Wim Van der Stede

Management Control 2007-2008

Prof. dr. W. J. Scheper
wim@cs.uu.nl
- 2 -
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
- 3 -
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
- 4 -
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.
Wim Van der Stede
Management Control Systems
Chapter 1: Management and Control
- 6 -
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 organizations best interest.

Management control includes all the devices / mechanisms
managers use to ensure that the behavior of employees is
consistent with the organizations objectives and strategies.
- 7 -
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 organizations
objectives will be achieved.
- 8 -
Management and its components ...
Management
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?
- 9 -
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 organizations success.

Objectives can be
financial versus non-financial;
quantified, explicit versus implicit;
economic, social, environmental, societal.
- 10 -
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.
- 11 -
Control ...
Strategic 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)
- 12 -
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
- 13 -
The planning / control cycle ...
Strategy Formulation
Strategy Implementation
Goals Objective Setting
Strategic Control
Management Control
- 14 -
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.
- 15 -
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
- 16 -
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 !
- 17 -
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?
- 18 -
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
- 19 -
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 dont 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.
- 20 -
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 organizations objectives
and strategies.

GOOD CONTROL is said to take place when there is
a high probability that the firms objectives will be achieved;
a low probability that major unpleasant surprises will occur.

Therefore, controls must be:

Future-oriented
Objectives-driven
Economically desirable
- 21 -
Control can be achieved through ...
Control Problem Avoidance

Management Control Systems

Action Controls;
Results Controls;
People Controls.
- 22 -
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.
- 23 -
Control alternatives
Controls can focus on:

the actions taken


the results produced


the types of people
employed and their
shared values and
norms.
Or any combination of those ...
ACTION CONTROLS
RESULTS CONTROLS
PEOPLE CONTROLS
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Depending on ...
Ability to measure results on important performance dimensions
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Action Control
and/or
Results Control
Action Control
(e.g., large projects)
Results Control
(e.g., movie director,
SBU-manager)
People Control
(e.g., research lab)
- 25 -
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?
Have knowledge about what
results are desirable?
Able to measure results?
Yes
No
Yes
No
No
Action controls
People controls
Results controls
Yes
Yes
Yes
No
Yes
No
?
Yes