Management Control Systems

Chapter 3: Action,
Personnel & Cultural Controls

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

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
Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Control alternatives

Controls can focus on:

the actions taken

ACTION CONTROLS

the results produced

RESULTS CONTROLS

the types of people

employed and their
shared values and
norms.

PEOPLE CONTROLS

Or any combination of those ...

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Action controls

Ensure that employees perform (or do not perform)

certain actions known to be beneficial (or harmful)
to the organization.

Prevention / detection
Most action controls are aimed at preventing
undesirable behaviors.

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Effectiveness of action controls ...

They are usable and effective only when managers:

Know what actions are desirable ...
Difficult in highly complex and uncertain task environments.
(e.g., research engineers or top-level managers)
Have the ability to make sure that the
desirable actions occur ...

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Behavioral constraints ...

Physical constraints
Locks, passwords, limited access,

Administrative constraints
Restriction of decision-making authority;
Separation of duties.
Primarily directed at one control problem:
eliminate motivational problems.

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Preaction reviews ...

Scrutiny of action plans, budgets.

Review / modification / approval.
Can potentially address all three control problems:
Alleviate lack of direction;
Provide motivation;
Mitigate personal limitations.

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Action accountability ...

Holding employees accountable for the actions they take.

It requires:
Defining what actions are (un)acceptable;
Communicating these definitions to employees;

e.g., work rules, policies and procedures, codes of conduct.

Observing or otherwise tracking what happens;

Direct observation / supervision;

Periodic tracking (e.g., mystery shoppers);
Evidence of actions taken (e.g., activity reports).

[Rewarding good actions, or] punishing actions that deviate.

It potentially addresses all three control problems.

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Redundancy ...

Assigning more people (or machines) to

a task than necessary.
e.g., backup people / computing facilities
Limited in addressing the control problems:
Provide motivation;
Overcome personal limitations.
also: rather costly

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Pros and cons of action controls ...

PRO

CON

The most direct form of control

Only for highly routinized jobs

Tend to lead to documentation

of the accumulation of knowledge
as to what works best.

May discourage creativity,

innovation, and adaptation

May cause sloppiness

May cause negative attitudes

Organizational memory

An efficient way of coordination:

i.e., they increase the predictability
of actions and reduce the amount
of inter-organizational information
flows to achieve a coordinated
effort.

e.g., little opportunity for

creativity and selfactualization

Sometimes very costly

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Control alternatives

Controls can focus on:

the actions taken

ACTION CONTROLS

the results produced

RESULTS CONTROLS

the types of people

employed and their
shared values and
norms.

PEOPLE CONTROLS

Or any combination of those ...

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

People controls ...

People controls ensure that employees ...

Will control their own behaviors

Personnel control
Self-monitoring

Will control each others behaviors

Cultural controls
Mutual-monitoring

People controls are part of virtually every management

control system + becoming more important in flatter
and leaner organizations with empowered employees.

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Personnel controls

Personnel controls build on employees natural tendencies

to control themselves, because most people
have a conscience that leads them to do what is right;
find self-satisfaction when they do a good job and see their
organization succeed.

labels ...
Self-control
Intrinsic motivation
Ethics and morality
Trust and atmosphere
Loyalty

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Methods to implement personnel controls ...

Generally, it is about
finding the right people, giving them a good
work environment and the necessary resources

Selection and placement

Finding the right people to do a particular job.

Training
Give employees a greater sense of professionalism;
Create interest in the job by helping employees to
understand their job better.

Job design + provision of necessary resources

So that motivated and qualified employees have a high
probability of success (e.g., equipment, staff support,
freedom from interruption, etc.)

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Cultural controls ...

Cultural controls or mutual-monitoring tap into

social pressure and group norms and values.

Cultural controls are effective because members

of a group have emotional ties to one another.

Cultures are built on shared ...

traditions;
norms;
beliefs;
ideologies;
attitudes;
ways of behaving, etc.

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Five ways to shape culture (I)

Codes of conduct
Codes of ethics; corporate credos, mission statements, etc.;
Formal written documents with broad statements of corporate
values, commitments to stakeholders, and the ways in which
top management would like the firm to function.
Fundamental guiding principles of the company.

Group-based rewards
e.g., bonus, profit-sharing, employee ownership of company stock;
Cultural controls rather than results controls because the link
between individual performance and rewards is weak.

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Five ways to shape culture (II)

Intra-organizational transfers
Improve the socialization of individuals in an organization and
inhibit the formation of incompatible goals and perspectives;
Improve identification with the organization as a whole as
opposed to subunit identification.

Physical and social arrangements

e.g., office plans, interior decor, dress codes and vocabulary, etc.

Tone at the top

Top management statements must be consistent with the culture
they are trying to create, and importantly, their behaviors should
be consistent with their statements.

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Start with people controls ...

People controls
Must always be relied on to a certain extent;
Have relatively few harmful side-effects;
Involve relatively low out-of-pocket costs.

However, it is rare that people controls will be sufficient.

In most cases, it is necessary to supplement them with
action controls;
results controls.

Maybe, you just shouldnt put all your trust in people !?

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Cases

Internal Revenue Service (p.88 ff.):

Evaluate the change of the IRSs collection function from the
COF organization to the ACS system
As Tim Brown, assistant commisioner for Collection, what
would you do?
When,. if ever, is computer monitoring appropriate? What
safeguards to privacy can you envision?

Alcon Laboratories, Inc. (p.99 ff.)

How would you characterize the control strategy used in the
R&D area?
Evaluate the control strategy: what, if anything, would you
suggest Alcon managers do differently?

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

Requirements

Cases must be ready and e-mailed to

jversend@cs.uu.nl by thursday 13 th may 12:00 a.m.
Cases must preferably be in powerpointslides
Names of teammembers and e-mail adresses must
be included
In order to participate in the final examination, all
cases must be made. They will be graded as OK or
not-OK. All cases minus one must be OK in order to
participate in the final examination.

Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003