Management control system

Chapter 1: The Nature and role of organizational

All kind of organizations (business, universities, governaments, hospitals) are concerned with

channelling human efforts toward attainment of organizational objectivies. Regardless of their

formal purposes, organizations are composed of people with their own personal goals. That is the

reason why organizations must coordinate them in order to achieve specific goals. Trying to help

gain control over the behavior of people in formal organizations, most enterprises use a

combination of techniques including personal supervision, rules standard operating procedures,

job descriptions, budgets, accounting measurments, and performance appraisal (valutation)

system. Although control is a critical component of any system (human or mechanical), the area

of management processes. The term “control” describe the “process of controlling or influencing

the behavior of people as members of a formal organizations to increse the likelihood that they

will achieve organizational goals.

There are four critical dimensions of this concept of control:

• it is oriented to goals;

• it relates to a lack of goal congruence;

• it refers to a process;

• it is probabilistic.

Goals orientation of control

The concept of control used here is that the control is to assist the organizations in achieving its

goals, which means all things that organizations seek to attain. The goals can come from several

sources (CEO, committes, external group of authority) and of course regardless of the source of its

goals, all control must be goal oriented.

Lack of total goal congruence

In our analysis we also assume that the goals of the organization are not necessarily the same goals

of all of the entity0s individual or group members. The larger the organization, the less likely the

goals of all of its members are to be congruent.

Individual goals = organizational goals

Unfortunately the state of total goal congrunce is rarely attained, ecept pherhaps in a one-person

firm where the owner is the only employee. A more tipical situation is when there is a sharing

between the goals of the companies and the individual goals.

Control is a process

This concept of control views ita s an ongoing process. Control is dynamic and not static so it must

adjust to changes in goal overtime. A proper control in y0 time could not be proper in y1 time.

Control is probabilistic

Technically, control is set to increse the percentage that people will behave in ways which are

consistent with organizational objectivies. No system can guarantee that this will occur all of the

time. This means that control is probabilistic rather than deterministic.

Concluding we can say that control is a proces designed in order to:

- motivate people to achieve goals;

- to influence the probability that people will behave in the desired ways;

THE NEED OF ORGANIZATIONAL CONTROL

Organizations require control because they consist of people with different interests, different

tasks, and different perspectives. Futhermore people have to be cordinated and directed by the

enterprices and so why in turn creates the need of control. Obviously, the larger the number of

people in a organization, the greater the need for some form of organizational control mechanism

(it’s more or less the opposite for the small size enterprises). That’s why in large and complex

enterprises, such as IBM or general motors, formal mechanism of control must be designed with

care and precision in order to achieve the best degree of control.

In order to motivate people to behave in ways consistent with organizational goals, control system

must perform 3 related tasks:

1) First of all they must be able to motivate people to make decisions and take actions which

are coherent with organizational objectivies;

2) Secondly control system have to coordinate the efforts of several different parts of an

organization. In fact, even when people seem to persue the organizational interest they

may find themselves working at cross purposes;

3) The third task is to provide information about the organization to evaluate results, while

simultaneously permetting people to operate on a daily basis without having every

decision reviewed. To have an Idea of how this problem can afflict an enterprise we should

think that in USA just a 69% of the top manager are aware about the real strategy of the

company, less than 40% of the medium manager are aware abaut this, anche more or less

of employees are aware about this kind of information.

To illustrate this, we shall examine selected situations in which goal congruence may be lacking,

which indicated need of control.

motivational problems→ in all kinds of organizations people must be motivated to focus

themselves to the organizationals goals. In the routine people make decision that may or may not

be consistent with the organizational purposes. In theory, the control system will cause people to

on achieving the goals of the organization. An example of this problem could be when employees,

when they are called for create a budget plan, require much more resources than they really need.

One of the most common reason that justify this kinds of behaviour is to accomplish their own

purposes much easier.

Lack of direction→ the same need that we’ve explained for the motivational problems come up

also about the coordination of people. Indeed problem may be caused by a lack of coordination.

Every part of an enterprise have to be coordinated each other otherwise they may risk to move or

work at cross-purposes. In some situations, it could be enough manage a series of meetings and

periodic opportunity to asses progress against those goals by oral and written report. If carefully

designed, this type of control could be adequate for some kind and size of enterprises. Instead, in

more complex and larger organizations, the problem of coordination may be much more than

trivial. In firms such as GE, the effort required simply for coordination may be quite substantial.

Personal limitations→ These kind of problem can come up for example when an employee start

his job for the first time. Of course they will be not completely prepared to do the job well, so this

identify a problem about the personal skills of the employees.

Concluding another reason for control system is to permit the decentralization of day to day

operations. The situation in which managers are allowed to be more independent while

maintaining an overall control is of widespread significance, but we will focus on it subsequently.

Another function of control system is to facilitate the implementation of planning and the

planning process. Many organizations make mistakes believing that a plan is complete when a

written plan has been developed. Unfortunately, this is merely the end of the beginning, and an

effective control sys-tem is required if plans are to be fulfilled. Another way to look at this is that

planning is actually a component of a control process, and not a stand-alone system.

CONTROL VERSUS CONTROL SYSTEM

An “organizational control system” can be defined as a set of mechanisms –both processes and

techniques- which are designed to increase the probability that people will believe in ways that

lead to the attainment of organizational objectives. The ultimate objectives of a control system is

not to control the specific behaviour of people, but rather to influence people to take actions and

make decisoons which in their judgment are consistent with organizational goals.

“Control “ is a generic process and it can be exercised either by:

Supervision→ the process of supervision refers to the day to day scheduling, observation, and

oversight of work. Supervision tipically occurs during the managerial activity. In fact in a day to day

interaction between managers and staff, work is assigned, observed, reviewed and suggestions

are made. Regularly staff meeting are rare and the work planning process is normally informal, in

addition explicit goals or standard are not likely to be set. This method of control is more likely to

be observed in firms with sales less than $5 million. Yet it can be observed in multi-billion dollar

enterprises at all levels of management. Although it may not be thought of as a method of control

as such by the managers who practice it, nevertheless the ad hoc supervisory method is an implicit

control strategy.

Leadership as a method of control→ the process of leadership refers to the use of formal leaders

to perform several responsibilities in order to influence the behaviour of people to achieve

organizational goals. Just as supervision, leadership is a personal method of control, but differs

from this one in that because there are planned processes which leaders are expected to use to

influence the behaviour of people who are their subordinates. In fact leaders are expected to set

performance goals and stimulate group interaction and communications as well as to provide

performance feedback, personal support and recognition.

Ad hoc control techniques as a method of control→ some of the most common techniques of

control are: job descriptions, rules, standard operating procedures, appraisal system, budgets etc.

it is very common for such techniques to be used in organization s on a piecemeal basis. Typically

they are add one-at-a-time as the organizations following the process of grow and experiences

greater need for control. Although this is a practical and realistic way to exercise control, it may

caused some disadvantages such as that individual techniques may actually work at cross-

purposes, or, even worse important aspects of organizational performance may not be adequately

controlled. Control techniques are an unplanned method of impersonal control. The term

“impersonal control” is used to refer to control by means of system and procedures rather than

though perdonal efforts.

Formal control system for control system→ the term control system has been defined above. It

refers to a set of processes and techniques which have been designed explicity as a system toi

influence the behaviour of people. It is a planned method of impersonal control.

Organizational requirements for control system:

Stage 1 – Small organizations, less than $5 million in sales -> AD HOC SUPERVISION may be

effective. Managers are able to provide sufficient input to permit people to function smoothly

without the need of a formal goal setting and so on.

Stage 2 – formal leadership and control techniques $5 to 50 million -> Including, formal gol setting

sessions, regular staff meetings, reports, budgets, policies and similar techniques will be or

assistance in increasing control. This happens in the period of rapid growth.

Stage 3 – exceed $50 millions -> it will be hard to have control without a formal control system.

Stage 4 – multi-billion dollars enterprises, the control system required is hard and complex, that is

why some component parts may not set well with each other. Sometimes when companies go

very well, so they are profitable the weak part of control are not noticeable however, when it

comes to negativity then ineffective control can be noticed.

Conclusion:

This chapter has examined the nature and role of organizational control. Identified different

methods of control and distinguished between control and control system.

Chapter 2: Management control systems

A management control system is a set interre- lated communication structures that facilitates the

processing of information for the purpose of assisting managers in coordinating the parts and

attaining the purpose of an organization on a continuous basis. AlI organizations use control

systems. All but the smallest organizations require the use of formal control systems to function

effectively. Many organizations use informal as well as formal control systems.

The purpose of management control systems

The purpose of a management control system is to assist management in the coordination of the

parts of an organization and the steering of those parts toward the achievement of its overall

purposes, goals and objectives. A control system is designed to bring unity out of the diverse

activities of an organization as it seeks to fulfill its overall purpose. It is a major tool of

management for bringing about the cooperative effort that is at the very heart of the work of

organizations. In this book we shall use the term purpose to refer to the mission of the

organization which is directed, first and foremost, toward meeting needs of customers and

society. We shall use the term objectives to refer to specific, short-term, and predominantly

quantitative pursuits of an organization. We shall use the term goals to refer to specific, long-term

pursuits of an organization. Each part of an organization has a purpose, objectives, and goals. The

MCS knits the organization together so that each part, by exercising the autonomy given to it,

fulfills a purpose that is consistent with and contrib-utes to the fulfillment of the overall purpose

of the organization.

Control systems should be designed so as to bring about unity of pur-pose through the use of

diverse efforts of individuals in the organization. The task of management control is the

achievement of unity through diversity by the use of communications and coordination, in pursuit

of short-term objectives and long- term goals.

Domain of management control systems (read)

There is some disagreement about the proper domain for control sys- tems among authors in the

field. Anthony, Dearden and Govindarajan, for example, in an influential book consider strategic

planning, management control, and task control as three separate but interrelated processes of

planning and control. Management control is seen by them as "the process by which managers

influence other members of the organization to implement the organization's strategies." In their

view, the proper domain for management control systems is the successful implementation of

strategy. They do not treat adaptation and innovation as an integral part of the managerial control

process.

William Newman, on the other hand, in his very lucid development of the design and use of

control systems, considers the domain of control systems to be the control function of

management and believes: "Control is one of the basic phases of managing, along with planning,

organizing, and leading." Control is seen as an essential part of the management pro- cess and a

part of all the managerial efforts of an organization.

Our view of the domain of control systems is different; it is derived from the theory of cybernetics

and is close to that described by Stafford Beer in his two books, Cybernetics and management and

Decisions and con- trol, by Katz and Kahn in their important work, Social psychology of organi-

zations and by Griesinger in his paper Toward a cybernetic theory of the firm. Here the entire

organization is viewed as a control system. "Control" is seen as a characteristic or attribute of a

control system; it occurs when the organization is attaining its purpose. Purpose and the

attainment of pur- pose are central to the work of control systems.

Unlike the Anthony, Dearden, and Bedford view, our definition of managerial control considers

both the control of strategy and the control of operations. Moreover, because it is concerned with

the design of management systems used to steer an organization towards its purpose, it includes

aspects of the planning, organizing, and leading functions of management, thus distinguishing it

from Newman's definition. We believe our definition has face validity – it is based upon a strong

theoretical foundation, consistent with management practice and quite natural. But you should be

aware that authors differ in their approach to this subject.

This book adheres to our defined domain of control while freely incorporating many useful

concepts from the other two approaches. It de- scribes a management control framework which

when implemented will enhance organizational adaptability and thus accelerate productivity and

quality improvements. The framework is a tool for resolving inadequacies in current control

systems, for coaxing organizations toward optimal performance, and for enhancing

competitiveness. Like the systems found in Japanese industry, it seeks to increase individual

cooperation, minimize sub optimization and stimulate responsiveness to changing conditions.

The organizational context of managerial control systems

If we are to design control systems to assist managers in carrying out their functions, we must

have a realistic description of the context within which organizations, managers and individuals

function. In this book we use a model of organization and management based upon the one first

described by Chester Barnard in his Functions of the executive.

ORGANIZATIONS→Subunits

Organizations are usually divided into subunits. Subunits are com-prised of individuals at particular

locations who perform certain activities in order to fulfill a portion of the purpose of the

organization. Subunits are organized to overcome the physical and biological limitations of

individuals in dealing with their environment. Subunits are usually formed by using the principles

of specialization and division of labor. By dividing labor into like activities, members can specialize

on certain tasks, thus improving the efficiency of the subunits.

The formation of subunits in an organization presents other challenges. A primary one is the

achievement of efficient coordination of activities between sub-units. The control system plays a

major role in attempting to coordinate the efforts of these subunits. The cost of coordinating the

efforts of these subunits may be referred to as transaction costs. Control systems designers try to

design systems that help in reaching goals and objectives while minimizing these transaction costs.

Inefficiencies in coordination result in excess transaction costs. The specialized subunits of

complex organizations are established with varying degrees of autonomy. Each unit has a specific

objective derived from the overall purpose of the organization and each is coordinated by another

subunit in a superior-subordinate relationship. In the past, it was not considered important that

the overall purpose of the organization be known or accepted by each sub-unit. More recently,

however, the revival in recognition of the