CHAPTER 3

BEHAVIOR IN ORGANIZATIONS

CHAPTER CONTENTS:
3.0 Chapter objectives
3.1 Goal congruence
3.2 Informal factors that influence goal congruence
3.2.1 External factors
3.2.2 Internal factors
3.3 The formal control system
3.4 Formal control process
3.5 Types of organizations
3.6 Functions of the controller
3.7 Questions

3.0 CHAPTER OBJECTIVES

 To explain the concept of goal congruence

 To describe the external factors that affect goal congruence process
 To describe the internal factors that affect goal congruence process
 To discuss the types of organizations to implement strategies.
 To know about the different structures of organization.
 To describe the functions of controller

MCS influence human behavior. The system should influence behaviors in a goal
congruence manner. The concept of goal congruence is explained here. Goal congruence
is affected both by informal processes and also by formal systems. Internal factors
External factors
Control is attained by two factors
1. Rules broadly defined
2. A systematic way of planning and controlling.
Organizations structures and their types.
The function of the controller on the management control process. Different types of
organization structures can be used to implement strategies. a discussion of the types of
organization structure is essential, since the design of management control systems
should fit the organization structure used. Finally, we describe the function of the
controller in the management control process.
3.1Goal congruence
Senior management wants the organization to attain the organization’s goals. However,
the members of the organization have their own personal goals, and these are not entirely
consistent with the goals of the organization. The actions of individual members of the
organization are directed toward achieving their personal goals. The central purpose of a
management control system, therefore, is to assure, so far as is feasible, what is called
“goal congruence.” goal congruence in a process means that actions it leads people to
take in accordance with their perceived self-interest are also in the best interest of the
organization.
Perfect congruence between individual goals and organizational goals does not
exist. One obvious reason is that individual goals and organizational goals do not exist.
One obvious reason is that individual participants usually want as much compensation as
they can get; whereas, from the organization’s viewpoint, there is an upper limit to
salaries beyond which profits would be adversely and unnecessarily affected. as a
minimum, however, the management control system should not encourage individuals to
act against the best interests of the organization. for example, if the system signal s that
the emphasis should be only on reducing costs, and if a manager responds by reducing
costs at the expense of adequate quality or by reducing costs in other parts of the
organization, then the manager has been motivated, but in the wrong direction.
Two questions are important in evaluating any management control practice:
1. What actions does it motivate people to take for their self-interest?
2. Are these actions in the best interest of the organization?

3.2 Informal factors that influence goal congruence

Both formal systems and informal processes influence human behavior in organizations
and, therefore, affect the degree to which goal congruence can be achieved. This book is
primarily concerned with formal control systems. Nevertheless, the designers of formal
systems should consider the informal processes in their design choices because formal
mechanisms should be consistent with informal processes in order to effectively
implement organization strategies. The system of strategic plans, budgets, and report is a
formal control system. Before discussing the formal system, we shall describe informal
forces. Work ethic, management style, and culture are examples of informal organization
processes, some of which are external to the organization, but most of which are internal.
3.2.1 External Factors
External factors are norms of desirable behavior that exist in the society of which the
organization is a part. They are often referred to as the work ethic. They are manifest in
employees’ loyalty to the organization, their diligence, their spirit, and their pride in
doing a good job (as contrasted with merely putting in time). Some of these attitudes are
local; they are specific to the city or region in which the organization does its work. In
encouraging companies to locate in their city or state, chambers of commerce or other
promotional organizations often claim that their locality has a loyal, diligent work force.
Others are industry specific: the railroad industry has norms that differ from those in the
airline industry. Still others are national; some countries have a reputation for excellent
work ethics. Currently, for example, Japan, South Korea, Hong Kong, and other East
Asian countries have an excellent reputation on this dimension.

3.2.2 Internal Factors

Culture. The most important internal factor is the organizations’ culture, or climate.
Organization culture refers to the set of common beliefs, attitudes, norms, relationships,
and assumptions that are explicitly or implicitly accepted and evidenced throughout the
organization. The term climate is used to designate the quality of the internal
environment that conditions the quality of cooperation, the development of individuals,
the extent of members’ dedication or commitment to organizational purpose, and the
efficiency with which that purpose is translated into results, Climate is the atmosphere in
which individuals help, judge, reward, constrain, and find out about each other. It
influences morale – the attitude of the individual toward his or her work and his or her
environment.
Cultural norms are extremely important, they explain why either of two
organizations may have an excellent formal management control system, but why one
has much better actual control than the other. An organizations’ culture is rarely stated in
writing,. And attempts to do so almost always result in platitudes.
Management Style. The internal factor that probably has the strongest impact on
management control is management style – in particular, the attitude of a manager’s
superior toward control. Usually the attitude of subordinates reflects in a general way
their perception of the attitude of their superiors, modified, of course, by each
subordinate’s own attitude. The attitude ultimately stems from the attitude of the chief
executive officer. This is another way of saying “an institution is the lengthened shadow
of a man.”
Managers come in all shapes and sizes. Some are charismatic and outgoing others
are less ebullient. Some spend much time looking and talking to people (called
“management by walking around”); others rely more heavily on written reports. We
know ,of no way to generalize about the “ideal” manager.

The Informal Organization. The lines on an organization chart depict the formal
organization – that is, the formal authority and responsibility relationships of the
specified mangers. The organization chart may show, for example, that the production
manager of Division Reports to the general manager. Actually the production manger
communicates with several other people in the organization other mangers, support units,
and staff people at headquarters – and simply friends and acquaintances. In extreme
situations, the production manager may pay inadequate, attentions to messages received
from the general manger. This tends to happen when the production manger is evaluated
more on production efficiency than on overall performance. The relationships that
constitute the informal organization are important in understanding the realities of the
management control process.

Perception and Communication. In working toward the goals of the organization,

operating mangers must know what these goals are and what actions they are supposed to
take in order to achieve them. They receive information about what they are supposed to
do through various channels. In part, it is conveyed by conversations and other informal
means. This information often is not a clear message about what senior management
wants done. An organization is complicated, and the actions that should be taken by one
part of it to accomplish the overall goals cannot be stated with absolute clarity, even
under the best of circumstances.
Moreover, the message received through various information channels may
conflict with one another, or managers may interpret them in different ways.

Cooperation and Conflict. The lines connecting the boxes on an organization chart
imply that the way organizational goals are attained is that senior management makes a
decision and communicates that decision down through the organizational hierarchy to
mangers at lower levels of the organization, who then implement it. This implication
ignores the personal goals of individuals, and it is not the way an organization actually
functions.

PRACTICE QUESTIONS
1.Explain the concept of goal congruence?
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_________
2Describe the external factors that affect goal congruence process?
 _____________________________________________________________________
_____________________________________________________________________
______

3.EXPLAIN the internal factors that affect goal congruence process

_____________________________________________________________________
_____________________________________________________________________
______

3.3 The Formal Control System

The informal factors discussed above have a great influence on the effectiveness of
management control in an organization. The other influence is, Of course, the formal
systems. These systems can be classified into two types: (1) the management control
system, which is our main emphasis in this book and, therefore, not discussed further at
this point; and (2) rules, which are describe d briefly below.

Rules
We use the word rules as shorthand for all types of formal instructions and controls, they
include standing instructions, practices, job descriptions, standard operating procedures,
manuals, and codes of ethics. Unlike the directives or guidance implicit in budget
amounts, which change from month to month, these rules are in force indefinitely – that
is, they exist until they are modified. Typically, rules are changed infrequently. They
relate to matters that range from the most trivial (e.g., capital expenditures of over $5
million must be approved by the board of directors).
Some rules are guides – that is, organization members are permitted, and indeed
expected, to depart from them, either under specified circumstances or if in the person’s
judgment a departure is in the best interests of the organization.
Some rules should never be broken. A rule that prohibits payment of bribes and a
rule that an airline pilot should never take off without permission from the air traffic
controller are examples; Some rules are prohibitions against unethical, illegal, or other
undesirable actions.

Physical Controls. Security guards, locked storeroom, vaults, computer passwords,

television surveillance, and other physical controls are part o the control structure. Most
of them are associated with task control, rather than with management control.
 Manuals. Much judgment is required in deciding which should be written and put in a
manual; which should be guidelines, rather than fixed rules, what discretion should be
allowed; and a variety of other matters. The literature constraints only obvious guidance
on these matters. Bureaucratic organizations have more detailed manuals than other
organizations; large organizations have more than small ones; centralized organizations
have more than decentralized ones; and organizations with geographically dispersed units
performing similar functions (such as fast food restaurant chains) have more manuals and
rules than single-site organizations.

System safeguards. Various safeguards are built into the information processing
system to ensure that the information flowing through the system is accurate and to
prevent (or at least minimize) fraud and defalcation. They include cross-checks of totals
with details,, required signatures and other evidence that a transaction has been
authorized, separation of duties, frequent counts of cash and other portable assets, and a
number of other rules that are described in texts on auditing. They also include checks of
the system that are made by internal and external auditors.

Part I. The Management Control Environment

Goals and Other

Strategies Rules informatio
(Chapter 2) Reward(Feedback)

Responsibility Was performance Yes

Strategic Budgeting center Report satisfactory
planning (Chapter 9) performance Actual (Chapters 11 &
(Chapters 5, 12)
(Chapter 8) 10,& 11) versus plan No

Revise Revise Corrective Measuremen

Feed Back
Action t
Exhibit 3-1 the formal control process Communicat
 3.4 Formal Control Process
Exhibit 3-1 is a sketch of the formal management control process. Its foundation is the
organization’s goals, and strategies for attaining these goals. A strategic plan is prepared
in order to implement these strategies; all available information is used in making this
plan. The strategic plan is converted to an annual budget that focuses on the planned
revenues and expenses for individual responsibility centers. Responsibility centers also
are guided by a large number of rules and other information. They operate, and the result
of their operation are measured and reported. Actual results are compared with the
plant, ,to answer the question “was performance satisfactory?” If it was satisfactory, there
is feedback to the responsibility center in the form of praise or other reward. If
performance was not satisfactory, there is feedback leading to corrective action in the
responsibility center and possible revision on the plan. (Like most such diagrams, this
sketch is valid only as a generalization. As we shall show in later chapters, the process in
practice is less straightforward than this sketch indicates.)

3.5 Types of Organization

The firm’s strategy has an important influence on its organization structure. The type of
organization structure, in turn, has an influence on the design of management control
systems. Although organization some in all sizes and shapes, their structures can be
grouped into three general categories: (1) a functional structure, in which each manger is
responsible for a specified function, such as production or marketing; (2) a business unit
structure, in which each business unit manager is responsible for most of the activities of
a business unit, which is a semi-independent part of the company; and (3) a matrix
structure, in which functional units have dual responsibilities.

Functional Organizations
The rationale for the functional form of organization is the same as that developed by
Frederick Taylor and others for specialization of labor in large scale production. It
involves the notion of a manager who brings specialized knowledge to bear on decisions
related top the functions. This contrasts with the general purpose manager, who cannot
possibly have as much knowledge about a given function as a specialist in that function.
A skilled marketing manger should make better marketing decisions and a skilled
production manger should made better production decisions than the decisions made by a
manger who is responsible form both marketing and production. Moreover, the skilled
specialist should be able to supervise workers in the same function better than the
generalist; similarly, skilled higher-level mangers should be able to provide better
supervision of lower-level managers in the same or similar function. Thus, an important
advantage of a functional structure is efficiency.
There are five disadvantages of a functional structure
First, in a functional organization, there is no unambiguous way of determining the
effectiveness of the separate functional managers because each function contributes
jointly to the final output of the organization.

A second disadvantage of the functional organization is that there is no good way of

planning the work if the separate functions at lower levels in the organization.
Third, if the organization consists of managers in one functions who report to higher-
level mangers of the same functions, who, in turn, report to still higher level mangers of
that function, then a dispute between managers of different functions can be resolved
only at the very top of the organization, even th0ug it originates at a low level.

Fourth, functional structures are inadequate when the firm diversifies its products and
markets.

Finally, functional organizations tend to create “silos” across function, thereby preventing
cross-functions coordination in areas such as new product development. This problem
can be mitigated by supplementing this organization with lateral cross-functional
processes such as cross-functional job rotation and team-based rewards.

A. Functional Organization

hief

cturing ing Manager

Plant 1 Plant 2 Plant 3

Region A Region B Reg
 B. Business Unit Organization

hief

Manager Business Manager Business Manager Business

Unit X Unit Y Unit Z
Staff Staff Staff

Plant Marketing Plant Marketing Plant Marketing

Manager Manager Manager Manager Manager Manager

C. Matrix Organization

hief

Manager Manager

Manager

Manager
Manager
Business Units
The business unit form of organization is designed to solve problems inherent in the
functional structure. A business unit, also called a division, is responsible for all the
functions involved in producing and marketing a specified product line. Business unit
mangers act almost as if their units were separate companies. They are responsible for
planning and coordinating the work of the separate functions, and they resolve dispute
that arise between these functions., they ensure that they plans of the marketing
department are consistent with production capabilities, their performance is measured by
the profitability of the business unit, and this is a satisfactory measure because profit
incorporates the activities of both ,marketing and production
Business unit mangers do not have complete authority. Headquarters reserves the
right to make certain decisions. At a minimum, headquarters is responsible for obtaining
funds for the company as a whole, and it allocates funds to business units according to its
judgment on where the available funds can be put to the best use. Headquarters also
approves the business unit budgets, judges the performance of business unit managers,
sets their compensation, ,and if the situation warrants, removes them. Headquarters
established the “charter’ of each business unit – that is, the product lines it is permitted to
make and sell or the geographical territory in which it can operate, or both, and
occasionally, the customers to which it may sell.
An advantage of the business unit form of organization is that it provides a
training ground in general management. The business unit manger should have the
entrepreneurial spirit that characterizes the CEO of an independent company.
Another advantage is that because the business unit is closer to the market for its
products than the headquarters organization, its manager may make sounder decisions
than headquarters can make, and it can react to new threats or opportunities more quickly.
Offsetting these advantages is the possibility that each business unit staff may
duplicate some work that in a functional organization is done at headquarters. The
business unit manager is presumably a generalist, but his or her subordinates are
functional specialists, and they must deal with many of the same problems that specialists
in other business units and at headquarters address. The layers of business unit staff may
be more expensive than the value gained by divisionalization. Moreover, skilled
specialists in certain functions are in short supply, and business units may be unable to
attract qualified persons. These problems could be mitigated by supplementing business
unit organization with certain centralized functional expertise.
Another disadvantage of the business unit form is that the dispute between
functional specialists in a functional organization may be replaced by disputes between
business units inn a business unit organization. These may involve one business unit
infringing on the charter of another unit. There may also be disputes between business
unit staffs and headquarters staff.
Although the possibility of holding several mangers responsible for pieces of the
company’s overall profit performance is attractive, the above noted disadvantages may
outweigh the benefits of business unit structure.

Implications for systems Design

If ease of control were the only criterion, companies would be organized into
business units when ever it was feasible to do so because in a business unit
organization, ,each unit manager is held responsible fro the profitability of the unit’s
product line, and he or she presumably plans, coordinates, and controls the elements that
affect its profitability. Control is not the only criterion, however. A functional
organization may be more efficient because larger functional units provide the benefits of
economies of scale. A business unit organization requires a somewhat broader type of
manger than the specialist who manages a function; competent general mangers may be
difficult to find.
Because of the apparently clear-cut nature of the assignment of profit
responsibility in a business unit organization, designers of management control systems
sometimes recommend such an organization without giving appropriate weight to the
other considerations involved in organization design. Nevertheless, the systems designer
must fit the system to the organization, not the other way around. In other words,
although the control implications of various organization structures should be discussed
with senior management, once management has decided that a given structure is best, all
things considered, then the system designer must take that structure as given.
Nevertheless, the systems designer should not insist that the rotation policy be
abandoned simply because to do so would make performance measurement easier.

3.6 Functions of the Controller

We shall refer to the person who is responsible for designing and operating the
management control system as the controller. Actually, in many organization, the title of
this person is chief financial officer.

The controller usually performs the following functions:

 Designs and operates information and control system.
  Prepares financial statements and financial reports (including tax returns) to
shareholders and other external parties.
 Prepares and analyzes performance reports and assists mangers by interpreting
these reports, by analyzing program and budget, proposals, and b consolidating
the plans of various segments into an overall annual budget.
 Supervises internal audit and accounting control procedures to ensure the validity
of information, establishes adequate safeguards against theft and defalcation, and
performs operations audits.
 Develops personnel in the controller organization and participates in the education
of management personnel in matters relating to the controller functions.

Relation to Line Organization

The controllership function is a staff function. Although the controller usually is
responsible fro the design and operation of systems in which control information is
collected and reported, the sue of this information in actual control is the responsibility of
line management. The controller also may b e responsible for developing and analyzing
control measurements and for making recommendations for action to management.
The controller does not make or enforce management decisions, however. The
responsibility for control runs from the chief executive officer down through the line
organization, which uses information provided by the controller.
The controller does make some decisions, In general, these are decisions that
implement policies decided on by line management. For example, a member of the
controller organization often decides on the propriety of expenses listed on a travel
voucher, line managers usually prefer not to get involved in discussions of whether the
traveler spent too much on meals or whether the airplane trip should have been made in
economy class rather than first class.
The controller plays an important role in the preparation of strategic plans and
budgets. Also, the controller organization typically analyzes performance reports,
assures that they are accurate, and calls the line manager’s attention to items that may
indicate the need for actins. In these activities, the controller acts almost like a line
manager. The difference is that the controller’s decisions can be overruled by the line
manager to whom the subordinate manger is responsible.
Part I. The Management Control Environment

Corporate Corporate
Controller Controller

Business Unit
Business Unit
Manager
Manager

Business Unit
Controller Business Unit
Controller

Exhibit 3-3. Alternative controller relationships

The Business Unit Controller

Business unit controllers inevitably have a divided loyalty. On the one hand they owe
some allegiance to the corporate controller, who is presumably responsible for the overall
operation of the control system. On the other hand, they owe allegiance to their business
unit mangers since controllers are responsible for furnishing staff assistance to them.
Two possible types of relationship are diagrammed in Exhibit 3-3.
In some companies the business unit controller reports to the business unit
manager, and has what is called a dotted line relationship with the corporate controller,
Here, the business unit general manager is the controller’s immediate boss. This means
that the business unit general manger has the ultimate authority in decisions relating to
hiring, training, transferring, compensation, promotion, and firing of business unit
controllers. However, the business unit general manger usually takes the inputs of the
corporate controller before making these decision.
In other companies’ business unit controllers report directly to the corporate
controller – that is, the corporate controller is their boss, and indicated by a solid line on
the organization chart.
There are problems with each of these relationships. If the business unit controller
works primarily for the business unit manger, there is the possibility that he or she will
not reveal “fat” in the proposed budget or provide completely objective reports on
performance. On the other hand, if the business unit controller works primarily for the
corporate controller. The business unit manger may treat him or her as a “spy from the
front office” rather than as a trusted aide.
PRACTICE QUESTIONS
Explain in detail about the formal control system?
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
Explain about the formal control process
________________________________________________________________________
________________________________________________________________________

Explain about the different structures of organization

A) Functional type of organization
________________________________________________________________________
________________________________________________________________________

B) Matrix type of organization

________________________________________________________________________
________________________________________________________________________

C) Business unit organization

________________________________________________________________________
________________________________________________________________________

Write about the functions of controller

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
3.7 QUESTIONS

1.explain the concept of goal congruence?

2.explain the informal factors that influence goal congruence process?
3.explain the influence of formal control system in goal congruence process?
4.explain about the various types of organizations in brief?
5.explain the functions of the controller in detail?
6. Write about the role of business unit controller?