Summary Management Control Systems
Week 1
Chapter 1 introduction to management control systems
Introduction
The central question of every company is how to align managers and employees’ behaviour with the
organisation’s mission, goals and strategies. In the book a management controls system is defined as:
Comprising a combination of control practices designed and implemented by top managers to
increase the probability that lower-level managers and employees will behave in ways consistent with
the organization's mission, goals and strategies.
Examples of control practices are budgets, mission statements, transfer pricing arrangements,
performance measures and reward systems. In management control, there needs to be a clear
distinction between lower level management and top management. Small organisations rather don’t
have this distinction and therefore aren’t relevant when it comes to management control systems.
Top-down and bottom-up roles of management control systems
The importance of formal management control systems is highlighted in the introduction. If the top
managers fail to implement the appropriate control practices, lower-level managers and employees
will often not have a clear sense of what decisions to take. We call this the top-down role of
management control systems.
Without appropriate control practices, top managers will not have a clear sense of what lower-level
managers have done and what they think. We call this the bottom-up role of management control
systems.
There are three reasons management control systems are important:
1. Lower level managers and employees may not automatically understand the mission, goals
and strategies of the organization, nor how they can contribute to these.
- Top-down role of management control systems: Explain mission, goals and strategies in
the most operational way possible. Support coordination across business functions at
decentralized level
- Bottom-up role of management control systems: Report on goal achievement; provide
input when goals are unrealistic. Enable coordination and cooperation with other
decentralized units.
2. Lower level managers and employees may not automatically agree with the organizational
mission, goals and strategies
- Top down role of management control systems: Motivate lower-level management and
employees to strive for the organizational mission, goals and strategies.
- Bottom-up role of management control systems: Facilitate top managers to benefit
from the specialized skills and knowledge of lower-level managers and employees.
3. Lower level managers and employees may not automatically have the resources needed to
act according to the organizational mission, goals and strategies
- Top down role of management control systems: Resource allocation, develop personal
skills of lower-level managers and employees
, - Bottom-up role of management control systems: Enable lower-level managers to
acquire the support and resources to execute their responsibilities
A management control system ‘package’ – input, throughput and output controls
In order to address the management control system, there are three types of control practices: input,
throughput and output controls.
1 Input controls
Input controls have to do with the people in the organization, and the capabilities, characteristics,
knowledge and intentions they bring to their function. Top managers can systematically design
control practices that help to ensure that these capabilities, characteristics, knowledge and
intentions increase the chance that the lower-level managers and employees will engage in such
behaviours as can be deemed consistent with the organization's mission, goals and strategies.
Employee selection processes
Value statements
Employee socialization processes
2 Throughput controls
Managerial effort is a generic term that applies to all the observable actions and choices managers
make as part of their managerial responsibilities. Because managers don’t always make choices
which benefits the mission, goals and strategies of the organization, top managers also need to
implement throughput controls. These control practices direct lower level managers and employees
behaviour through formal delegation of decision making responsibility to lower level managers.
The organisation’s set of rules
The organizational architecture
3 Output controls
A third way to direct lower-level managers and employees behaviour is by making managers
accountable for certain ‘results’, or output. Output controls work through planning, measuring and
following up on important performance targets. They direct lower-level managers and employees
behaviour through expressing expectations of what is a ‘good enough’ performance.
Budgets
Financial and non-financial performance measures (often combined with reward systems)
Risk management
,Week 2
Chapter 2 Mission, goals and strategies
Introduction
In order to align the lower level managers and employees with the mission, goals and strategies of a
company, we need to understand how this behaviour comes about. Any mission, goal or strategy
needs to be related to the purpose of the organization and for whom it exists. In the market
economy there are two major views on this topic: the shareholder view and the stakeholder view.
According to the shareholder view, organizations exist to satisfy the goals of their owners. However,
advocates of the stakeholder view claim that the organization exist to satisfy the goals of a broader
set of groups, including employees, customers, suppliers, lenders and society.
The shareholder view
The shareholder view implies that organizations exist to fulfil the demand of the owners, which often
include a high return on the owners investment at as low a risk as possible. Some arguments which
support that owners has a rather special status compared to other stakeholders are:
The original owners founded the organization and only the owners have the legal power to
close down as long it obeys the laws where it operates.
The owners take higher risks than the other stakeholders since the owners can claim only
residual. They only get any money when the other stakeholders have had their share.
The company cannot survive in the long run if the owners get no return on their investment.
This means the other stakeholders also rely on the owners getting a fair return.
1 Corporate governance
Corporate governance relates to the shareholder view; it deals with how owners and owner
representatives of different kinds act to influence the organization to work in the best interest of the
owners. The increased interest in corporate governance is probably because owners now look
different then how they looked a few decades ago. Corporate governance involves a large number of
different means that can be used by the owners in order to govern the company. Some of the
common ones are:
The board of directors
Financial reports
Auditing and internal control
Incentive programmes
Investor meetings
Media
The stakeholder view
The stakeholder view implies that organizations exist to fulfil the demands not just of the owners,
but of several stakeholder groups. This means that no stakeholder permanently holds a special status
as more important than the others. However, this does not exclude the possibility that some
stakeholders at least for the moment, are more important for the organization than others. Some
arguments for the stakeholder view are as follows:
, The organization is not just dependent on the owners for its survival and success, but on all
the different stakeholder groups.
It is ethically questionable to systematically favour one group over the others
Ensuring that stakeholders groups such as customers and employees are happy will also lead
to higher profitability.
Considering all stakeholders is a more long-term view and thus more sustainable, especially if
society is considered a stakeholder
An organization’s stakeholders are individuals and organizations who contribute to and benefit from
the organization in question. These groups or individuals are as follows:
Owners
Customers
Employees
Suppliers
Lenders
Society
1 Corporate social responsibility
Just like corporate governance, CSR is an old phenomenon that has gained a lot of attention this
century. There are three types of arguments for working with CSR:
Ethical
Business
Fashion
In practice the CSR work in organizations often includes a number of formal and informal tools such
as listed as follows:
Code of conduct
Sustainability reporting
Internal reporting channels
Culture and values
Personal example
Storytelling
Training
Intranet
Equally important is how organizations communicates to stakeholders, the media and the public.
Mission
An organization mission (or purpose) is about the reason why the organization exists. Often, the
mission addresses how the company can improve the lives of customers but also how to improve
environmental and social aspects of society.
Different types of organizational goals
