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Hoofdstuk 1: introduction to management control
Introduction
The goal of management control systems is to implement organizational strategies. Organizations
that are able to efficiently meet their strategic objectives are the best performers in the long run.
Management control, therefore, directly concerns organizational performance and one of its
challenges is, indeed, to increase the organization’s long-term performance. Management control
systems consist of the various ways in which the organization’s top management team attempt to
enhance the organization’s performance in line with strategic objectives. Such typical control system
elements include strategic planning; budgeting; resource allocation; performance measurement,
evaluation and reward; responsibility center allocation; and transfer pricing.
Management control is the systematic process by which the organization’s higher-level managers
influence the organization’s lower-level managers to implement the organization’s strategies.
Management control is about decentralized organizations. Large firms that strive to maximize their
value on behalf of their shareholders are the organizations that are the most in need of informing
their decentralized managers about the strategic goals and associated actions that will satisfy their
owners.
Management control: role and position
Decentralization causes a number of reasons why lower-level managers do not automatically
perform in line with the organization’s overall objectives:
1. Decentralized managers do not automatically understand the goals and strategies developed
by higher-level managers, nor how they can contribute to these goals and strategies.
2. Decentralized managers do not automatically agree with organizational goals and strategies
developed by higher-level managers.
3. Decentralized managers do not automatically have the resources needed to act with
organizational goals and strategies developed by higher-level managers.
An important first function of management control is its top-down function to provide lower-level
managers with a clear sense of direction that helps them take actions, make decisions and achieve
results that help the organization to achieve its overall goals. Bottom-up, management control
should inform higher-level managers about the progress of decentralized managers in their efforts to
achieve organizational objectives.
Motivation to achieve the organization’s goals may be lacking because managers have private goals
that are incompatible with the goals of the organization. Private goals include goals that managers
try to achieve out of self-interest, and that lead to the consumption of organizational resources for
private reasons. An important second function of management controls is their top-down function to
motivate lower-level managers to take actions, make decisions and achieve results that help the
organization achieve its overall goals. Bottom-up, management control should facilitate the higher-
level managers to benefit from the specialized skills and knowledge of decentralized managers. An
important third function of management control is its top-down function to ensure that
decentralized managers have the skills and the organizational resources they need to perform in line
with organizational objectives. Bottom-up, management control should enable lower-level managers
to acquire the support to develop their skills as well as the organizational resources to execute their
responsibilities.
1
, Exhibit 1.4: top-down and bottom-up functions of management control
Origin of the need for management Top-down function of Bottom-up function of management
control management control control
1. Decentralized managers do not Explain strategies and goals of Report on goal achievement; provide
automatically understand the the organizations in as input when goals are unrealistic.
goals and strategies developed operational a way as possible. Enable the coordination and
by higher-level managers, nor Support coordination across cooperation with other decentralized
how they can contribute to business functions at units
these goals and strategies. decentralized level.
2. Decentralized managers do not
automatically agree with Motivate lower-level managers Facilitate higher-level managers to
organizational goals and to strive for organizational benefit from the specialized skills and
strategies developed by higher- goals. knowledge of lower-level managers
level managers.
3. Decentralized managers do not
automatically have the Resource allocation, develop Enable lower-level managers to
resources needed to act with personal skills of lower-level acquire the support and resources to
organizational goals and managers and their execute their responsibilities
strategies developed by higher- subordinates
level managers.
Comparing management control and general management
Management control is an organizational phenomenon that affects all managers within the
organization. It is useful to consider that control is often regarded as a basic managerial function,
alongside other managerial function that are typically labelled planning, organizing, leading and
staffing. Those managerial functions refer to the kind of decisions made and actions that managers
typically take.
- Planning concerns the decisions that managers need to make about what the organizational
participants need to do in the future.
- Organizing concerns the use of physical, human and financial resources in such a way that
the plans can become operational, and the planned actions can be taken.
- Staffing concerns the managerial responsibility to ensure that the organization employs the
right people to perform the actions.
- Leading concerns the managerial function of ensuring that the plans and planned activities
are followed by organizational participants. Controlling suggests the importance of
establishing whether the actions and activities are performed according to plan.
With management control it is not only about the way in which individual managers decide and act,
but rather how managers across levels cooperate. For this reason management control goes beyond
the individual managerial functions in three ways: 1. Management control is the systematic process
by which the organizations higher-level managers influence the organization’s lower-level managers.
2
,Comparing management control and management accounting
Typical cost accounting tools that managers could use to keep score, direct attention and solve
problems are variance analysis and budgeting. The persistence of the relevance of financial
information for management control can be explained by at least two reasons:
- The importance of money as the overall measure of organizational performance
- The general importance of the organization’s overall accounting system to satisfy the
information needs of the organization’s stakeholders.
Human behaviour in organizations
Management control is about influencing the behaviour of humans in organizations in such a way
that this behaviour becomes goal-congruent. Goal-congruent behaviour is behaviour that helps the
organization to implement its strategies and to reach its goals. Goal-congruent behaviour is hard to
obtain and assess in a timely manner for three reasons:
1. Managers may deviate from the organization’s strategies because they do not understand or
support those strategies or lack the resources to accomplish the organization’s strategies.
2. The concept of goal-congruent behaviour is problematic in itself as it is not always a priori
clear which behaviour is goal-congruent and which behaviour is not.
3. Even if the need for management control is clear and management control has become a
part of the managerial task, good management control is quite a challenge for those
managers exercising it. It requires that, throughout the organizational hierarchy, managers
understand what the organizational strategies require them to do, and are able to inform the
organizational participants under their supervision about those strategies in a way that
increases goal-congruence. This often implies that goals higher in the organization need to be
translated into goals lower down in the organization.
Distinguish between three sources of managerial motivation:
1. Managers are motivated by goals that they are asked to achieve.
2. Managers are motivated by rewards that they may get from their efforts.
3. Managers are motivated by the social context in which they work.
Motivation is the combination of the effort, direction and persistence. Effort is the amount of time
and energy that humans expend in performing a certain activity. Direction of effort is almost as
important as the level of effort, because expending effort in the wrong direction is at best equal to
not expending effort, but may in fact work against the organization’s objectives. Persistence relates
to the duration of the effort and is an important condition for effort to be expended until the
organizational objective is reached.
It is important for the designers of formal systems to take into account the informal processes, such
as work ethic, management style and culture, in organizations because successful implementation of
organizational strategies requires appropriate informal processes that, in totality, create the social
context in which managers take actions and make decisions. They consist of both external and
internal factors.
External factors are norms of desirable behaviour that exist in the society of which the organization
is a part.
Cultural norms are important for three reasons:
1. They may explain why two organizations, with identical formal management control systems,
may vary in terms of actual control.
2. Culture can explain why organizations are hard to change.
3. The culture of an organization is not just a factor that is present in the organization, and
which we need to take as it comes.
3
,Hoofdstuk 2: Designing management control systems
Introduction
We should identify various objects of control:
- Control of the individual manager;
- Control of the management team the manager is part of;
- Control of the unit that the management team supervises;
- Control of all units with management teams;
- Control of the whole organization.
Management control systems
Elements of a controlled system
Every controlled system has at least 5 elements:
1. A detector or sensor - a device that measures what is actually happening in the process
being controlled.
2. An assessor - a device that determines the significance of what is actually happening by
comparing it with some standard or expectation of what should happen.
3. An effector - a device that alters behaviour if the assessor indicates the need to do so.
4. A communications network - devices that transmit information between the detector
and the assessor and between the assessor and the effector.
5. A predictive model - knowledge about the effect of the behavioural changes made by
the effector.
The control process used by managers contains the same elements. Detectors report what is
happening throughout the organization; assessors compare this information with the desired state;
effectors take corrective actions once a significant difference between the actually state and desired
state has been perceived; and the communications system tells managers what is happening and
how that compares to the desired state.
4
,Management control systems and processes, in and out of control
Management control by control of managerial input
Managerial inputs are the combination of capabilities, characteristics, knowledge and intentions that
managers bring to their function. Specifically, control can be exercised by ensuring that these inputs
increase the chance that the manager will engage in such behaviours as can be deemed consistent
with the organization's objectives. We address 3 applicable controls (normally belonging to the HRM
activities of the organization.
- Staffing: involves designing jobs and roles in the organization and ensuring that the right
people are recruited, promoted or selected.
- Development: involves ensuring basis conditions that enable managers to be informed about
organizational goals and to behave in line with those goals.
- Culture building: involves leading, by example or explicit management, managers into
showing the right kinds of behavior.
Tone at the top: higher-level managers set the example in the way they act, the opinions they
proclaim and the norms they seem to adhere to for lower-level managers.
Management control by control of managerial decisions
Managerial effort is a generic term that applies to all the observable actions and choices managers
make as part of their managerial responsibilities. Controlling decisions means that managerial
discretion is limited to those decisions' categories or decision choices that are considered in line with
organizational objectives.
These types of control are an important part of the organization’s formal control system (Chapter 5).
Some examples include the following:
- The formal delegation of decision making authority to lower level managers. That lower
managers obtain the relative freedom to take actions and make decisions for their respective
subunits. This is a formal way of control.
- The formal delegation of decision making responsibility to lower level managers.
Complementary delegation of decision making authority is the specification of the
responsibilities that managers carry.
- The prescription of certain behaviours of managers in some specific situations. Organizations
normally use formal procedures that dos and don’ts of managers concerning.
5
,Management control by control the managerial output (performance)
A third way to control managerial behaviour is by making managers accountable for certain results.
Accountability for results can take the form of target setting, such tat managers are instructed to
achieve goals. These use of management by objectives (MBO) and balanced scorecard philosophies
relies heavily on this way of controlling managerial behaviour.
Another form of making manager accountable for results is through linking managerial compensation
toe the achievement of certain results.
Delineating management control, strategic control and task control
Management control fits between strategy formulation and task control in several respects. Strategy
formulation is the least systematic of the three, task control is the most systematic, and management
control lies in between. Strategy formulation focuses on the long run, task control focuses on the
short-run activities and management control is in between. Strategy formulation uses rough
approximations of the future, task control uses current accurate data, and management control is
again in between. Each activity involves both planning and control, but the emphasis varies with the
type of activity. The planning process is much more important in the strategy formulation, the
control process in the task control and planning and control are approximately equal in importance in
management control.
Management control
Management control is the process by which managers influence other members of the organization
to implement the organization’s strategies.
Management control activities
Management control activities:
- 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 behavior
6
, Goal congruence
Goal congruence means that, insofar as is feasible, the goals of an organization’s individual members
should be consistent with the goals of the organization itself. The management control system
should be designed and operated with the principle of goal congruence in mind.
Tool for implementing strategy
Management controls are only one of the tools managers use in implementing desired strategies. As
indicated in exhibit 2.7, strategies are also implemented through the organization’s structure, its
management of HR and its particular culture
Organizational structure specifies the roles, reporting relationships and division of responsibilities
that shape decision making within an organization. HRM is the selection, training, evaluation,
promotion and termination of employees so as to develop the knowledge and skills required to
execute organizational strategy. Culture refers to the set of common beliefs, attitudes and norms
that explicitly or implicitly guide managerial actions.
Financial and non-financial emphasis
Management control systems encompass both financial and non-financial performance measures.
The financial dimension focuses on the monetary ‘bottom line’ – net income, return on equity etc.
But virtually all organizational subunits have non-financial objectives – product quality, market share,
customer satisfaction etc.
Aid in developing new strategies
Interactive controls calls management’s attention to developments, negative or positive (loss of
market share, customer complaints, opening up of a new market as a result of the elimination of
certain government regulation), that indicate the need for new strategic initiatives. Interactive
controls are an integral part of the management control system.
Strategy formulation
Strategy formulation is the process of deciding on the goals of the organization and the strategies for
attaining these goals. Goals describe the broad overall aims and objectives describe specific steps to
accomplish the goals within a given timeframe. Goals are timeless. The need for formulating
strategies usually arises in response to a perceived threat or opportunity. Complete responsibility for
strategy should never be assigned to a particular person or organizational unit. Providing a means of
bringing worthwhile ideas directly to the attention of the senior management without allowing them
to be blocked by lower levels is important.
7
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