Chapter ( 6 )

Designing and Evaluating

Management Control Systems
 This chapter discusses
A general framework that can be
used to design management control
systems (MCSs) or to improve
existing systems.
 The process of designing and improving MCSs
requires address two basic questions:
* What is desired?
* And what is likely to happen?

 If what is likely is different from what is desired,

then managers must address the following two
MCS design questions:
What controls should be used?
And how tightly should each be applied?
UNDERSTAND WHAT IS DESIRED AND
WHAT IS LIKELY:

 MCS cannot be designed or evaluated without

understanding of the demands of the roles being
controlled; that is; what it is the organization
wants the employees to do.

 Objectives, and strategies that are derived from a

good understanding of the organization’s
objectives often provide important guide to the
actions that are expected.
UNDERSTAND WHAT IS DESIRED AND
WHAT IS LIKELY:

 A better understanding of objectives and strategies

1.yields a larger set of feasible control alternatives,
2.provides a better chance of being able to apply
each alternative tightly, if so desired,
3. and reduces the chance of creating behavioral
displacement problems.

 The understanding of what is desired is most

valuable if it is defined in terms of the actions
desired, since the purpose of management control is
to influence actions.
UNDERSTAND WHAT IS DESIRED AND
WHAT IS LIKELY:

 specify in the objectives is very valuable. For

example, non specific statements such as “ the
objective of the firm is to serve long term interests
of the stakeholders, its employees, and society” or
“ the strategy of the firm is to be leader in the
consumer durables industry” – provide only
general guidance as to what employees in the firm
should do. A specific objective, such as “ we are
seeking a 15 % return on invested capital after
taxes and 20% growth in sales” provides better
guidance as to how decisions should be made.
UNDERSTAND WHAT IS DESIRED AND
WHAT IS LIKELY:

 goals and strategies must be :

1. Described in a specific statement
2. They should be congruent with the true
organizational objectives and ethical
surrounding.
3. Translated into role demands

 Role demands can be specified in terms of either

the actions that must be performed or the results
that determine the success or failure in that role.
UNDERSTANDING THE DESIRED ACTIONS
OR RESULTS:

 one way to understand what must be controlled is to

identify the key actions that must be performed in
order to provide the greatest probability of success .
These actions differ considerably among
organizations and among different roles in
organization.
 It is not always easy to isolate a short list of key
actions, but sometimes it can be done, particularly
for the oft-recurring actions, or the “ regular
process”.
UNDERSTANDING THE DESIRED ACTIONS
OR RESULTS:

 For lower-level personnel, such as production line

workers, the key actions may be well understood
because they are highly routinized.

 Non routine actions that are usually done by doctors,

lawyers, etc… require professional judgment. Usually its
difficult to judge whether the action taken is appropriate
except through close monitoring by someone of equal or
great professional qualifications and knowledge.
( reviewed only by superiors or peers).
UNDERSTANDING THE DESIRED ACTIONS
OR RESULTS:

 Most organizations require standard sets of actions for

personnel preparing investment proposals, business
plans, and justifications for new hires.

These were action controls

UNDERSTANDING THE DESIRED ACTIONS
OR RESULTS:

 Another way to understand role demands is in

terms of key results

 key results can be defined as

the few key areas where “ things must go right “ for
the business to succeed. If results in these areas
are not adequate, the organization’s performance
for the period will be less than desired.
UNDERSTANDING THE DESIRED ACTIONS
OR RESULTS:

 Key results may or may not be stable, but

they should be re-reviewed, and adapted if
necessary, as the environmental conditions
change or the chosen strategy changes
UNDERSTANDING THE LIKELY ACTIONS
OR RESULTS:

 Managers should investigate the potentials

for each of the control problems ( lack of
direction, motivational problems, or personal
limitations ).
 In other words, they should ask whether the
employees understand what they are
expected to do ( key actions) or to
accomplish ( key results), whether they are
properly motivated, and whether they are
able to fulfill their required roles.
UNDERSTANDING THE LIKELY ACTIONS
OR RESULTS:

 If the likely actions or results are different

from the key actions or results, more or
different MCSs might be called for,
depending on the severity of the problems
and the cost of the MCSs.
 DECISION ( 1) :
CHOICE OF CONTROLS

 The different types of management controls are not

equally effective at addressing each of the
management control problems. For example, the
behavioral constraints do not help solve the lack of
direction problems, so if the direction is a significant
problem in the area of concern, managers will have
to consider other forms of control.
 DECISION ( 1) :
CHOICE OF CONTROLS

CONTROL TYPES AND CONTROL PROBLEMS

PERSONNEL/CULTURAL CONTROLS AS AN
INITIAL CONSIDRATION:

 In deciding among the many management

control alternatives, managers should start
by considering whether personal or cultural
controls will be sufficient. Personal/ cultural
controls are worthy of 1st consideration
because they have relatively few harmful
side effects and relatively low cost. In some
cases, such as a small enterprises ,
personal/cultural control may provide
effective management control by themselves.
PERSONNEL/CULTURAL CONTROLS AS AN
INITIAL CONSIDRATION:

 However, personal/cultural controls are

sufficient only if the employees understand
what is required in their particular roles, are
capable of performing well, are supported by
requite organizational structures and
systems, and are motivated to perform well
without additional supervision.
PERSONNEL/CULTURAL CONTROLS AS AN
INITIAL CONSIDRATION:

 Rarely all the four conditions are satisfied so

managers must combine them with result or
action controls.

 Managers combination of MCSs should be

evaluated on the advantages and
disadvantages of each control system.
ADVANTAGES AND DISADVANTAGES OF
ACTION CONTROLS:

Pros
 The most direct form of control
 Tend to lead to documentation
of the accumulation of
knowledge as to what works
best.
• 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.
Cons
 Only for highly routinized jobs
 May discourage creativity,
innovation, and adaptation
 May cause sloppiness
 May cause negative attitudes
• e.g., little opportunity for
creativity and self-
actualization
 Sometimes very costly
ADVANTAGES AND DISADVANTAGES OF
RESULTS CONTROLS:
Pros
 Result control , which is used at
many level in most organization.
 Result control can often be
affective when it is not clear what
behavior are most desirable .
 Result control can yield good
control while allowing the
employees whose behavior are
being control high autonomy
 They yield greater employee
commitment and motivation.
Cons
 Result control are not
effective in every situation
 Failure to satisfy all three
effectiveness condition
 They shift risk to employees
(because of uncontrollable
factors). Hence, they often
require a risk premium for
risk averse employees.
 Sometimes conflicting
functions:
• Motivation to achieve
• targets should be
“challenging”
• Communication among entities
• targets should be slightly
conservative
 DECISION ( 2) :
CHOICE OF CONTROL TIGHTNESS
 The decision as to whether controls should be tight or
loose in any particular organization, or area within the
organization, depends on answers to three questions:

1- What are the potential benefits of tight control?

2- What are the costs?
3- Are any harmful side effects likely?
 DECISION ( 2) :
CHOICE OF CONTROL TIGHTNESS
1- What are the potential benefits of tight control?

 In any organization, tight control is most beneficial over

the areas most critical to the organization’s success. The
critical success factors, however, vary widely across
organization.
 For example, a business week article on the trend
toward retail super stores noted that:
1- Carrying heavy inventories without tight control, of course, a recipe for
bankruptcy.

2- Tight inventory control can be implemented by focusing on :

key results If Employees can be trusted to determine how to keep inventory near the
optimal levels.
Or Key actions that involve detailed inventory procedures and decision rules.
 DECISION ( 2) :
CHOICE OF CONTROL TIGHTNESS
2- What are the costs?

 Some forms of control are costly to implement in

tight form.
 Tight controls in the form of pre-action reviews,
for example, can require considerable top-
management time.
 Tight results controls might require extensive
studies to gather useful performance standards, or
they might require sophisticated information
systems to collect and analyze all the required
performance data.
 DECISION ( 2) :
CHOICE OF CONTROL TIGHTNESS
3- Are any harmful side effects likely?
 All the conditions necessary to make type of
control feasible, such as Knowledge about how
the control object relates to the desired ends.
 For example: if the environment is unpredictable
and the need for creativity is high, such as in hi-
tech firms, good knowledge does not exist about
either the actions that are needed or the results
that should be accomplished. Therefore, neither
action nor results control can be said to be clearly
effective, and the implementation of either in
tight form is likely to cause problems.
 DECISION ( 2) :
CHOICE OF CONTROL TIGHTNESS
3- Are any harmful side effects likely?

 Tight action controls would likely cause

behavioral displacement and stifle problems.

 Tight results control would likely cause

problems to select the right results measures and
set adequately challenging targets.
SIMULTANEOUS TIGHT-LOOSE
CONTROLS:

 In a dated but often cited management book, in

search of Excellence, (Peter & Waterman)
observed that a number of companies, they
defined as (excellent).
 They observed that the MCSs used in these
companies can be considered loose and even
encourage, autonomy, entrepreneurship and
innovation. But these same control systems can
also be called tight because of:
SIMULTANEOUS TIGHT-LOOSE
CONTROLS:

- People in the company share a set of rigid values

such as: Focus on customer need.
-Peter & Waterman observed that policies and
procedures and other types of controls are not
necessary in these companies because of:
1- People know what they are supposed to do in
most situations because the handful of guiding
values is crystal clear.
2- Culture regulates rigorously the few variables that
do count.
SIMULTANEOUS TIGHT-LOOSE
CONTROLS:

-The MCSs in these organizations are dominated by

personnel or culture control.

- They can be said to be tight on objectives and core

values but loose on procedures.

-It sounds like Nirvana: let culture provide a high

degree of reliance that the employees are acting in
the organization’s best interest and avoid most of the
harmful side effects.
SIMULTANEOUS TIGHT-LOOSE
CONTROLS:

-It may be possible to approach similar type of

simultaneous tight-loose control even where a
strong culture does not exist.

- This can be accomplished by using tight controls

over the few key actions or results that have the
greatest potential impact on the success of the
organization.
 ADAPTING TO CHANGE:

 Most organizations emphasized one form of

management control but they often change their
emphasis from one form to another as their needs,
capabilities and environments change. For
example: small companies can often be
controlled through the supervisory abilities of
their founding leaders who develop the staff of
loyal employees, centralized most key decisions,
and involve themselves personally in detailed
reviews of budgets and expenditures.
 ADAPTING TO CHANGE:

 But as organization grow, these forms of

personnel/cultural and action control have to be
replaced with other forms of control.

 In addition to growth, many other situational

factors (such as intensifying-competition global
expansion-technological change) cause
organizations to adapt their management control
systems to their changing environments: .
 KEEPING A BEHAVIORAL FOCUS:

 What makes the analysis of management

controls so difficult?
- Is that their benefits and side effects are dependent
on how employees will react to the controls that are
being considered.
-Significant behavioral differences exit among
people in different countries. Different parts of a
single country, in different firms and in different
areas of the same firm.
 KEEPING A BEHAVIORAL FOCUS:

- The managers need to be aware from differences

Because the effectiveness of the management
controls.

-For example: design engineers and advertising

executives tend to react more negatively to action
controls than do employees working in production
scheduling or accounting.
 KEEPING A BEHAVIORAL FOCUS:

- On other hand, some employees in lower

organizational levels seem to be relatively highly
interested in money as a reward.

- These differences make the implementation of

MCSs particularly challenging

- These factors emphasize that no one form of

control is optimal in all circumstances.
 MAINTAINING GOOD CONTROL:

 What causes control problems so serious that an

organization is out of control?

- That is not rare because some companies not

exist any more because their MCSs failed.

- The list of surviving organizations that have been

criticized for poor or lax controls is long and often
includes even the most admired companies.
 MAINTAINING GOOD CONTROL:

-The causes of the problems these companies have

faced are often diverse:

1- Imperfect understanding of the setting (associated

with rapid growth).
2- The effect of the management controls in that
setting.
3- management’s inclination to subjugate the
implementation of good management controls to
other. (Growth situation).
 MAINTAINING GOOD CONTROL:

 Criticisms:
- Not easy to criticized while many organizations
may have faced MCS weakness of various
magnitudes.

- It is not easy to keep a finely tuned set of MCSs in

place over long periods of time.
 MAINTAINING GOOD CONTROL:

 Criticisms of MCSs must be made with caution, Controls

that seem quit loose may have some unseen benefits
such as: (high creativity- low cost).
- MCSs only reduce the probability of poor performance.
- There is no perfect MCSs.
- Control is a complex part of the management function.
(There is no one best way to accomplished good control.)
- There are many control benefits and cost that might not be
totally apparent at first glance.