Management Control Systems

Chapter 1: Management and Control

Wim Van der Stede

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003
Management control ...
 The process by which management:
– … ensures that people in the organization carry
out organizational objectives and strategies;
– … encourages, enables, or, sometimes “forces”
employees to act in the organization’s best interest.

 Management control includes all the devices / mechanisms

managers use to ensure that the behavior of employees is
consistent with the organization’s objectives and strategies.

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Function and benefit ...

 Purpose / function ...

– get done what management wants done;
– influence behavior in desirable ways.

 Benefit …
– increased probability that the organization’s
objectives will be achieved.

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Management and its components ...
 Management …
– … the process of organizing resources and directing
activities for the purpose of organizational objectives.

 Process-breakdown …
» Objective setting;
» Strategy formulation;
» Control.

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Objective setting ...
 Objectives are …
» a necessary prerequisite for any purposeful activities.

 Without objectives, it is impossible …

» to assess whether the employees’ actions are purposive;
» to make claims about an organization’s success.

 Objectives can be …
» financial versus non-financial;
» quantified, explicit versus implicit;
» economic, social, environmental, societal.

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -5-
Strategy formulation ...
 An organization must select any of innumerable
ways of seeking to attain its objectives.

 Strategies define how organizations should

use their resources to meet their objectives.

 Hence,
… strategies put constraints on employees to
focus activities on what the organization does
best or areas where it has an advantage over
competitors.

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Control ...
 Strategic control …
» Is our strategy (still) valid?
» Strategy revision -- “intended” vs. “emergent” strategies.

 Management Control …
– Are our employees likely to behave appropriately?
» Do they understand what we expect of them?
» Will they work consistently hard and try to do what
is expected of them?
» Are they capable of doing what is expected of them?

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -7-
Planning and control ...
OBJECTIVE SETTING
 predominantly external focus;
PLANNING  predominantly top-management
responsibility;
Strategy Formulation  sometimes very unsystematic,
Strategic Control implicit and/or emergent.

CONTROL  predominantly internal focus;

 relevant for every superior-
Strategy Implementation subordinate relationship;
 more systematic and rhythmic.
Management Control

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The planning / control cycle ...

Goals Objective Setting

Strategy Formulation Strategic Control

Strategy Implementation Management Control

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -9-
The basic control problem ...
 Management control is about encouraging
PEOPLE to take desirable actions,
» i.e., it guards against the possibilities that employees will
do something the organization does not want them to do,
or, fail to do something they should do.

 Hence, management control has a ...

… BEHAVIORAL ORIENTATION !
 If all personnel could always be relied on to do what is
best for the organization, there would be no need for a
management control system.

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Recall that ...
 Management Control is about taking steps to help
ensure that the employees do what is best for the
organization.
 Three issues:
» Do they understand what we expect of them ...
 Lack of direction

» Will they work consistently hard and try to do what

is expected of them ...
 Lack of motivation

» Are they capable of doing what is expected of them ...

 Personal limitations

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Lack of direction ...

 Employees do not know what the organization

wants from them.

 When this lack of direction occurs, the likelihood

of the desired behaviors occurring is obviously
small.

COMMUNICATION + REINFORCEMENT !

Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 12 -
Motivational problems ...
 When employees ‘choose’ not to perform as
their organization would have them perform.

 Because …
– Lack of goal congruence
» Individual goals do not coincide with organizational goals.

– Self-interested behavior
» Generally, individuals are prone to being “lazy” ...
 e.g., take long lunches, overspend on things that make
life more pleasant, use of sick leaves when not sick, etc.
» More extreme examples of motivational problems:
 Employee crime (fraud and theft).

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Personal limitations …
 Sometimes, people are “unable” to do a good job
because of certain personal limitations they have.

 Some examples / causes:

– lack of requisite knowledge, training, experience;
– employees are promoted above their level of competence;
– some jobs are not designed properly;
– etc.
TRAINING
JOB ASSIGNMENT / PROMOTION
JOB DESIGN

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Management control is more than ...
 A simple cybernetic control system involving
a single feedback loop, like a thermostat …
» Detector  measure performance;
» Assessor  compare with pre-set standard;
» Effector  take corrective action.

 Many controls don’t focus on measured performance ...

» e.g., direct supervision, employee hiring standards,
codes of conduct.

 Many controls are proactive rather than reactive …

» i.e., they are designed to prevent control problems before the
organization suffers any adverse effects on performance.

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Control and “good” control ...
 Again, … management controls include all the devices
managers use to ensure that the behaviors and decisions
of people are consistent with the organization’s objectives
and strategies.

 “GOOD CONTROL” is said to take place when there is …

– a “high” probability that the firm’s objectives will be achieved;
– a “low” probability that major unpleasant surprises will occur.

 Therefore, controls must be: » Future-oriented

» Objectives-driven
» Economically desirable

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Control can be achieved through ...

 Control Problem Avoidance

 Management Control Systems

» Action Controls;

» Results Controls;

» People Controls.

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Control-problem avoidance ...
 Three strategies …
– Activity elimination
» e.g., subcontracts, licensing agreements, divestment.

– Automation
» Computers / robots eliminate the human problems
of inaccuracy, inconsistency, and lack of motivation;
» Only applicable to relatively easy decision situations;
» Automation can be very costly.

– Centralization
» Superiors reserve for themselves the most critical
decisions.

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Control alternatives …
 Controls can focus on:

– the actions taken ACTION CONTROLS

– the results produced RESULTS CONTROLS

– the types of people PEOPLE CONTROLS

employed and their
shared values and
norms.

Or any combination of those ...

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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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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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