Management Control Systems

Chapter 6:
Designing and Evaluating MCS

Wim Van der Stede

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003
Designing control systems ...
 Two basic questions:
» What is desired ?
» What is likely to happen ?

 If what is likely is different from what is desired, then

two basic MCS-design questions must be addressed:

» What controls should be used ?

» How tightly should each be applied ?

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What is desired ?
 Start from objectives and strategies ...
» They should be important guides to the actions that
are expected, especially if they are specific …
 e.g., “Become a leader in the industry ” vs.
“15% ROI and 20% sales growth.”

 Identify the key actions (KA)

» i.e., actions that must be performed to provide
the greatest probability of success.

 Identify the key results (KR)

» i.e., the few key areas where things must go
right for the business to flourish.

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What is likely ?
 Three questions:
» Do employees understand what they are expected
to do (key actions) or to accomplish (key results)?
 lack of direction

» Are they properly motivated?

 lack of motivation

» Are they able to fulfil their desired roles?

 personal limitations

 The discrepancy between what is desired and what is

likely will determine the choice and the tightness of
the management control systems.

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -4-
Choice of controls ...
 The different types of controls (action, results and people
controls) are not equally effective at addressing each of the
control problems.
Lack of Lack of Personal
direction motivation limitations
Results accountability  
Action controls
- Behavioral constraints 
- Preaction reviews   
- Action accountability   
People controls
- Selection / placement   
- Training  
- Provision of resources 
- Strong culture  
- Group-based rewards  

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Start with people controls ...
 People controls …
» Must always be relied on to a certain extent;
» Have relatively few harmful side-effects;
» Involve relatively low out-of-pocket costs.

 However, it is rare that people controls will be sufficient.

In most cases, it is necessary to supplement them with …
» action controls;
» results controls.

 Maybe, you just shouldn’t put all your trust in people !?

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Pros and cons of action controls ...
PRO CON
 The most direct form of control.  Only for highly routinized jobs.
 Tend to lead to documentation  May discourage creativity,
of the accumulation of knowledge innovation, and adaptation.
as to what works best.
 May cause sloppiness.
– Organizational memory
 May cause negative attitudes.
 An efficient way of coordination:
– e.g., little opportunity for
– i.e., they increase the predictability
creativity and self-
of actions and reduce the amount
of inter-organizational information
actualization.
flows to achieve a coordinated  Sometimes very costly
effort.
– e.g., preaction reviews

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Pros and cons of results controls ...
PRO
 Behavior can be influenced
while allowing significant
autonomy.
 They yield greater employee
commitment and motivation.
 They are often inexpensive.
– e.g., performance measures
are often collected for
reasons not directly
related to management
control.
Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003
CON
 Often less than perfect indicators of
whether good actions have been taken.
 They shift risk to employees (because
of uncontrollable factors). Hence, they
often require a risk premium for risk
averse employees.
 Sometimes conflicting functions:
– Motivation to achieve
» targets should be “challenging”;
– Communication among entities
» targets should be slightly conservative.
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Choice of control tightness ...

 What are the potential benefits of tight controls?

– In any organization, tight control is most beneficial over
areas most critical to the organization’s success.

 What are the costs?

 Are any harmful side-effects likely?

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Control system change ...
 As firms grow, their controls evolve, usually towards …

» Increased formalization of procedures ...

 for action accountability purposes;
and/or

» Development of more elaborate information

systems ...
 for results control purposes.

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Keep a behavioral focus ...
 There is no one best form of control ...
– What works best in one company (or area within
a company), may not work in another ...
– e.g., accounting personnel vs. design engineers.

 Therefore, it is important to keep the focus on

the people involved, because …
– It is their responses that will determine the success
or failure of the control system !

 The benefits of controls are derived only from

their impacts on behaviors!

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Overview ...
Can people be avoided? Yes Control-problem
(e.g., automation, centralization)
avoidance
No
Yes
Can you rely on people involved?
No People controls
Yes
Can you make people reliable?
No
Have knowledge about what Yes Able to assess whether
specific actions are desirable? specific action was taken?
Yes
No
Action controls
Have knowledge about what Yes
results are desirable? Able to measure results?
Yes
No
Results controls
?
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Depending on ...

Knowledge of which specific actions are desirable

Ability to measure results on important performance dimensions
Excellent

Action Control
and/or Action Control
Results Control (e.g., large projects)

Results Control People Control

(e.g., movie director, (e.g., research lab)
SBU-manager)
Poor

High Low

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