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Summary Management Control A&C
- Instelling
- Rijksuniversiteit Groningen (RuG)
English summary of 'Management Control Systems' by Anthony, Govindarajan, Hartmann, Kraus and Nilsson There are some typing errors in the document.
[Meer zien]Voorbeeld 4 van de 77 pagina's
Voorbeeld 4 van de 77 pagina's
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Voorbeeld van de inhoud
Hoofdstuk 1Management control is directly concerned with organizational performance and one
of its challenges is to increase the organization’s long-term performance.
Goal management control system: Implement organizational strategies. A typical
management control system includes strategic planning, budgeting, resource
allocation, performance measurement, evaluation and reward, responsibility centre
allocation and transfer pricing.
Management control: systematic process by which the organization’s higher-level
managers influence the organization’s lower-level managers to implement the
organization’s strategies (top management team or senior management = board).
Management control is about decentralized organizations: not all the power to
make decisions that affect the future of the organization resides at the highest level in
the organization. Most of the times, failures could have been avoided by the proper
design and use of management control systems. Understanding the failures of these
failures helps us to understand better where management control systems fail and
what potential weak spots they have. Mostly, there was a lapse in internal controls to
keep managerial behaviour on track. Performance pressure may incentivize
executives to commit fraud in reporting performance levels that have no economic
substance. Although management control applies to all managers in the firm, we
should not forget that sometimes failures of the management control system result in
wrong behaviour of individuals.
Small and centralized organizations, consisting only of a few people, face a smaller
challenge of ensuring that decentralized management behaves in line with
organizational objectives, and have little need for the systematic, complex and costly
design of management control systems. In smaller firms, communication between the
top management team and the rest of the organization is more direct than in big firms
and will remain more informal.
In contrast, large and decentralized organizations cannot do without formal
management control systems. If the senior managers fail to implement the
appropriate management controls, lower-level managers will simply not have a clear
sense of what decisions to take, what results to achieve and where to lead people
and how to use the resources under their responsibility top-down role of
management control systems.
Reversely, without appropriate management controls, senior managers will not have
a clear sense of what decisions lower-level managers are taking, what results they
are achieving and where they are leading the people and using the resources under
their responsibility bottom-up role of management control systems.
When organizations decentralize, they create managerial challenges that need to be
addressed through the proper design of management controls (no decentralization
without control). A well-design organization is aware of the benefits of decentralized
operations as well as the costs of installing the right management controls. If
organizations are to profit from the skills, motivation and commitment of their full
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,working staff, management control should be exercised to maintain or enhance the
skill set, job motivation and organizational commitment.
Decentralization causes a numbers 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 goals are mostly determined at the organizational
level and not at the managerial level (f.e. maximizing shareholder value or
delivering maximum quality services). Goals need to be operationalized to
inform individual managers about the required direction of their efforts and
decisions. Top-down function provides a clear sense of direction, bottom-up
management control informs higher-level managers about the progress of
decentralized managers in their efforts.
2. Decentralized managers do not automatically agree with organizational goals
and strategies developed by higher-level managers motivation may be
lacking due to private goals of the managers that are incompatible with the
goals of the organizations. Private goals include goals that managers try to
achieve out of self-interest and lead to the consumption of organizational
resources for private reasons or private goals that they try to achieve out of a
genuine interest in the organization’s well-being. Benefitting from local
information and from specialized managerial skills (lower-level managers) are
important reasons to decentralize. Top-down function to motivate lower-level
managers to take actions, make decisions and achieve results and bottom-up,
management control should facilitate higher-level managers to benefit from
the specialized skills and knowledge of decentralized managers.
3. Decentralized managers do not automatically have the resources needed to
act with organizational goals and strategies developed by higher-level
managers to act in line with the organizational strategies, managers need
both personal skills and monetary and physical organizational resources. The
lack of personal skills is sometimes hard to detect, because these
decentralized managers may often find excuses for poor performance. The
provision of sufficient monetary and physical resources to decentralized
managers is a challenge, but they are needed for purposeful actions, but the
provisions of resources should result in a sufficient return. Top-down function
need to ensure that decentralized managers have the skills and organizational
resources they need and bottom-up should enable lower-level managers to
acquire the support to develop their skills as well as the organizational
resources to execute their responsibilities.
Basic managerial functions:
Planning: decisions that managers need to make about what the
organizational participants need to do in the future (investments, plans for
guiding others).
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, Organizing: use of physical, human and financial resources such a way that
the plans can become operational and the planned actions can be taken.
Staffing: ensure that the organization employs the right people to perform the
actions (importance of human resources for organizations).
Leading: ensuring that the plans and planned activities are followed by
organizational participants. It requires leadership and motivational activities by
managers.
Controlling: establishing whether the actions and activities are performed
according to plan. Check, ex post, if the plans have made sufficient progress.
Each of the typologies presented offers a description of the different aspects of
management and each typology is in fact and answer to a different question one may
have about the importance of management.
A close look at managerial functions reveals that all these functions, roles and skills
are important for management control. Management control goes beyond the
individual managerial functions:
1. Management control is the systematic process by which the organization’s
higher-level managers influence the organization’s lower-level managers
integrating various managerial functions (‘orchestration’).
2. Management control is about different layers in the organizational hierarchy
management control connects different hierarchical levels to help the
organization to realize its strategies.
3. Management control is about the tools and techniques that managers apply in
their execution of management control both top-down and bottom-up control
activities.
Management accounting: the process of preparation, interpretation and
communication of performance information to management scorecard keeping,
attention directing and problem solving functions of management. Financial
information is very important and therefore the following cost accounting tools are
used widely: variance analysis and budgeting. Relevance of financial information for
management control: importance of money as the overall measure of organizational
performance and general importance of the organization’s overall accounting system
to satisfy the information needs of the organization’s stakeholders. Techniques, such
as budgeting, resource allocation, the calculation of various financial performance
measures and traditional cost analysis enable managers to exchange information
about the organization’s strategies between hierarchical levels, to coordinate actions
between managers across functions and to formulate motivating strategic targets.
While financial performance is important, there are also imperfections of accounting
returns to report the riskiness of the performance levels achieved.
Management control is about influencing the behaviour of humans. Goal-congruent
behaviour: behaviour that helps the organization to implement its strategies and to
reach its goals. It is hard to obtain and assess in a timely manner: managers may
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, deviate from the organization’s strategies because they do not understand those
strategies, do not support those strategies or simply lack the resources to accomplish
the organization’s strategies; it is not always a prior clear which behaviour is goal-
congruent and which is not (can only be judged later on, after the moment decision is
taken) and the freedom we provide to lower-level managers to make decisions to
help the organizations achieve their strategic goals (higher-managers hope to profit
from lower-level managers) (creativity and entrepreneurship important); and
operationalization: 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.
Goal-congruent behaviour: requires sequential translation of goals that are
relatively abstract, financial and longer term into goals that are relatively concrete,
operational and short term. Management needs to ensure that no translation errors
are made. The central purpose of a management control system is to ensure a high
level of goal congruence. Perfect goal congruence does not exist.
It is important that management control is based on principles of human motivation
that appear to be generally valid and to point to motivational pitfalls that should be
avoided in the exercise of management control.
Managerial motivation
1. Managers are motivated by the goals that they are asked to achieve.
Motivation is a combination of effort, direction and persistence. Effort is
the amount of time and energy that humans expend in performing a certain
activity. Effort levels increase when humans are confronted with a goal
that is clear, not too distant and the achievement of which is considered an
accomplishment. The direction of effort: expending effort in the wrong
direction may work against the organization’s objectives. Persistence:
duration of effort and is an important condition for effort to be expended
until the organizational objective is reached (long-term devotion, not to give
up directly). Limitations of goals: treat, failure to meet the conditions, lack
clarity, turbulent environment and perception and communication.
While goal setting is an important tool in management control, its use
should be done with care and its effectiveness should always be judged
based on the managerial function and the circumstances that affect this
function.
2. Managers are motivated by rewards that they may get from their efforts.
Relationship between the services provided by employees and the
monetary reward that these employees get in return is less clear and
subject to various rules and regulations. There are performance-related
rewarding systems in combination with fixed pay. Managers are less
protected by labour laws that put restrictions on labour contracts. There is
a higher variation in reward structures between organizations and
managerial functions and managers are therefore generally eligible for
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