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Slide 1.
Chapter 1: Management and Control
Kenneth A. Merchant and Wim A. Van der Stede, Management Control Systems, 2nd Edition Pearson Education Limited 2007
Slide 1.2
Management control

Management control is a critical function in organizations. Management control failures can lead to: - large financial losses - Reputation damage - Possibly even to organizational failure Management control systems can affect the development of strategies. Management control is the back end of the management process.
Slide 1.3
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.
Or, Management Control is the process by which managers influence other members of the organization to implement the organizations strategies.
Management control includes all the devices/mechanisms managers use to ensure that the behavior of employees is consistent with the organizations objectives and strategies.
Slide 1.4
Management Control Activities:

Management control involves a variety of activities, including: Planning what the organization should do. Coordinating the activities of several parts of the organization. Communicating information. Evaluating information. Deciding what, if any, action should be taken. Influencing people to change their behaviour.
Slide 1.5
Function and benefit
Purpose/function
get done what management wants done; influence behavior in desirable ways.
Benefit
increased probability that the organizations objectives will be achieved.
Slide 1.6
Management and its components

Objective Setting
Strategy Formulation
Management Control
Slide 1.7
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.
Slide 1.8
Strategy formulation
Strategy Formulation is the process of deciding on the goal of the organization and the strategies for attaining these goals. 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.
Slide 1.9
Distinctions between Strategy Formulation an Management Control
Strategy Formulation is the process of deciding on new strategies; Management Control is the process of implementing those strategies.
Slide 1.10
Key questions
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?
Slide 1.11
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.
Slide 1.12
Basic control issues
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
Slide 1.13
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 !
Slide 1.14
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. Employee crime (fraud and theft).
More extreme examples of motivational problems:
Slide 1.15
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 JOB DESIGN

Slide 1.16
Elements of a Control system

Detector or Sensor : a device that measures what is actually happening in the process being controlled. Assessor : a device that determines the significance of what is actually happening by comparing it with some standard or expectation of what should happen. Effectors : a device (often called feedback) that alters behavior if the assessor indicates the need to do so. Communications Network : devices that transmit information between the detector and the assessor and between the assessor and the effectors.
Slide 1.17
Note that
Management controls do not always involve a simple cybernetic system 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.
Slide 1.18
Control can be achieved through:

Control
Problem Avoidance Control Systems
Management
Action Controls;
Results Controls;
People Controls.
Slide 1.19
Control-problem avoidance
Three possibilities:
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.
Slide 1.20
Control alternatives
Controls can focus on:

the actions taken
ACTION CONTROLS
the results produced
RESULTS CONTROLS PEOPLE CONTROLS
the types of people employed and their shared values and norms
Or any combination
Slide 1.21
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, entity manager)
People Control
(e.g. research lab)
High
Low
Slide 1.22
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
?
Slide 1.23
CASE STUDY
Leos Four-Plex Theater Questions 1. Where is the theaters control system lacking? Are the controls themselves weak or incomplete, or are the theatres problems caused primarily because of lack of discipline in using the existing controls? 2. What control improvements would you suggest for Leos Four-Plex?

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Slide 1.

Chapter 1: Management and Control

The process by which management:

Management Control Activities:

Function and benefit

Management and its components

Without objectives, it is impossible

Distinctions between Strategy Formulation an Management Control

our employees likely to behave appropriately?

The basic control problem

Management control is about encouraging PEOPLE to take desirable actions,

Hence, management control has a BEHAVIORAL ORIENTATION !

Basic control issues

Are they capable of doing what is expected of them

Employees do not know what the organization wants from them.

More extreme examples of motivational problems:

TRAINING JOB ASSIGNMENT JOB DESIGN

Elements of a Control system

Many controls dont focus on measured performance

Many controls are proactive rather than reactive

Control can be achieved through:

Problem Avoidance Control Systems

Controls can focus on:

the results produced

RESULTS CONTROLS PEOPLE CONTROLS

(e.g. movie director, entity manager)

Control-problem avoidance People controls

Can you rely on people involved?

Can you make people reliable?

Have knowledge about what results are desirable?

Able to measure results?

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