English summary of Management Control Systems, Merchant & van der Stede
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Management Control Systems
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Avans Hogeschool (Avans)
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Management Control Systems 4th Edition
Summary includes chapters 1 - 12, 16, 17, additional readings: Kris, Spekle & Wildener (2016), Arjalies, D-L., & Mundy J. (2013) and Simions' level of control. This is a comprehensive summary of 44 pages including pictures and graphs from the book.
Solution manual for management control systems 3rd edition by K.A Merchant and W.A Van der Stede
NL samenvatting boek Marchant & van der Stede
NL samenvatting boek MvdS
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Management Control Systems
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Strategic control summary
Chapter 1
Management control: the process by which management ensures that people in the organisation
carry out organisational objectives and strategies. And encourages, enables or sometimes even
forces employees to act in the organisation’s best interest.
Management control includes all the devices/mechanisms managers use to ensure that the
behaviour of employees is consistent with the organisation’s objectives and strategy.
The purpose/function of management control is to get done what the management wants done and
to influence behaviour in desirable ways.
The benefit of management control is that it increases the probability that the organisation’s
objectives will be achieved.
The components of management:
- Objective setting: objectives are a necessary prerequisite for any purposeful activities.
Without objectives it is impossible to access whether employees’ actions are purposive; to
make claims about an organisation’s success. Objectives can be:
Financial vs. non-financial
Quantified explicit, implicit
Economic, social, environmental, or societal
- Strategy formulation: an organisation must select any of innumerable ways of seeking to
attaints objectives. Strategies define how organisations should use their resources to meet
their objectives. Hence, strategies put constraints on employees to focus activities on what
the organisations does best or areas where it has an advantage over competitors. Many
organisations develop formal strategies through systematic, often elaborate, planning
processes: intended strategy. However, strategies can sometimes be left largely unspecified.
- Management control: focusses on execution, and it involves addressing the general question:
Are our employees likely to behave appropriately? This question can be decomposed into
several parts:
Do our employees understand what we expect of them?
Will they work consistently hard to try to do what is expected of them – that is, will they
pursue the organisation’s objectives in line with the strategy?
Are they capable of doing a good job?
If the answer to any of these questions is negative, the final question is: What can be done to
solve the management control problems?
The basic control problem:
Management control is about encouraging people to take desirable actions: that is, it guards against
the possibilities that employees will do something the organisation does not want them to do, or, fail
to do something they should do. Hence, management control has a behavioural orientation. If all the
personnel could always be relied on to do what is the best for the organisation, there would be no
need for a management control system.
The causes of the needs for control can be classified into three main categories:
- Lack of direction: do they understand what we expect of them? Employees do not know
what the organisation wants from them. When this occurs, the likelihood of the desired
behaviours occurring is small. Solution: communication and reinforcement.
- Lack of motivation: do they work consistently hard to try to do what is expected of them?
When the employees “choose” not to perform as the organisation would have them
perform. Lack of goal congruence: individual goals do not coincide with organisational goals.
Self-interested behaviour: generally, individuals are prone to being “lazy”.
, - Personal limitations: are they capable of doing what is expected of them? Sometimes people
are unable to do a good job because of certain personal limitations they have. Solution:
training, job assignment/promotion, job design.
Management controls do not always involve a simple cybernetic system like a thermostat:
- Detector measure performance
- Assessor compare with pre-set standard
- Effector take corrective action
Many controls don’t focus on measurement performance. For example, direct supervision, employee
hiring standards, and codes of conduct. Many controls are proactive rather than reactive: they are
designed to prevent control problems before the organisation suffers any adverse effect on
performance.
The cost of not having a perfect control system can be called control loss. Perfect control does not
exist.
Sometimes control problems can be avoided:
- Activity elimination: managers can sometimes avoid the control problems associated with a
particular entity or activity by turning over the potential risks, and the associated profits, to a
third party through such mechanisms as subcontracting, licensing agreements, or
divestment.
- Automation: computers/robots eliminate the human problems of inaccuracy, inconsistency,
and lack of motivation. Only applicable for programmable decisions situations.
- Centralization: top management reserves the important, and sometimes not so important,
decisions for themselves, and in so doing, they avoid having the lower-level-employees make
poor decisions.
- Risk sharing: partial avoidance is possible by risk sharing. Sharing risks with outside entities
can bound the losses that could be incurred by inappropriate employee behaviours.
Examples, insurance, enter into a joint venture.
Controls can focus on:
- The actions taken action
controls
- The results produced results
controls
- The types of people employed
and their shared values and
norms people controls.
Or any combination.
,
, Chapter 2
Result controls are used for controlling the behaviours of employees at many organisational levels. It
includes rewarding individuals for generating good results (or punishing them for generating bad
results). Result controls are consistent with, and even necessary for the implementation of
decentralized forms of organisation with largely autonomous entities or responsibility centres. Result
controls influence actions, because it causes employees to be concerned about the consequences of
the actions they take. However, actions are not constrained. On the contrary, employees are
empowered to take whatever actions they believe will best produce the desired results.
Implementing result controls involves four steps:
1. Defining performance dimensions: involves balancing an organisations’ responsibilities to all
of their stakeholders, including owners, debtholders, employees, etc. What you measure is
what you get, this is why it is important to choose performance measures that are aligned
with the chosen performance dimensions. If not congruent with the organisation’s
objectives, the controls will actually encourage employees to do the wrong things!
2. Measuring performance: the object of the measurement is typically the performance of an
organisational entity or an employee during a specific time period. Types of measures:
- Objective:
financial measures. For example, stock price (market based), return on assets
(accounting based).
Non-financial measures. For example, market share, customer satisfaction.
- Subjective. For example, managerial characteristics (being a team player).
If managers identify more than one result measure for given employee, they must attach
weightings to each measure (e.g. 40% and 60%) so judgement can be aggregated into an
overall evaluation.
3. Setting the performance targets: these improve motivation by providing clear goals for
employees to strive for. Also, performance targets allow employees to assess their
performance.
4. Providing rewards: or incentives could be monetary or not monetary.
- Extrinsic rewards: for example, a raise, or a better position, public recognition.
- Intrinsic rewards: people often derive their own internally generated intrinsic rewards
through a sense of accomplishment for achieving the desired results.
Result controls work best only if all of the following three conditions are present:
1. Superiors/managers must know what results are desired in the areas being controlled: these
desired results must be communicated to the employees effectively.
2. The individuals whose behaviours are being controlled must have significant influence on the
results in the desired performance dimensions: controllability principle: results measures are
useful only to the extent that they provide information about the desirability of the actions
or decisions that were taken. If the results are uncontrollable, the controls tell us little about
the actions that were taken: good actions will not necessarily produce good results and bad
actions may similarly be obscured.
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