Chapter 1:
Management control is the systematic process by which the organization’s higher-level managers
(the board) influence the organizations lower-level managers to implement the strategy. The goal of
management control is to implement organizational strategies.
Management control systems consist the various ways in which the organizations management
attempt to improve the performance. Control system elements include: strategic planning,
budgeting, resource allocation, performance measurement, evaluation and reward etc. These are the
tools the board can use to make the lower-level managers behave in line with the objectives.
The distinction between higher and lower-level managers is crucial for our understanding of the
organization’s need for management control. Decentralization is the most important reason why
management control systems are needed. The lower-level managers can make decisions on their
own, so organizations need formal mechanisms and routines that facilitate goal sharing and
cooperation.
Large firms which strive to maximize their shareholders value are most in need of informing the
lower-level manages about the strategic goals and associated actions. This is called the top-down
management control system. It helps decentralized managers decide what decisions to take, what
results to achieve, where to lead people and how to use their resources.
There is also a bottom-up role of management controls, they inform the senior managers what
decisions have been taken, what results have been achieved, where employees have been led and
what resources have been used.
Top-down management controls are to inform the lower-level managers what to do and the bottom-
up management controls are to inform the higher-level managers what the lower-lover managers
have achieved.
Why decentralized managers do not automatically achieve organizational goals:
1. They do not automatically understand the goals and strategies, nor how to contribute.
The managers do not automatically understand how to contribute to an organizational goal. The
goals need to be operationalized and communicated to inform individual (lower-level) managers
about the required direction of their decisions, so they know how to contribute.
2. They do not automatically agree with these goals and strategies
The lower-level managers sometimes have their private goals they try to achieve for the organization
but do not contribute to the overall goal, they do not always agree with the formulated goals,
because lower-level managers are often better informed about the local conditions of the firm. The
lower-level management should be motivated to take actions and make decisions to achieve to
overall goal. The higher level-management should benefit from the specialized skills and information
of the lower-level managers.
3. they do not automatically have the needed resources.
The lower-level managers need to have the resources and the skills to perform in line with the overall
goal. Enable the lower-level managers to develop their skills and enquire the needed recourses.
A well-designed organization is aware of the benefits of decentralized operations as wel as the cost
of installing the right management controls. Management control is not just to ‘check’ on employees
it is also to support, enable and empower the lower-level managers and employees.
General management contains about five functions, these classification does not explain the exact
activities the managers perform and the processes they are involved in. It just a description of the
overall purpose of management.
, - Planning what does the organization need to do in the future
- Organizing efficient using resources
- Staffing that an organization employs the right people
- Leading ensuring the plans are followed by the employees
- Controlling Checking if the plans have made progress
Another typology to describe management lines up with the role a manager plays such as the
informational role, the leadership role or the decision-making role. In addition to this typology there
is a theory about the skills a ‘good’ manager needs. These functions, roles and skills are important for
management control.
Management control goes beyond the individual functions. It is the systematic process by which
organization higher-level managers influence the lower-levels managers to realize the organizations
goals and strategies. It connects different layers in the hierarchy, so the goals will be realized at all
the hierarchical levels. Finally, it is about the tools and techniques that are applied in the execution of
management control.
Management accounting is the process of preparation, interpretation and communication of
performance information to management. The functions are scorecard keeping, attention directing
and problem solving. It’s firstly important for MC because money is the overall measure of the
performance and secondly it satisfies the information needs of the shareholders. The accounting
tools are very important, but an organization cannot be management by financial information alone,
sometimes non-financial important is essential to implement the strategy. Not always is a goal
measurable in accounting term such as profit or loss.
MC is about influencing human behaviour in such a way that it becomes goal-congruent. This helps
the organization to implement its strategies and reach its goals. This is first of all not easy because
lower-level managers do not automatically beave goal-congruent. Secondly, it is not always clear
what goal-congruent behaviour is, because, goal congruence is something what can be judged only
later. It can be judged only later because, it is not immediately sure what the outcome of the decision
is. And finally, it related to the freedom which is provided to the lower-level managers, lower-level
managers need to inform the employees under their supervision about the strategies in a way that
increase goal-congruently.
Goal congruent behaviour requires a translation of relatively abstract higher-level management long
term goals to operational and short-term goals.
Human motivation: Motivation is the combination of effort, direction and persistence. To improve
the effort level goals should be clear, close to the manager and achievable. Direction of effort is
almost as important as the level of effort because expending effort in the wrong direction is almost
equal to not expending effort. Finally, managers need to be motivated over a longer period to
eventually reach the organizational goal.
1. managers are motivated by goals that they are asked to achieve: Lower-level managers must
know which goals they need to achieve and what action they are supposed to take. Goals setting is
an important tool of MC, but there is more than just goal setting alone because a short-term goal for
example, can affect to long term goals of an organization.
2. managers are motivated by rewards that they may get from their efforts; A reward can also be
an approved of the managers’ investment plan or a promotion.
3. managers are motivated by the social context in which they work: This consist both external and
internal factors such as work ethic, management style and culture but also norms of desirable
behaviour in the society in which the organization operates. A change in the organizational culture
can also be a tool of MC.
,Chapter 2:
Management control systems comprises all the arrangements, tools and techniques that
enable top-down and bottom-up control. Management control is about controlling human
behavior. The different control objective increase in complexity from the level of individual
managers up until the level of the whole organization. Without control an organization will
not reach their objectives of creating value for stakeholders. The management control
process is the process by which managers at all levels ensure that the people they supervise
implement their intended strategies.
Elements of a control system: every control system has at least five elements:
- Detector or sensor: a device that measures what is actually happening.
- Assessor: Determining the significance of what is happening.
- Effector: Alters behavior if the assessor indicates that this is needed (often feedback).
- Communication network: A device that transmits information between detector and
assessor.
- Predictive model: Knowledge about the effect of the behavioral changes made by the
effector.
There are differences between simple control processes and management control systems.
For example, in a thermostat the standard is pre-set and the standard in management
control systems is the result of the planning process. Also, management control is not
automatic, some detectors may be mechanical, but managers often detect important
information by observing the people they supervise.
Figure 1
Management control system and processes: A
system is a prescribed and usually repetitious way
of carrying out an activity or set of activities. A
system is characterized by a more or less
rhythmic, coordinated and recurring series of
steps to accomplish a purpose. However,
management actions are unsystematic, the
effectiveness of their actions is determined by
their skill in dealing with people, not by a rule
Management control by control of input: Managerial input is the combination of
capabilities, characteristics, knowledge and intentions that the managers bring to their
function. Control can be exercised by ensuring that the input increases the change of goal
congruent behavior. There are generally three applicable controls concerning manager/input
control:
, - Staffing: Recruiting, promoting and selected the right people to take on jobs and
roles.
- Development: Ensuring basic conditions to inform managers about organizational
goals and to behave in line with these goals, for example introduction program.