Well, how much Well, how much control do we get control do we get

then!?then!?Chapter 4Chapter 4

Kent Thorén INDEK / KTH. Builds on Merchant and Van der Stede

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Recall thatRecall that

Management Control Systems are a Management Control Systems are a critical function of management as they critical function of management as they are intended to ensure that the are intended to ensure that the organization´s objectives and strategies organization´s objectives and strategies are carried out effectively. are carried out effectively.

Management control systems Management control systems increase the increase the likelihood of organizational successlikelihood of organizational success if the if the implementation is appropriate.implementation is appropriate.

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Control Tightness Control Tightness

““Good control” is said to take place when there is …Good control” is said to take place when there is … a “high” probability that the firm’s objectives will be achieved; a “high” probability that the firm’s objectives will be achieved; a “low” probability that major unpleasant surprises will occur.a “low” probability that major unpleasant surprises will occur.

Hence, the benefit of a control system can be expressed Hence, the benefit of a control system can be expressed in terms of the in terms of the amount of controlamount of control achieved. achieved.

In this respect, In this respect, tight controltight control is “good” because it is “good” because itprovides “high” probability that provides “high” probability that that people will act as that people will act as the organization wishesthe organization wishes (assuming away harmful side- (assuming away harmful side-effects … ).effects … ).

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Control Tightness (cont.)Control Tightness (cont.) Major management decision!Major management decision!

Tightness of individual control mechanisms.Tightness of individual control mechanisms.

Tightness of collection of mechanisms – the Tightness of collection of mechanisms – the control system.control system.

Both tight and loose control are associated Both tight and loose control are associated with direct and indirect with direct and indirect costscosts..

Tightness requires significant managerial Tightness requires significant managerial knowledge knowledge of the object of control. of the object of control.

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Control Tightness (cont.)Control Tightness (cont.) Tight control: when controls areTight control: when controls are

detaileddetailed applied frequentlyapplied frequently

limited acceptance of non-compliancelimited acceptance of non-compliance

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Control Tightness (cont.)Control Tightness (cont.)

Action controls

Result controls

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Tight Action ControlsTight Action Controls Behavioral constraintsBehavioral constraints

Physical constraintsPhysical constraints Extra protection usually costs more.Extra protection usually costs more.

Administrative constraintsAdministrative constraints Restricting decision making to higher organizationalRestricting decision making to higher organizational

levels provides tighter controls if:levels provides tighter controls if: Higher-level personnel can be expected to make more reliable Higher-level personnel can be expected to make more reliable

decisions;decisions;

Those who do not have authority cannot violate the Those who do not have authority cannot violate the constraints.constraints.

Action controls

Result controls

Personal control

Culture

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Tight Action Controls Tight Action Controls (cont.)(cont.)

Preaction reviewsPreaction reviews Become tighter if the reviews are frequent, detailed,Become tighter if the reviews are frequent, detailed,

and performed by diligent, knowledgeable persons.and performed by diligent, knowledgeable persons.

Action controls

Result controls

Personal control

Culture

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Tight Action Controls Tight Action Controls (cont.)(cont.)

Holding employees accountable for their Holding employees accountable for their actions. Requires:actions. Requires: DefiningDefining what actions are (un)acceptable what actions are (un)acceptable CommunicatingCommunicating these definitions to employees these definitions to employees

Administratively (work rules, policies and procedures, Administratively (work rules, policies and procedures, codes of conduct) or sociallycodes of conduct) or socially

ObservingObserving or otherwise tracking what happens or otherwise tracking what happens Direct observation / supervisionDirect observation / supervision Periodic tracking (e.g., “mystery shoppers”)Periodic tracking (e.g., “mystery shoppers”) Evidence of actions taken (e.g., activity reports)Evidence of actions taken (e.g., activity reports)

[Rewarding good actions, or] punishing actions that [Rewarding good actions, or] punishing actions that deviatedeviate

Action controls

Result controls

Personal control

Culture

Potentially addresses all three control problems!

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Loose Action ControlsLoose Action Controls Are action controls particularly effective if Are action controls particularly effective if

they are too loose?they are too loose? Can be harmful if not accompanied by personnel Can be harmful if not accompanied by personnel

controls (e.g., selection, training)controls (e.g., selection, training) May create ambiguity and confusion. May create ambiguity and confusion. Loose action controls often stifleLoose action controls often stifle action, while action, while

selectively used and selectively used and tight action controls can tight action controls can enhance managers’ autonomy and entrepreneurial enhance managers’ autonomy and entrepreneurial spiritspirit::

““Everything that is not explicitly forbidden is Everything that is not explicitly forbidden is allowed.”allowed.”

Action controls

Result controls

Personal control

Culture

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Tight Result ControlsTight Result Controls

The achievement of tight results The achievement of tight results controls rely on:controls rely on: highly highly specific specific and realistic budgetary and realistic budgetary

goals, goals, frequent frequent and and detailed detailed reporting reporting feedback, feedback, complete complete performance measures performance measures directly linked to directly linked to rewardsrewards..

The definitions of the desired results The definitions of the desired results areasareas

The performance measuresThe performance measures

The reinforcements providedThe reinforcements providedAction

controlsResult

controls

Personal control

Culture

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Tight Result Controls Tight Result Controls (cont.)(cont.)

The The definitionsdefinitions of the desired results areas of the desired results areas CongruenceCongruence

Choosing measurable performance dimensions thatChoosing measurable performance dimensions thatreflect an organization’s “true” objectives;reflect an organization’s “true” objectives;

e.g., e.g., # visitors for the success of a museum?# visitors for the success of a museum?# of patents for the success of R&D-# of patents for the success of R&D-

departments? departments? Annual profits for a firm with significant Annual profits for a firm with significant

growth prospects?growth prospects? SpecificitySpecificity

Disaggregation + quantification;Disaggregation + quantification; e.g., “keep customers happy” vs.e.g., “keep customers happy” vs.

“less than 1 pct. customer complaints.” “less than 1 pct. customer complaints.”Action controls

Result controls

Personal control

Culture

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Tight Result Controls Tight Result Controls (cont.)(cont.)

The The definitionsdefinitions of the desired results areas of the desired results areas (cont.)(cont.) Communication and internalizationCommunication and internalization

Depends on:Depends on: qualification of the personnel involved;qualification of the personnel involved; the amount of participation allowed in the goal-setting process;the amount of participation allowed in the goal-setting process; the perceived degree of controllability; and,the perceived degree of controllability; and, the reasonableness of the goals.the reasonableness of the goals.

CompletenessCompleteness What you measure is what you get !What you measure is what you get ! Hence, when the defined results areas are incomplete, Hence, when the defined results areas are incomplete,

performance in the unmeasured areas is likely to slip.performance in the unmeasured areas is likely to slip.Action

controlsResult

controls

Personal control

Culture

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Tight Result Controls Tight Result Controls (cont.)(cont.)

The performance The performance measures:measures: Precision (cf., amount of “noise”)Precision (cf., amount of “noise”) Objectivity (cf., freedom of “bias”)Objectivity (cf., freedom of “bias”) TimelinessTimeliness

Refers to the Refers to the time lagtime lag between the individual's between the individual'sperformance and the measurement of results.performance and the measurement of results.

UnderstandabilityUnderstandability What are we held accountable for?What are we held accountable for? How can the measure be affected?How can the measure be affected?

Action controls

Result controls

Personal control

Culture

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Tight Result Controls Tight Result Controls (cont.)(cont.)

The The reinforcementsreinforcements provided provided Links between results and rewards should Links between results and rewards should

be:be: Direct: i.e., no ambiguity or buffers;Direct: i.e., no ambiguity or buffers; Definite: i.e., no excuses.Definite: i.e., no excuses.

Rewards must be relevant, a difficulty we Rewards must be relevant, a difficulty we will discuss in coming lectures.will discuss in coming lectures.

Action controls

Result controls

Personal control

Culture

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Tight Result Controls Tight Result Controls (cont.)(cont.)

Always consider the strategic context:Always consider the strategic context: The point of applying results controls is often The point of applying results controls is often

to to loosen loosen control:control: Combining results control with significant Combining results control with significant

decentralization decentralization to manage complex operations to manage complex operations and highly competitive environments.and highly competitive environments.

Enhance managers’ flexibility subject to goal Enhance managers’ flexibility subject to goal achievement (e.g., return on investment).achievement (e.g., return on investment).

Action controls

Result controls

Personal control

Culture

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Tightness of Personnel Tightness of Personnel ControlsControls

The tightness of personnel controls depends a The tightness of personnel controls depends a great deal on great deal on the overlap between individual the overlap between individual and organizational objectivesand organizational objectives.. Selection and training !?Selection and training !?

Natural overlap of individual and Natural overlap of individual and organizational goals is unusual, but sometimes organizational goals is unusual, but sometimes makes other forms of control less needed. makes other forms of control less needed.

Action controls

Result controls

Personal control

Culture

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Tightness of Cultural Tightness of Cultural ControlsControls

Cultural control is generally considered to be Cultural control is generally considered to be a relatively loose form of control. a relatively loose form of control.

However, cultural controls are often more However, cultural controls are often more powerful powerful && stable stable

But cultural controls can be very constraining. But cultural controls can be very constraining. Strong organizational cultures often limit Strong organizational cultures often limit people’s way of “seeing the world”.people’s way of “seeing the world”.

Action controls

Result controls

Personal control

Culture

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Tightness of Cultural Controls Tightness of Cultural Controls (cont.)(cont.)

Sometimes culture provides strong Sometimes culture provides strong control; especially when it includes few control; especially when it includes few deeply held and widely shared beliefs deeply held and widely shared beliefs and values.and values.

Most large organizations however have Most large organizations however have weak cultures due to diversity and weak cultures due to diversity and dispersion of people.dispersion of people.

Action controls

Result controls

Personal control

Culture

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Difficulties with Difficulties with Personnel/Cultural Personnel/Cultural

ControlsControls Difficult to asses control effectiveness.Difficult to asses control effectiveness.

There may be sub-cultures which conflict with the There may be sub-cultures which conflict with the culture senior management wishes to promote. culture senior management wishes to promote. This loosens control. This loosens control.

How should one deal with sub-cultures? Partly How should one deal with sub-cultures? Partly contingent on strategy:contingent on strategy: Large, diversified companies – sub-cultures less of a Large, diversified companies – sub-cultures less of a

problem and may even be beneficial. Examples: problem and may even be beneficial. Examples: ““Professional” organizations, such as universities and hospitals.Professional” organizations, such as universities and hospitals. Less diversified firms with extensive interdependencies and Less diversified firms with extensive interdependencies and

synergies between sub-units synergies between sub-units more important to build a more important to build a strong common culture.strong common culture.

Action controls

Result controls

Personal control

Culture

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Combination of tight & Combination of tight & loose control mechanismsloose control mechanisms

Multiple types of tight and loose controls Multiple types of tight and loose controls generally co-exist and play a mutually supporting generally co-exist and play a mutually supporting role, but may also role, but may also conflictconflict with each other. with each other.

Adapt to situation, strategy and knowledge.Adapt to situation, strategy and knowledge.

Warning: Inappropriate use of controls might have Warning: Inappropriate use of controls might have harmful side effects! Example of conflict:harmful side effects! Example of conflict: Small, fast-growing, entrepreneurial firms relying Small, fast-growing, entrepreneurial firms relying

heavily on (tight) personnel/cultural controls, being heavily on (tight) personnel/cultural controls, being acquired by larger company and subjected to tighter acquired by larger company and subjected to tighter results controls.results controls.

Reinforce or overlap!? Some mechanisms are Reinforce or overlap!? Some mechanisms are complementarycomplementary – some might be – some might be substitutablesubstitutable..