Management Control Systems Chapter 3 Action Personnel Cultural

Management Control Systems Chapter 3: Action, Personnel & Cultural Controls Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003

Recall that. . . u Management Control is about taking steps to help ensure that the employees do what is best for the organization. u 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 -2 -

Control alternatives … u 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 -3 -

Action controls … u Ensure that employees perform (or do not perform) certain actions known to be beneficial (or harmful) to the organization. u Prevention / detection – Most action controls are aimed at preventing undesirable behaviors. Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 -4 -

Effectiveness of action controls. . . u 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 -5 -

Behavioral constraints. . . u Physical constraints – Locks, passwords, limited access, … u 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 -6 -

Preaction reviews. . . u 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 -7 -

Action accountability. . . u Holding employees accountable for the actions they take. u It requires: » Defining what actions are (un)acceptable; » Communicating these definitions to employees; u e. g. , work rules, policies and procedures, codes of conduct. » Observing or otherwise tracking what happens; u u u » u 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 -8 -

Redundancy. . . u 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 -9 -

Pros and cons of action controls. . . PRO CON u The most direct form of control u Only for highly routinized jobs u Tend to lead to documentation of the accumulation of knowledge as to what works best. u May discourage creativity, innovation, and adaptation u May cause sloppiness u May cause negative attitudes – Organizational memory u 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 u Sometimes very costly Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 10 -

Control alternatives … u 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 - 11 -

People controls. . . u People controls ensure that employees. . . – Will control their own behaviors u Personnel control u Self-monitoring – Will control each others’ behaviors u Cultural controls u Mutual-monitoring u 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 - 12 -

Personnel controls … u 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. u labels. . . – Self-control – Intrinsic motivation – Ethics and morality – Trust and atmosphere – Loyalty Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 13 -

Methods to implement personnel controls. . . u Generally, it is about … “… finding the right people, giving them a good work environment and the necessary resources” … u Selection and placement » Finding the right people to do a particular job. u Training » Give employees a greater sense of professionalism; » Create interest in the job by helping employees to understand their job better. u 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 - 14 -

Cultural controls. . . u Cultural controls or mutual-monitoring tap into social pressure and group norms and values. u Cultural controls are effective because members of a group have emotional ties to one another. u 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 - 15 -

Five ways to shape culture … (I) u 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. u 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 - 16 -

Five ways to shape culture … (II) u 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. u Physical and social arrangements » e. g. , office plans, interior decor, dress codes and vocabulary, etc. u 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 - 17 -

Start with people controls. . . u People controls … » Must always be relied on to a certain extent; » Have relatively few harmful side-effects; » Involve relatively low out-of-pocket costs. u However, it is rare that people controls will be sufficient. In most cases, it is necessary to supplement them with … » action controls; » results controls. u Maybe, you just shouldn’t put all your trust in people !? Merchant and Van der Stede: Management Control Systems © Pearson Education Limited 2003 - 18 -

Cases u Internal Revenue Service (p. 88 ff. ): – Evaluate the change of the IRS’s 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? u 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 - 19 -

Requirements u u 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 - 20 -