Management Control 2007-2008

Prof. dr. W. J. Scheper

wim@cs.uu.nl

Objective of the course

Gain understanding of Management Control:
what is management control?
how can control be implemented?
what managementinformation is needed?
which organizational conditions?

Get students actively involved by using the

case method

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Structure of the course

7 sessions
Take-home cases
Final examination:
Take home case
Due date: 30 september 2008

Literature:
K. A. Merchant & W.A. van der Stede, 2003, Management
Control Systems, Prentice Hall, ISBN 0 273 65596 5
OR
K. A. Merchant & W.A. van der Stede, 2007, Management
Control Systems, Prentice Hall, ISBN 0 273 7080 15

Website

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Structure of the course in detail

1. Introduction

Ch. 1

April 21

2. Control system design

Ch. 2 & 3

May 6

3. Control tightness & side effects

Ch. 4 & 5 & 6

May 19

4. Planning & budgetting and setting

performance targets

Ch. 7 & 8 & 9 & 10

Ch. 7 & 8 & 9

June 2

5. Problems with accounting measures

Ch. 11 & 12
Ch. 10 & 11

June 9

6. Management control roles & ethical

issues

Ch. 14 & 15

June 16

7. Situational influences

Ch. 16 & 17

June 23

Writing in blue: 2nd edition differs from 1st -edn.

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Management Control Systems

Chapter 1: Management and Control

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 organizations best interest.
Management control includes all the devices / mechanisms managers
use to ensure that the behavior of employees is consistent with the
organizations objectives and strategies.

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Function and benefit of Management Control

Purpose / function ...

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

Benefit
increased probability that the organizations 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; what goals do we want to achieve?
Strategy formulation; how are we going to realize these goals?
Control: are we on track in realizing these goals?

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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 organizations success.

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

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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?
(design)
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?

Do our employees behave as expected? (execution)

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Planning and control ...

OBJECTIVE SETTING
PLANNING
Strategy Formulation
Strategic Control
CONTROL
Strategy Implementation
Management Control

predominantly external focus;

predominantly top-management
responsibility;
sometimes very unsystematic,
implicit and/or emergent.
predominantly internal focus;
relevant for every superiorsubordinate relationship;
more systematic and rhythmic.

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The planning / control cycle ...

Goals

Objective Setting

Strategy Formulation

Strategy Implementation

Strategic Control

Management Control
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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.
Remedy: COMMUNICATION + REINFORCEMENT !

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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

Statement!!

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.
Remedies?

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.

Remedies:
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
Assessor
Effector

measure performance;
compare with pre-set standard;
take corrective action.

Many controls dont 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 organizations objectives
and strategies.
GOOD CONTROL is said to take place when there is

a high probability that the firms objectives will

be achieved;
a low probability that major unpleasant surprises
Future-oriented
will occur.
Objectives-driven
Economically desirable

Therefore, controls must be:

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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
the results produced
the types of people
employed and their
shared values and
norms.

ACTION CONTROLS

RESULTS CONTROLS
PEOPLE CONTROLS

Or any combination of those ...

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Depending on ...
Excellent

Action Control
and/or

Action Control

Results Control

(e.g., large projects)

Results Control
Poor

(e.g., movie director,

SBU-manager)

High

People Control
(e.g., research lab)

Low

Knowledge of which specific actions are desirable

Ability to measure results on important performance dimensions

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Overview ...
Can people be avoided?
(e.g., automation, centralization)

Yes

No

Can you rely on people involved?

No

Yes
Yes

Can you make people reliable?

Control-problem
avoidance
People controls

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
results are desirable?
No

Yes

Able to measure results?

Yes

Results controls

?
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