Management Control Systems

Chapter 6: Designing and Evaluating MCS

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 ?

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

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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.

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

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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.
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Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

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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Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

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 shouldnt put all your trust in people !?

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

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Pros and cons of action controls ...

PRO
 

CON
 

The most direct form of control. Tend to lead to documentation of the accumulation of knowledge as to what works best.
Organizational memory

Only for highly routinized jobs. May discourage creativity, innovation, and adaptation. May cause sloppiness. May cause negative attitudes.
e.g., little opportunity for creativity and selfactualization.

 

An efficient way of coordination:

i.e., they increase the predictability of actions and reduce the amount of inter-organizational information flows to achieve a coordinated effort.

Sometimes very costly

e.g., preaction reviews
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Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Pros and cons of results controls ...

PRO


CON


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.

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.

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

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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 organizations success.

What are the costs? Are any harmful side-effects likely?

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

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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.

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

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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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Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Overview ...
Can people be avoided? (e.g., automation, centralization)
No Yes

Control-problem avoidance People controls

Can you rely on people involved?

No

Yes Yes

Can you make people reliable?

No

Have knowledge about what Yes Able to assess whether specific actions are desirable? specific action was taken?
No Yes

Have knowledge about what results are desirable?

No

Action controls
Yes

Able to measure results?

Yes

Results controls

?
Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003 - 12 -

Depending on ...
Knowledge of which specific actions are desirable

Ability to measure results on important performance dimensions

Excellent

Action Control
and/or

Action Control
(e.g., large projects)

Results Control

Results Control
Poor

(e.g., movie director, SBU-manager)

People Control
(e.g., research lab)

High

Low

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

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Cases


Disctech, Inc. (p.207 ff.):

What went wrong? What shoud Bill Winslow do to restore confidence at Disctech and prevent similar occurrences in the future?

Airtex Aviation (p. 238 ff.):

Did Airtex need a nes control system at the time of the takeover? Evaluate the control system that Frank and Ted implemented. Should anything be done differently?

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

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