Prof. dr. W. J. Scheper wim@cs.uu.nl Management Control 2007-2008 Prof. dr. W. J. Scheper wim@cs.uu.nl

Objective of the course Gain understanding of Management Control: what is management control? how can control be implemented? what managementinformation is needed? which organizational conditions? Get students actively involved by using the case method

Structure of the course 7 sessions Take-home cases Final examination: Take home case Due date: 30 september 2008 Literature: K. A. Merchant & W.A. van der Stede, 2003, Management Control Systems, Prentice Hall, ISBN 0 273 65596 5 OR K. A. Merchant & W.A. van der Stede, 2007, Management Control Systems, Prentice Hall, ISBN 0 273 7080 15 Website

Structure of the course in detail 1. Introduction Ch. 1 April 21 2. Control system design Ch. 2 & 3 May 6 3. Control tightness & side effects Ch. 4 & 5 & 6 May 19 4. Planning & budgetting and setting performance targets Ch. 7 & 8 & 9 & 10 Ch. 7 & 8 & 9 June 2 5. Problems with accounting measures Ch. 11 & 12 Ch. 10 & 11 June 9 6. Management control roles & ethical issues Ch. 14 & 15 June 16 7. Situational influences Ch. 16 & 17 June 23 Writing in blue: 2nd edition differs from 1st edn.

Management Control Systems Chapter 1: Management and Control

Management control ... The process by which management: … ensures that people in the organization carry out organizational objectives and strategies; … encourages, enables, or, sometimes “forces” employees to act in the organization’s best interest. Management control includes all the devices / mechanisms managers use to ensure that the behavior of employees is consistent with the organization’s objectives and strategies.

Function and benefit of Management Control Purpose / function ... get done what management wants to be done; influence behavior in desirable ways. Benefit … increased probability that the organization’s objectives will be achieved.

Management and its components ... … the process of organizing resources and directing activities for the purpose of organizational objectives. Process-breakdown … Objective setting; what goals do we want to achieve? Strategy formulation; how are we going to realize these goals? Control: are we on track in realizing these goals?

Objective setting ... Objectives are … a necessary prerequisite for any purposeful activities. Without objectives, it is impossible … to assess whether the employees’ actions are purposive; to make claims about an organization’s success. Objectives can be … financial versus non-financial; quantified, explicit versus implicit; economic, social, environmental, societal.

Strategy formulation ... An organization must select any of innumerable ways of seeking to attain its objectives. Strategies define how organizations should use their resources to meet their objectives. Hence, … strategies put constraints on employees to focus activities on what the organization does best or areas where it has an advantage over competitors.

Control ... Strategic control … Management Control … Is our strategy (still) valid? Strategy revision -- “intended” vs. “emergent” strategies. Management Control … Are our employees likely to behave appropriately? (design) Do they understand what we expect of them? Will they work consistently hard and try to do what is expected of them? Are they capable of doing what is expected of them? Do our employees behave as expected? (execution)

Strategy Implementation Planning and control ... CONTROL Strategy Implementation Management Control PLANNING Strategy Formulation Strategic Control predominantly external focus; predominantly top-management responsibility; sometimes very unsystematic, implicit and/or emergent. predominantly internal focus; relevant for every superior- subordinate relationship; more systematic and rhythmic. OBJECTIVE SETTING

The planning / control cycle ... Objective Setting Goals Strategic Control Strategy Formulation Strategy Implementation Management Control

The basic control problem ... Management control is about encouraging PEOPLE to take desirable actions, i.e., it guards against the possibilities that employees will do something the organization does not want them to do, or, fail to do something they should do. Hence, management control has a ... … BEHAVIORAL ORIENTATION ! If all personnel could always be relied on to do what is best for the organization, there would be no need for a management control system.

Recall that ... Management Control is about taking steps to help ensure that the employees do what is best for the organization. Three issues: Do they understand what we expect of them ... Lack of direction Will they work consistently hard and try to do what is expected of them ... Lack of motivation Are they capable of doing what is expected of them ... Personal limitations

Lack of direction ... Employees do not know what the organization wants from them. When this lack of direction occurs, the likelihood of the desired behaviors occurring is obviously small. Remedy: COMMUNICATION + REINFORCEMENT !

Motivational problems ... When employees ‘choose’ not to perform as their organization would have them perform. Because … Lack of goal congruence Individual goals do not coincide with organizational goals. Self-interested behavior Generally, individuals are prone to being “lazy” ... e.g., take long lunches, overspend on things that make life more pleasant, use of sick leaves when not sick, etc. More extreme examples of motivational problems: Employee crime (fraud and theft). Statement!! Remedies?

Personal limitations … Sometimes, people are “unable” to do a good job because of certain personal limitations they have. Some examples / causes: lack of requisite knowledge, training, experience; employees are promoted above their level of competence; some jobs are not designed properly; etc. Remedies: Training Job assignment / promotion Job design

Management control is more than ... A simple cybernetic control system involving a single feedback loop, like a thermostat … Detector  measure performance; Assessor  compare with pre-set standard; Effector  take corrective action. Many controls don’t focus on measured performance ... e.g., direct supervision, employee hiring standards, codes of conduct. Many controls are proactive rather than reactive … i.e., they are designed to prevent control problems before the organization suffers any adverse effects on performance.

Control and “good” control ... Again, … management controls include all the devices managers use to ensure that the behaviors and decisions of people are consistent with the organization’s objectives and strategies. “GOOD CONTROL” is said to take place when there is … a “high” probability that the firm’s objectives will be achieved; a “low” probability that major unpleasant surprises will occur. Therefore, controls must be: Future-oriented Objectives-driven Economically desirable

Control can be achieved through ... Control Problem Avoidance Management Control Systems Action Controls; Results Controls; People Controls.

Control-problem avoidance ... Three strategies … Activity elimination e.g., subcontracts, licensing agreements, divestment. Automation Computers / robots eliminate the human problems of inaccuracy, inconsistency, and lack of motivation; Only applicable to relatively easy decision situations; Automation can be very costly. Centralization Superiors reserve for themselves the most critical decisions.

Control alternatives … Controls can focus on: the actions taken the results produced the types of people employed and their shared values and norms. ACTION CONTROLS RESULTS CONTROLS PEOPLE CONTROLS Or any combination of those ...

Depending on ... Action Control Results Control People Control Ability to measure results on important performance dimensions Knowledge of which specific actions are desirable High Low Excellent Poor Action Control and/or Results Control (e.g., large projects) (e.g., movie director, SBU-manager) People Control (e.g., research lab)

Overview ... ? Can people be avoided? (e.g., automation, centralization) Control-problem avoidance Can you rely on people involved? Can you make people reliable? Have knowledge about what specific actions are desirable? Able to assess whether specific action was taken? results are desirable? Able to measure results? Yes No Action controls People controls Results controls ?