Faculty of Business Economics and EntrepreneurshipInternational Review (2015 No.3-4)39SCIENTIFIC REPORTSManagement control in modernorganizationsSljivic Slavoljub8, Skorup Srdjan9, Vukadinovic Predrag 10AbstractThis paper deals with management control as an important instrument for managingperformances in modern organizations. The paper indicates to the circumstances in whichclassical theory of management control was created, and describes its process offunctioning, with the specifics in large organizations. The aim is to point to some openquestions and directions of further development of the management control, as well as to atleast partially fill the gap that exists in the domestic literature. The conclusion is that theexisting management control framework remains still valid. Open questions can be bestresolved within the concept that observes this matter as a "package" of different controlsystems, not just those that are oriented to accounting-based performance measures.KEY WORDS: management control, planning and control cycle, performancemeasurementJEL: M21, M41UDC: 005.584.1005.642.2COBISS.SR-ID 2195159168Corresponding author,Faculty of Business Economics and Entrepreneurship, Belgrade,Serbia, e-mail: [email protected] school of proffesional studies "Prof. dr Radomir Bojković", Kruševac, Serbia,email: [email protected] University,Danijelova 32, 11000 Belgrade, Serbia, e-mail:[email protected]

40Faculty of Business Economics and EntrepreneurshipInternational Review (2015 No.3-4)IntroductionIn economics there are few issues that could be said to have universal significance.One of them is: how to ensure that managers and workers do their jobs in the interest oftheir owners? Both, profit and non-profit organizations, managers and entrepreneurs,private, public and mixed owners etc., are equally interested for answers to this question.During the 1960s, the classical theory of management control tried to offer systematicanswers to the above question. The changes that have taken place in the coming decadeshave shown that these answers were too narrowly focused, both in terms of selection of keystakeholders (owners of large decentralized corporations), and in terms of controlinstruments (accounting-oriented).Modern organizations communicate with a wide range of different stakeholders. Formany of them, accounting-oriented control is neither the only, northe most important typeof control. This is particularly true for organizations that are looking for new businessmodels, based mainly on innovations, in order to adapt to changed external circumstances.The need for a new framework of management control is obvious. Building thisframework is slow and there is an evident gap between the theory of management controland managerial behavior. Unfortunately, one of the important consequences of this gap isthe increase of financial scandals and unethical behavior of managers.The subject of this paper is the basic elements of the management control process inmodern organizations. The goal is to point out the limitations and perspectives ofmanagement control. In addition, the paper needs to at least partially fill the gap in thedomestic literature.The paper consists of five parts. The first part is literature review. The second partdescribes the basic elements of the management control process. The third part deals withthe specifics of large corporations. The fourth part highlights some open issues anddirections of further development of the theory of management control. The fifth part is thediscussion and conclusions.Literature reviewDefinitionsManagement control is a process in which organization strives to achieve the plannedor desired results, or "performances". In doing so, organizations may take various actions tominimize the negative effects arising from the external and internal environment.Management control represents a method for managing organization,s performances.Clearly relationship exists between management control and accounting, but there arefundamental differences too. For example, the goal of financial accounting is the summaryreporting on company,s performances. The information is primarily intended for externalstakeholders and are prepared in accordance with accepted standards of financial reporting.On the other hand, the task of management control is to help managers of organizations toformulate key strategic objectives and plans and monitor their execution. In general,management control is an internal process. The techniques and tools used by management

Faculty of Business Economics and EntrepreneurshipInternational Review (2015 No.3-4)41control are adapted to the specifics of each organization and are not subjected to anygenerally accepted standards.On the other hand, there are also significant differences between managementaccounting (in particular cost accounting) and management control. Cost Accountingfocuses on the measurement of costs in organizations. Management control is a broaderconcept than cost accounting. Management control focuses on company,s results, whereincosts are significant, but not the only measure of those results (ACCA, 2009).Management control conceptDevelopment of management control as a theoretical discipline is linked to seminal anpaper entitled Planning and Control System, which was published by Robert Anthony in1965. He defined management control as a function that links strategic planning withoperational control (Otley, 1994). Management control was originally conceived as asolution to the managerial problems of large, decentralized corporations in developedindustrial countries. Managers had the problem of how to coordinate and control the workof subordinate organizational units within the corporation. The task was to comply theactivities of such units with the objectives of top management. In addition, it was necessaryto provide information to help managers to be able to correct any deviations from theapproved plans.The classical theory of management control has offered a solution through theformation of so-called responsibility centers. These are cost centers, revenue centers, profitand investment centers. A special branch of management accounting, called responsibilityaccounting, was created on this basis.So-called Agency theory developed by economists Jensen and Meckling during theeighties is very responsible for the formation of the classical theory of management control.Agency theory is based on the idea of a world in which operates a number of explicit andimplicit contracts between two persons, owners and employees. In this world, both sides arebehaving in a rational way and are motivated solely by self-interests. The agencyrelationship is reflected in the fact that the owner (or principal), delegates decision-makingauthority to the manager (or agent) which executes orders on behalf of the owner. Becauseof maximizing his personal utility, manager as an agent will not always act in the bestinterest of the owner. Consequently, the owner is required accounting and other controlmethods for controlling the behavior of managers. In addition to self-interests, the agencyrelationship between owners and managers is also influenced by other factors such asadverse selection, moral hazard, asymmetric information, and the like (Hewege, 2012).Since the creation of the classical theory of management control in the 1960s untiltoday, it has been more than half a century. During this period, major changes in theenvironment of organizations have been occured. Globalization, deregulation, the rise ofpowerful emerging economies such as China, India and Brazil, diffusion of newtechnologies, digitization of information, etc., are just some examples of such changes. Itraised doubts among academics, managers and other stakeholders that the current system ofmanagement control has become irrelevant for doing business in changed conditions(Nixon, Burns, 2005).Doubts were further intensified by other reasons. Series of collapses of corporationsand financial scandals have highlighted the weaknesses of the external regulations and

42Faculty of Business Economics and EntrepreneurshipInternational Review (2015 No.3-4)internal controls. More than ever, the managers of corporations were forced to take intoaccount the interests of shareholders and other stakeholders. The position of managers inmodern corporations became delicate; as internal stakeholders, they are the bearers of thecontrol authority. Balancing the ethical role to do good for others, and equally for all,managers often face obstacles in the form of information and other interests of thedominant groups of stakeholders. Their single interests are not always aligned with thegoals of the corporation. In addition, there are personal interests of managers such asbonuses, the desire for power, self-aggrandizement and the like. For all these reasons it isunderstandable why the motives for the unethical behavior of a manager in corporations isgrowing (Malinić, 2011; Stevanovic, 2011). In practice, this behavior is usually realizedthrough contracting easily attainable planned objectives and by manipulation of data(Langevin, Mendoza, 2013).In many ways the nature of the changes itself has changed. They have becomepervasive and nonlinear, discontinuous and abrupt. Modern managers are forced to work innew kinds of business models such as alliances, clusters, partnerships, outsourcing andoffshoring companies, e-commerce and the like. Some authors emphasize the potential ofvirtual organizations and the role of critical competencies of managers and team membersfor business success (Radovic- Markovic, et al., 2015). In addition, enterprises andentrepreneurs are inspired by open innovation as an emerging paradigm for creating newbusiness models for the effective commercialization of new products, or services (Jevtic etal., 2014). Any such business model is a challenge to the existing system of managementcontrol.Consequently, there is a strong need for the existing framework of managementcontrol to be supplemented with new knowledge, in order to respond to the challengesarising from the changing environment. This does not mean that the current framework hasnow become irrelevant; construction of a new framework for management control is a longterm process, but its basic elements are still valid (Nixon et al., 2005).Process of management control elementsThe process of management control can be represented by a planning and controlcycle, as in Figure 1. The cycle consists of seven steps, of which the first five cover theplanning process, and the last two steps are related to the control process. Planning isprimarily a decision-making process. Control is implemented by means of measuring andcorrecting the results achieved, to ensure the realization of plans.The purpose of the planning is to prepare managers of organizations for action. Thefirst step is to define the objectives. In relation to the objectives, managers need to definetwo components, namely: (i) the type of objectives and (ii) the level of the desired goals.The first role of planning, therefore, is to determine so-called targeted objectives. Thesecond role of planning is to predict how the organization can achieve the assigned targets.,In steps 2-4 in Figure 1, organization s managers consider different strategies forachieving the planned goals, evaluate their effects and choose the best alternative. A timedecomposing of selected long-term plans into annual plans or budgets is performed in step 5.

Faculty of Business Economics and EntrepreneurshipPlanningprocessInternational Review (2015 No.3-4)Identify ObjectivesStep 1Identify alternative courses of action(strategies) which might contribute towardsachieving the objectivesStep 2Evaluate each strategyStep 3Choose alternativecourses of actionStep 4Implement the long-termplan in the form of theannual budgetStep 5Measure actual results andcompare with the planStep 6Respond to divergencesfrom planStep 743Control processFigure 1:The Planning and Control CycleSource: ACCA, 2009The control includes the steps 6-7 in Figure 1. The measurement and comparison ofachieved results with the original plan are performed in the first of these two steps. In thesecond step, corrective action is taken in order to achieve the desired objectives, or tocorrect the plan. Control without planning is impossible, and vice versa; planning withoutcontrol serves no purpose.The process of control is not a linear process. The essence of control is not to"evaluate" whether the planned objectives have been achieved or not, but to monitorprogress in achieving objectives. This progress is not determined at the end of the planning,period, but rather during the implementation of the organization s plans. A feedbackmechanism that is described by Figure 2 serves for this purpose.The feedback can have a dual role. First, due to the deviation of the achieved resultsfrom the planned targets, it could occur the action plans, i.e. strategy to be reviewed.Second, for the same reason it is possible to re-examine the objectives themselves.Performance measurement is a very important issue in the process of managementcontrol. It is often simply considered that the performance measurement is in the exclusivejurisdiction of the financial (accounting) indicators.

44Faculty of Business Economics and EntrepreneurshipPlanningInternational Review (2015 No.3-4)Monitoring ckingProgresstrackingProgresstrackingAction planFigure 2: Feedback loop controolSource: Giraoud, F. et al.Management control, however, does not apply only to the profit-orientedorganizations, but also in sectors such as health, public administration, humanitarianorganizations, environmental protection, etc. Control process cannot begin until types, orqualitative dimensions of desired results are not defined. Then it is necessary to translatethese qualitative dimensions into measurable units, or indicators, as in Figure 3.Definition ofperfomanceDimension ADimension BDimension CEtc.MeasurementsystemIndicator 1Indicator 2Indicator 3Indicator onitoringresultsFigure 3:The structure of the control process: performance indicatorsSource: Giraoud, F. et alThe organization may have a larger number of dimensions of desired performances, aswell as individual indicators. In this case, we can talk about measurement system. Theimportance of measurement is that it increases thelikelihood that the planned objectives will actually be the subject of control. Whenselecting an appropriate performance measurement system, there is always a great subjectivity.Problems of this kind are particularly pronounced in the qualitative dimensions of performancesand their indicators. Qualitative dimensions of the performances are not always clear andmanagers at different positions can perceive them in different ways. In practice it is not alwayseasy for certain qualitative dimensions to be covered by appropriate indicator.Modern management control systems use three groups of indicators for monitoringperformances, as follows: (i) financial, (ii) non-financial and (iii) the combined (financialand non-financial).

Faculty of Business Economics and EntrepreneurshipInternational Review (2015 No.3-4)45Financial performance indicators are those relating to the measurement of profitability,risk and liquidity. When it comes to non-financial indicators, there are a number of reasonsin favor of their use in practice. The general argument is that using only financial indicatorsfocuses management action on a too narrow circle of variables that are important for theorganization,s success. Therefore, the non-financial indicators focus on the contributions ofthose factors that may be equally important for business performance as much as materialresources.Balanced Scorecard is now the most popular approach when it comes to combinedindicators for monitoring performances (Kaplan et al.,1996). The basic idea is thatexclusive reliance on financial indicators leads to strategic myopia, because managersscarify long-term gains at the expense of short-term gains. The great weakness oftraditional financial performance indicators is that they are so-called lag indicators. Theytalk about the performances that are a consequence of previous strategies and plans, andhave nothing to do with the drivers of future performances, or lead indicators (Đuričin etal., 2005).Large corporations specificsLarge, diversified corporations are faced with the question: when the power ofdecision-making is divided between the various entities and hierarchical levels within thecorporation, at what levels and in what way should be implemented management control?(Giraud et al., 2011) .In order to preserve the benefits of decentralization, managers of entities or "localmanagers" should have the freedom to implement an autonomous control process on theirdelegated level. The reasons for this are several. First, if there were no autonomous controlat the entity level, the responsibility of local managers would no longer be "visible".Control would be realized at higher levels, such as senior managers. Such a practice wouldbe inconsistent with previously performed decentralization of decision-making. Second, thesenior managers would become overloaded due to large amounts of detailed informationthat is not relevant to their hierarchical level.Management control at the level of individual entities is not, however, sufficient foreffective control at the level of corporation as a whole. This is because the performances ofentity do not guarantee that the corporation as a whole will achieve the plannedperformances. What is needed is to ensure good vertical coordination in the control process,top-down and bottom-top. This process is called strategic alignment. Agency risks thatcould arise in terms of vertical coordination are solved by using different incentiveschemes. These incentive schemes may be formal, such as indexing earnings of managersand staff to the performances achieved, and/or informal in the various forms of reward orpunishment.Management control in large corporations is shown in Figure 4. Figure shows thethree fundamental functions of performance management at the level of large corporations,such as horizontal coordination, strategic alignment and motivation of managers andworkers. With this in mind, it follows that the main role of senior managers in the processof management control is to guide behavior and motivate employees.

46Faculty of Business Economics and EntrepreneurshipInternational Review (2015 No.3-4)StrategicalignmentIncentivesHorizontal coordinationFigure 4: The control process in a decentralized corporation: the different dimensions of overallperformance managementSource: Giraoud et al. 2011Responsibility centers are a key mechanism for the realization of this triple function ofsenior managers in large corporations. Responsibility center is each entity in theorganization that has substantial authority to make business decisions (Lanen et al., 2006).Responsibility centers are functioning somewhat like small businesses. They have to bedirected to their own objectives, which are defined as a contribution to the generalobjectives of the company. It is therefore essential for large companies to createdecentralized systems for measuring performances, not only for the company as a whole,but also for the responsibility centers (Weetman, 2010).Open issues and future development of the theory ofmanagement controlThe main issue that management control deals with is how to ensure that managersand employees work in the interest of the organization? The recent development ofmanagement control has shown that there are two aspects of this problem. One aspectincludes information systems and accountability. Another aspect involves the behavior andmotivation of employees in organizations.The classical theory of management control puts the emphasis on information systems andaccountability. This theory has experienced numerous criticisms in recent decades. The maincomplaint is that it has too narrow a focus of observation, which is almost exclusively based onaccounting-based information. It is even criticized the concept of responsibility centers, becausethe assumption of their mutual independence has not been confirmed in practice. Namely, it isasked from responsibility center manager to be accountable not only for activities that areunder his control, but also from the ones that are outside his control (Hewege, 2012). Theproblem with excessive reliance on accounting information was partially offset by theintroduction of combined performance measures in the form of the Balanced Scorecard.However, many problems still remained.

Faculty of Business Economics and EntrepreneurshipInternational Review (2015 No.3-4)47Lasting problem related to the aspect of information and accountability is the issue ofperformance measurement. Performance measurement is a powerful mechanism forinfluencing the behavior of employees in organizations. It is said that what gets measured,gets done. The problem is that what is not measured, gets less attention. Because someperformance measures are more difficult to quantify, modern systems of managementcontrol show signs of myopia in practice (Otley, 2003).Another aspect of management control, one that relates to the behavior and motivation ofemployees, has developed under the influence of interdisciplinary and multidisciplinary researchesin the fields such as anthropology, social theory, organizational theory and the like. Simonpresented the idea of two types of control. The first type of control is called belief systems and isimplemented through adoption of the vision and values, as well as the organizational culture of theemployees. Another type of control is called systems boundaries and is based on the authority anddiscretion of managers. Organizations can combine both control systems in their operations,creating a wide range of possible controls (Otley, 2013).Many authors criticize the excessive reliance of the theory of management control onagency theory. Thesis that between owners and managers/employees there is only rationalrelationship based on self-interests is excessive simplification of reality. What is ignored inthis relationship is the factor of national culture, as an important context in whichmanagement control is implemented (Hewege, 2012).For further development of management control theory it is important fact that modernorganizations have a variety of control systems at their disposal. Therefore, the term controlsystems "package" is increasingly used in modern literature. If all these systems are createdand coordinated from one place in the organization, then it might be talking about anintegrated system of management control. Figure 5 shows the typology of managementcontrol systems package.The typology in Figure 5 is the result of research work on systematization andanalyzing management control systems, almost four decades long. The purpose of thismethodological framework is to facilitate and motivate discussion on the topic ofmanagement control, rather than to suggest a final solutions.Cultural controlsClansValuesSymbolsPlanningCybernetics ControlsReward ngeBudgets measurementmeasurement ministrative licies andproceduresFigure 5: Management control systems packageSource: Malmi et al., 2008

48Faculty of Business Economics and EntrepreneurshipInternational Review (2015 No.3-4)At the top of the frame are cultural controls, which are broad and subtle. Given thatchange slowly, they can be seen as a contextual framework for other types of controls. Inthe center of the frame are planning, a cybernetic control and rewarding. In many modernorganizations these types of control are tightly linked. At the bottom of the frame areadministrative controls that should provide the structure for the implementation ofplanning, a cybernetic controls and rewarding.,The framework s idea in Figure 5 is enabling managers to direct employees towardbehavior that is in accordance with the interests of the organization (Malmi, Brown, 2008).Discussion and ConclusionsDespite the controversies and doubts, management control persists as an indispensabletool for managing performances in modern organizations. The reason for this lies in the factthat the management control deals with the issue which is topical for all times: how toensure that managers and workers perform in the interest of the organization?The initial focus of management control was at large, decentralized corporations andthe application of the accounting-based performance indicators. Changes in theenvironment, then in the internal structure of the organizations, and increasing unethicalbehavior of managers, have launched an avalanche of doubts about the ability ofmanagement control to respond to its basic task.Contemporary literature tends to close this gap. An approach that understoodmanagement control as a "package" consisting of several types of control can be adopted asa good starting point in this direction. The classic theory of management control was able to"unpack" some parts of this package such as planning, a cybernetic controls and rewarding.Balanced Scorecard approach has fulfilled the gap when it comes to hybrid, or mixedperformance measures. Other parts of the package such as cultural and administrativecontrols require a multidisciplinary approach. Until we come up with new solutions, theexisting system of management control remains valid.References[1] ACCA (2009). Paper F5: Perfomance Measurement, BPP Learning Media Ltd.[2] Đuričin, D., Janošević, S., Kaličanin, Đ.(2005).Menadžment i strategija, Ekonomskifakultet, Centar za izdavačku delatnost, Beograd[3] Giraoud, F., Zarlowski, P., Saulpic, O., Lorain, M., Fourcade, F., Morales, J.(2011).Fundamentals of management control, Pearson Education France[4] Hewege, C.R.(2012).A Critique of the Mainstreem Management Control Theory andthe Way Forward, Sage Open,, pp.1-11[5] Jevtic, B., Grozdanic, R.(2014).Strategic Importance of Open Innovation for SME,s”,The Third International Conference on Employment, Education and EntrepreneurshipBelgrade, (EEE 2014), Belgrade, Serbia, 16 – 18 October 2014, Book of Proceedings,pp.88-105

Faculty of Business Economics and EntrepreneurshipInternational Review (2015 No.3-4)49[6] Kaplan, R.S., David P. Norton, D.P. (1996). Using the Balanced Scorecard as aStrategic Management System, Harvard Business Review, january-february, pp.1-12[7] Lanen, W., Anderson, S.W., Maher, M. (2011). Fundamentals of Cost Management,McGraw-Hill Irwin[8] Langevin, P., Mendoza, C.(2013).How Can Management Control System FairnessReduce Manager,s Unethical Behaviours?”, European Management Journal, 31,pp.209-222[9] Malinić, D. (2011).Etička dimenzija kvaliteta finansijskog izveštavanja, Ekonomikapreduzeća, vol.59, 5-6, pp.243-261[10] Malmi, T., Brown, D.(2008).Managemet Control Systems as a Package-Opportunities,Challenges and Research Directions”, Management Accounting Research, 19, pp.287300[11] Nixon, W., Burns, J. (2005).Management control in the 21th century-Introduction,Management Accounting Research, 16, pp.260-268[12] Otley, D.(2003).Management Control and Perfomance Management:whence andwhither?, The British Acounting Review, 35, pp. 309-326[13] Otley, D.(1994).Management Control in Contemporary Organizations: Towards aWider Framework, Management Accounting Research, no.5, pp.289-299[14] Radovic-Markovic, M., Markovic, D., Radulovic, D. (2015).Critical competenciesofVirtual Team Members and its Managers for Business Success, International Review,no. 1-2, ISSN 2217-9739, pp. 17-25[15] Stevanović, N. (2011).Finansijsko-izveštajna odgovornost u kontekstu EU,međunarodnog i novog domaćeg regulatornog okvira, Ekonomika preduzeća, vol.59,5-6, pp.227-242[16] Weetman, P.( 2010).Management Accounting, Prentice HallArticle history: Received 20 August 2015 Accepted 25 October 2015

Management control represents a method for managing organization,s performances. Clearly relationship exists between management Despite the controversies and doubts, management control persists as an indispensable tool for managing performances in modern organizations.