.81 0.94 environment” construct

“external environment” was treated as a second-order variable, whereas the economic,

technology, legal, and social items were treated as first-order variables.
It is apparent from Table I that all items in first-order variables showed an AVE
above 0.5 and compound reliability above 0.7. In addition, Cronbach’s a was greater
than 0.7, which indicates that this construct did not need modification.
Internal consistency between the second-order variable and the first-order
variables was 0.90, in accordance with Cronbach’s a, which was 0.94. The variables’
common variance was 0.70, indicating their respective contributions inside the
construct.
Among the first-order variables, social items showed the highest levels, with AVE
of 0.81 and compound reliability of 0.94. The legal items had AVE of 0.77 and
reliability of 0.93. The technological items had an AVE of 0.76, and economic items had
an AVE of 0.72.
This ranking of items within the construct of “external environment” show, according
to the respondents, that social variables – such as the job market, cultural changes,
IJOA education, technical training, life expectancy, lifestyle, age, geographical distribution, and
21,2 social values – were important factors influencing the company’s artifacts of
management. This finding reflects the importance that the companies attach to people
– not only those who purchase and consume the products and services the company offer,
but also the people who work inside the company.
According to these data it is possible to infer, for example, that the age of people
232 who consume goods and services in the labor market, or the educational level and the
lifestyle of these people, can influence the dissemination of marketing strategies for
their products or the level of service adopted by companies. An example of this
relationship in the Brazilian scenario is the growing importance of insurance and social
security as the longevity of the population increases.
The results indicated that the legal variable presented strong association with
companies’ planning and control, showing that in Brazil, companies are deeply
impacted by complexity and speed of changes in regulations. The data allow us to
conclude that, for example, the complexity of the Brazilian tax system and also the
high rates of taxes on products and services in Brazilian society induce the companies
to develop a detailed tax planning. A recent case in the Brazilian environment is
concerning to the change of regulation on pharmaceutical products with the advent of
generic drugs, which brought a big change in internal company scenarios.
The technology also demonstrates to be associated with elements of organisational
culture. In this sample of large Brazilian companies, the issue related to technological
improvement and the search for innovation clearly appears. In this context a notable
example is the influence of two environmental factors. The first is the availability of
big reserves of deep water oil, and the second refers to the development of
technological expertise in Brazil for the extraction of such oil. Both factors have caused
impact in the environment of oil companies in Brazil.
It is apparent that the economic items were a little less important in the construct of
external environment, although it should be noted that all variables were significant
and at similar levels.
Data analysis shows that the economic variable is associated more significantly with
the elements “planning” and “control”. This can be explained as the companies in Brazil
tend to focus on growth and business expansion, and to achieve this goal they need to be
alert to the economic changes in Brazil and in other countries. Any important change in
this variable can severely threaten the economic situation of company. This attention to
the economic variable becomes important when companies are in process of drafting or
revising their planning and controlling performance.
According to the findings of the study, Brazilian economic variables such as
economic growth, reduction of interest rates and low inflation cause influence in the
management process adopted by companies. In cycles of greater prosperity of
the country companies feel more willing to improve its management process through the
specialized consulting services, or implementing new enterprise reporting planning, and
providing training to their employees. Since 1995 Brazilian economic society has
experienced a drastic reduction of inflation rates that changed the management
practices of Brazilian companies.
In general, all of the external environment variables are significantly associated
with the elements of organisational culture. It should be noted that planning and
control are the elements of culture that showed the highest level of association.
 4.2.2 Organisational culture. In this part of the analysis, organisational culture was Environment,
treated as the second-order variable, with planning, execution, control, and managers’ culture, and
characteristics and skills being treated as first-order variables. Table II shows the
initial results. management
The first-order variables had an AVE greater than 0.5 and a compound reliability
greater than 0.7. Cronbach’s a was also greater than 0.7. The reliability ratio (0.92)
showed adequate internal consistency between first-order and second-order variables. 233
The AVE was 0.73, which represented the common variance of the items that
contributed to the construct, Cronbach’s a showed high internal consistency at 0.93.
The results revealed that “control” and “planning” were the most prominent items in
determining the second-order variable (“organisational culture”) in this sample of
companies. This indicates that two phases of the administrative process (planning and
control) stand out in determining this construct. The managers’ characteristics and
skills and the execution phase of the administrative process ranked third after planning
and control.
The most significant item was control. Control can induce cultural change for
companies as they react to changes in the external environment. Through control, the
company seeks to achieve the goals it plans, assesses performance and the efficiency of
the control systems, and considers the possibility of putting in practice new cultural
changes to achieve its goals.
With regard to questions about the level of formalization of the strategic planning
process, 40 per cent of companies responded that they formalize their plans. In these
companies, there are periodic discussions on this issue, establishing timeline and steps
to be followed. Another important point is about to the comprehension of participation
of the manager in the planning process. Survey data show that in about 30 per cent of
the sampled companies, all managers are involved in strategic planning and other
companies show a varying degree of participation of managers in this process.
With respect to disclosure of business strategies for all managers, the results show
that in 50 per cent of the sample all managers are informed of strategies. These data
demonstrate that Brazilian companies, in all levels of management, are adequately
informed about the company’s strategies. Regarding the participation of managers in
the budgeting process, it is observed that in 49 per cent of surveyed companies all
managers are involved in preparing the budget and in 45 per cent of them they are
strongly committed to the implementation of budget targets. It should be observed that
36 per cent of managers say they have autonomy to carry out their activities. From this
data it can be inferred that the participatory decision-making style prevails.
On the issue of control, it is observed that in 56 per cent of companies the budget is an
instrument used as a parameter for evaluating performance. It is observed that in about

Variables AVE Compound reliability

Organisational culture 0.73 0.92 Table II.

Planning 0.76 0.93 AVE and compound
Execution 0.58 0.87 reliability of the
Control 0.84 0.94 “organisational culture”
Managers’ characteristics and skills 0.58 0.85 construct
IJOA 60 per cent of the cases managers are strongly committed to monitoring and tracking
21,2 results in relation to what was planned. Managers must justify deviations from planned
results and must discuss them with their peers in formal meetings.
Finally, on the issue of characteristics and skills of managers interesting results
were also found. It was observed that 35 per cent of Brazilian companies have
managers with postgraduate degrees and that 50 per cent of the companies strongly
234 encourage the training of its employees, paying for all or part of courses attended by
them. These incentives can be evidenced in the form of undergraduate and executive
programs, among others. A common practice in these companies is to value manager’s
ideas. Survey data report that in 54 per cent of the companies there seems to be a
stimulus to a harmonious relationship among its managers.
4.2.3 Management control systems. The analysis for the management control
systems revealed a common variance (AVE) of 0.50 for the construct’s component
items. Compound reliability was 0.81 and Cronbach’s a was 0.73.
The analysis of each item in the construct of “management control systems” showed
EVA as the most prominent, although all items had similar levels (all above 0.50). The
ABC costing system ranked second, followed by standard costing and target costing.
The BSC was fifth. Finally, simulation systems and variable costing showed lower
levels, although still within the mean level of other variables.
EVA was thus the most commonly adopted management control technique. It would
seem that companies prefer EVA because it is a global indicator that facilitates the
analysis of final results.
It was noticed from the surveyed companies that only 25 per cent have fully implemented
ABC costing. Most of the companies do not have this system or have partially implemented
some concept of this costing method. The standard cost is mainly an instrument for
controlling production costs. Its full adoption is concentrated in approximately 35 per cent of
Brazilian companies of the sample. Findings indicate low utilization (15 per cent) of the
concept of target costing by the companies. Regarding the adoption of the BSC, results
indicate that half of the sample of Brazilian companies use this artifact. Data show that
15 per cent of the studied companies use EVA information. According to the results,
55 per cent of companies from the sample adopt variable costing for the purposes of decision
making and 49 per cent of companies declare the use of simulations.

4.3 Discriminant validity

The premise of discriminant validity is that the correlations between the variables
should be smaller than the square root of the AVE, and the indicators should be more
strongly related with their latent variable than with the other variables. Table III
shows the results of the tests for discriminant validity.

External Organisational Management

Variables environment culture control systems

External environment 0.82

Organisational culture 0.6 0.85
Table III. Management control
Correlations of constructs systems 0.4 0.6 0.71
It is apparent that the correlations were below the square root of the AVE, which Environment,
was 0.82 for the external environment variable, 0.85 for organisational culture, and 0.71 culture, and
for management control systems. This indicates that the first-order variables were
more strongly related with the second-order variable than with the other constructs’ management
variables. A significant relationship therefore existed between the variables
under analysis.
235
4.4 Analysis of the structural model
In the structural model, the essential criteria for the assessment were the path
coefficients, signals, values, and significance levels, including the R 2 of the endogenous
latent variables (Henseler et al., 2009). With regard to the parameters for the analysis of
this coefficient, Chin (1998) classified 0.67 as “considerable/strong” and 0.33 as
“moderate”, whereas Cohen (1977) considered 26 per cent as “strong”. Parameters
ranging between 26 and 33 per cent can thus be considered acceptable and adequate.
Figure 3 shows the relationships between the second-order variables and their
significance levels (t-values).
The R 2 complied with the criterion, with moderate and high ratios. Applying
bootstrapping, the student’s t-test (with significance set at 0.05 and the assessment
parameter at t . 1.96) revealed that the relationships between the constructs of
“external environment”, “organisational culture”, and “management control systems”
had t-values greater than 1.96 (5.963 between “external environment” and
“organisational culture” and 9.889 between “organisational culture” and “management
control systems”). The path coefficients for all these relationships were this significant
for the analysed model.
In general, it was apparent that the most significant relationship was between
“organisational culture” and “management control systems”, which indicates that the
items of “organisational culture” had a considerable influence on management controls.
It was also apparent that the “external environment” has an indirect influence on
“management control systems” through the organisational culture items.

Figure 3.
Structural analysis
Note: Obs: t-values higher than 1.96 indicate that the coefficient is significant at: 5 per cent
IJOA 5. Conclusions
21,2 This study has investigated the relationship between external environment and
organisational culture, and the relationship between organisational culture and
management control systems (Figure 1).
The findings have shown that factors of external environment have strong
relationship with organisational culture and H1 can be accepted. The study has also
236 shown that there is a strong relationship between organisational culture and
management control systems and H2 can be accepted. It is thus apparent that the
elements of organisational culture present in any given company are important in
determining the management control systems adopted by management.
With regard to individual items within the constructs, the “social” item was most
prominent in the external environment (although significance levels for all items were
similar). With regard to the construct of “organisational culture”, “control” was the most
prominent item. The results indicate that the Brazilians companies in the present sample
emphasized planning and control in the organisational culture, which is plausible because
their activities are complex and therefore need adequate planning and control.
It is apparent that organisational culture has a significant influence on the types of
management control systems that companies adopt. The controls most commonly
adopted were (in order): EVA, ABC, standard costing, target costing, BSC, simulation
systems, and variable costing. However, it was apparent the sample companies did not
frequently use simulation systems and variable costing for control; rather, these
techniques predominantly appeared as support systems in the execution of their activities.
Regarding the type of culture, findings indicated that a substantial part of Brazilian
companies have formalized planning and control processes. Managers at all levels are
involved in this process, with autonomy to make their decisions, encouraged to reach
better decisions through a system of performance evaluation, with educational support
for improving their skills and driven by incentives to develop ideas inside a
harmonious environment. According to the profile of these companies, we can infer
that they tend to adopt management control systems. It was possible to come to the
conclusion that the need for companies to have control over their activities makes them
natural “adopters” of management control systems.
The results show that among the researched Brazilian companies, variables of the
external environment (e.g. economic, technology, legal, and social) are associated with
all investigated elements of culture, especially with planning and control. This result
proved to be consistent as the company pointed to a culture of formalization of the
planning and budgeting process. In such condition, it is natural to take into account the
analysis of the variables of external environment.
The literature indicates that companies should analyze the external environment
variables, considering that these variables may influence the internal elements. In addition,
there are also studies showing that organisational culture influences operational processes
and internal controls in companies. This study aimed at comprehending these themes,
showing evidences that there is a significant relationship between them, including the
relationship with adopted management control systems. The study demonstrates academic
relevance and innovation through seeking the association between the three studied
constructs. Regarding its practical relevance, the study highlights the importance of the
influence of external environment variables in business management, emphasizing that
managerial aspects can influence the adoption of management control systems.
 This study makes a solid contribution demonstrating empirically the relationship Environment,
between the three constructs and their elements, proving what isolated studies have culture, and
shown over time. Future studies could further investigate other items and factors of the
external environment, organisational culture and characteristics of management control management
systems.

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About the authors

Luciane Reginato is a Professor in the Accounting Department of the University of São Paulo –
240 USP/FEA – Brazil, and a Doctor in Accounting and Controllership. He has experience in
accounting and management, acting on the following areas: controllership, information
technology management, and management models. He is the author of books: Controladoria: um
enfoque na eficácia organizacional, and Controladoria: apoio ao processo decisório; national and
international conferences; Member of the Institute of Research and Technology – IADE; member
of the editorial board of Journal of Accounting & Finance; Member of the Accounting and
Controllership Conference – USP; and researcher – CNPQ and FAPESP. Luciane Reginato is the
corresponding author and can be contacted at: lucianereginato@usp.br
Reinaldo Guerreiro is a Professor in the Accounting Department of the University of São
Paulo – USP/FEA – Brazil, Doctor in Accounting and Controllership, Professor at the
University of São Paulo, Professor of Accounting Finance Magazine Usp; Member of Foundation
Committee on Coordination of Improvement of Higher Education Personnel; Director of
Administration Area, Accounting, Tourism and the Foundation for the Coordination of
Improvement of Higher Education; member of the editorial board of the Brazilian Business
Review; member of the editorial board of O & S Organizations & Society; member of the editorial
board of Logicon Center; member of the editorial board of RBGN Journal of Business
Management; member of the editorial board of the Journal of Accounting and Organizations;
member of the editorial board of Journal of Accounting & Finance; member of the editorial board
of Advances in Scientific and Applied Accounting; Coordinator of the National Council for
Scientific Development, Audit Cia de Saneamento Basico do Estado de São Paulo; Associate of
the American Accounting Association; Member of the European Accounting Association; and
Member of the Performance Management Association. He is the author of books: Contabilidade
gerencial; Estruturação de sistemas de custos para gestão de rentabilidade; Gestão do lucro; Meta
da empresa; and Controladoria.

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