Management and control
Chapter 1
Management relates to the process of organizing resources and directing activities for the purpose of
achieving organizational objectives; consist of 4 phases:
1. planning
 mission; reason of company’s existence
 vision; what to do to reach the mission
 objective
 strategy; Corporate S.(expansion/ shutdown/ no change)
Business unit S. (Differentiation, cost leadership, focus)
Operational S. (mktg, finance, HR, R&D)
2. organizing
 organization structure
 amount of resources
 task
 Standard Operation Procedure
3. leading
 Implementation
4. controlling
 Performance Evaluation
 Actual-Target comparison
Management process:
1. Objective setting; important for design of management control system; doesn’t have to be
quantified, needn’t be financial, must be understood by the employees
2. Strategy formulation; define how organizations must use their resources to meet their objectives,
can be formulated thru SWOT analysis, it emerged from the interaction between management,
employees and environment
3. Strategic control; to see whether the company’s strategy should be changed, considering the
environment, competition and other factors; primarily focused on external (SWOT factors)
4. Management control; to ensure the employees (behavior) do the best for the company, so that they
understand company’s expectation, implement the company’s strategy as intended, capable to do
their job, actions taken to solve management problems
Causes of management control problems:
1. Lack of direction: causes employee to behave inversely to the desired behavior. Employees must
be informed on how to maximize their contribution to the fulfillment of company’s objectives
2. Motivational problems: employees are reluctant to give 100% effort, because individual and
company goal don’t naturally coincide
3. personal limitation: caused by lack of knowledge, training, experience, or jobs that are not
designed properly
Characteristics of good management control:
Good management control: management are confident that no major unpleasant surprise will occur, but still
allows probability of failure because perfect control is rare and the control loss(cost of not having perfect
control) must be achieved to reach optimal control (cost of implementing more control > control loss)
 future oriented (no unpleasant surprises in future)
 objective driven (objective represents what the organization seeks)
Control problem avoidance:
activity elimination; potential risk in particular activity can be turned over to 3 rd party
(Subcontract, licensing agreements, divestment)
Automation; automated devices can be set to behave consistently in accordance to the
company’s wants (lower inaccuracy, inconsistency, lack of motivation, unlike human)
but maybe costly and lack of feasibility
Centralization; centralization in decision making of key risk areas is needed (Mergers
and divestment)
Risk sharing; to limit loss; thru insurance
Chapter 2: Result control
Result control:
Rewarding for good result (meritocracies), punishing for bad results
Reminds employees of the consequences of actions taken
Employees are empowered to take any actions, not dictated by the company
Cannot be used in every situation, effective only where the desired result areas can be controlled
(to a considerable extent) by the employees whose actions are being influenced and where the
controllable result areas can be measured effectively
Preventive type control, effective in addressing motivational problems, personal limitation
problems
Steps in result control:
1. defining performance dimensions
“what you measure is what u get”; goals and measurement are the factors that shape up the
employees’ mind of what is important, therefore it must be clear
2. measuring performance
measurement is done in a specific period
3. setting performance targets
affect behavior in 2: stimulate action and motivation; allow employee to self evaluation
4. providing rewards/punishments
extrinsic(bonus, promotions) / intrinsic(self-esteem)
conditions determining the effectiveness of result controls:
 knowledge of desired results
must be communicated effectively to employees, result desirabilitymore of the quality
represented by the result measure is preferred to less, everything else being equal
 ability to influence desired results (controllability)
person whose behavior are being controlled must be able to affect the result in a material way in a
given timespan; a manager only accountable for mistakes made under his control
result control will not be effective where the result that can be measured are either not controllable
or largely uncontrollable
 ability to measure controllable results effectively
to judge the effectiveness of result measures is ability to evoke the right behaviors. To evoke right
behaviors, result measures should be:
1. precise
hi precision = small dispersion of results given by independent measurers =give good
evaluation
2. objective
freedom of bias; objective evaluation can be done by people who are independent of the
process(personnel on controller’s staff); independent people (auditor)
3. timely
timeliness: lag between the employees’ performance and the measurement of results;
good for 2 reasons: employees need consistent, a short term pressures to perform well; it
increases the value of interventions that might be necessary
4. understandable
employee w/controlled behavior must understand his accountability and what he must do
to influence the measure. E.g: customer service employee must understand what the their
customers value (cust. Satisfaction)
Chapter 3: action, personnel and cultural controls
Action control involves taking steps to ensure that employees act in the organization’s best interest by
making their actions themselves the focus of control
Forms of action controls:
o behavioral constraints
it is a negative form of action control, it is divided into 2 kinds: physical constraints(locks on
desks, passwords, access limit to certain areas) and administrative constraintslimit on
employees’ ability to perform all/ a portion of a specific act; low grade manager can only approve
$1000 expenditures, while med-grade manager can approve $10000 expenditure
another admin consseparation of duties; different person for positions that closely
related(checks receiver must be separated from the accountant who entries tha account receivable
ledger)
o preaction reviews
scrutiny of the action plans of the employees being controlled (approval/checking made by the
supervisors about certain proposals)
o action accountability
holding employees accountable for the actions they take. Its implementation requires:
1. defining of actions which is good/bad
2. communicating the definitions to employees
3. observing / tracking what happens
4. rewarding/punishing the actions
o redundancy
assigning more employees / machines to a task than is strictly necessary, or at least having backup
employees / machines available, can also be seen as a control because it increases the probability
that a task will be satisfactorily accomplished.
Action controls and the control problems
Types of action controls Lack of direction
Behavioral constraints
X
Preaction review
X
Action accountability
redundancy
Motivational problems
X
X
X
X
Personal limitations
X
X
X
Prevention vs detection
Detection type action controls are used after the occurrence of the behavior
Examples:
Type of action
controls
Behavioral
constraints
Preaction reviews
Action
accountability
Redundancy
Prevention
Detection
Locks on valuable assets, separation on
duties
Expenditure approvals budget reviews
Prespecified policies linked to expectations
of rewards and punishments
Assigning multiple people to an important
task
N/A
N/A
Compliance-oriented internal audits,
cash reconciliations
N/A
Conditions determining the effectiveness of action controls:
 managers know what actions are desirable/undesirable
knowledge of the desired actions can be discovered in 2 ways:
1. analyzing the actions/results patterns in a specific situations / similar situations over time
to learn what actions produce the best results

2. information from others(consultants) esp, for strategic decisions
managers are able to ensure that the desirable actions occur (or that the undesirable actions do not
occur)
the effectiveness of the behavioral constraints and preaction reviews varies directly with the
reliability of the physical devices / administrative procedures the organization has in place to
ensure that the desired actions are taken.
action tracking often provides a significant challenge that must be faced in making
action-accountability controls effective. The criteria that should be used to judge are: precision,
objectivity, timeliness, understandability.
The action control system is not perfect, and to make it near perfect, it needs much cost,
therefore some managers use personal and culture controls to fill in the gaps. These controls help
employees to control their own behaviors.
Personnel controls
It builds on employees’ natural tendencies to control and/ or motivate themselves. It serves any of 3 basic
purposes:
1. clarify expectationshelp ensure employees understands what the organization wants
2. help ensure that the employees are able to do a good job(have the capability;
experience, intelligence and resources)
3. increase the likelihood that each employee will engage in self-monitoring
Self-monitoring is the naturally present force that pushes most employees to want to do
a good job, to be naturally committed to the organization’s goals. It is also effective
because most people have a conscience that leads them to do what is right and able to
derive positive feelings of self-respect and self-satisfactions when they do a good job
and see the organization succeeds
3 major methods of implementing personnel controls:
1. selection and placement of employees
Finding the right people to do a right job and giving them a good work-environment and the
necessary resources can obviously increase the profitability that a job will be done properly
2. Training
Training can provide useful information about what results and actions expected and how the
assigned task can be best performed (2 methods: on the job training and class training), also it can
have positive motivational effects because employees can be given a greater sense of
professionalism, and they are often more interested in performing well in jobs they understand
better
3. Job design and provision of necessary resources
A well designed job allows motivated and qualified employees a high probability of succeed
Cultural controls
Cultural controls are designed to encourage mutual monitoring, a powerful for m of group pressure on
individuals who deviate from the group norms and values; it is most effective where members of a group
have emotional ties to one another.
Cultures are built on shared traditions, norms, beliefs, values, ideologies, attitudes, ways of
behaving. Organizational cultures remain relatively fixed over time , even while their strategies, tactics, and
goals necessarily adapt to changing business conditions.
5 important methods in shaping culture , and thus effecting cultural controls:
1. codes of conduct
the codes of conduct provide broad, general statements of corporate values, commitments to stake
holders, and the ways in which top management would like the organization to function.
These codes are designed to help the employees to understand what behaviors are expected even
in the absence of a specific rule or principle.
Some codes of conduct may fail because they are not supported by strong leadership and proper
tone from the top.
2. group-based rewards
3.
4.
5.
In group-based rewards, the link between individual efforts and the result being rewarded is weak ,
perhaps near 0. Thus , communication of expectations and mutual monitoring are the primary
forces in group rewards.
The use of group reward also reduces measurement cost because each individual’s unique
contribution to overall performance doesn’t have to be measured.
intraorganizational transfers (employee rotation)
transfers tend to improve the socialization of the employees throughout the organization and
thereby inhibit the formation of incompatible goals and perspectives
physical and social arrangements
physical arrangements, such as office plans, architecture, and interior décor and social
arrangements, such as dress codes and vocabulary can also shape the organizational culture
tone at top
top level managers must be consistent with the type of culture they try to create, and their behavior
must be in accordance with their statements
personnel/cultural controls and the control problems
Lack of
direction
Ways of effecting personnel controls
Selection
Training
Job design and provision of necessary
resources
Ways of effecting cultural controls
Codes of conduct
Group-based rewards
Intraorganizational transfers
Physical arrangements
Ton at the top
X
X
X
X
X
Motivational
problems
X
X
Personal
limitations
X
X
X
X
X
X
X
X
The effectiveness of personnel/cultural controls
These controls are adaptable. All managers rely to some extent on their employees guiding and motivating
themselves.
Cultural controls often have the advantage of being relatively unobtrusive
Personnel and cultural controls have several important advantages over results and action controls:
 usable to some extent in almost every setting
 cost lower
 produce fewer harmful side-effects
But the degree to which personnel/cultural controls are effective may vary significantly across individuals,
groups, and societies. Some people are more honest, more strongly related
Control tightness / looseness
The achievement of tight result control depends on characteristics of the definitions of the desired result
areas, the performance measures, and the reinforcements provided
 definitions of desired results
a tight management control must have the results which have dimensions that congruent with the
true organizational objectives; the performance target must be specific; feedback in short time
increments the desired results must be effectively communicated and internalized by those whose
behaviors are being controlled; and if result controls are exclusively in a given performance , the
measures must be complete


measurement of performance
a result control system that is used to apply tight control requires excellence in all of these
measurements qualities(precise, objective, timely, understandable)
rewards / punishments
result controls are likely to be tighter if rewards and punishments that are significant to the
employees involved are directly and definitely linked to the accomplishment of the desired results
direct linkresult translate automatically into rewards/ punishments w/o no buffers and ambiguity
definite link between results and rewards no excuses are tolerated
tight action controls
action control system can only be considered tight if it is highly likely that employees will engage
consistently in all of the actions critical to the operation’s success and not take harmful actions.
 Behavioral controls


Physical (locks, electronic security) and administrative can produce a tight control in some areas
of organization. In general, administrative control such as, restriction of decision making to a
higher level management provides tighter control: if the higher level management can produce
more reliable decision; if it can be guaranteed that the ones without authority cannot violate the
decisions that have been established
Preaction reviews
If the reviews are frequent, detailed, and performed by diligent, knowledgeable people, then the
reviews can be considered tight. Preaction reviews are typically tight in areas involving large
allocations because many investments are not easily reversible and can affect the success/failure of
the business.
But reviews done by the top management doesn’t mean that the preaction review is tight, because
sometimes the top management doesn’t have time and it can merely rubberstamp them
Action accountability
The amount of control generated by action accountability control depends on the characteristics of
the definitions of desirable actions, the effectiveness of the action-tracking system and the
reinforcement provided
To be considered tight, the definition of actions must be congruent, specific, well communicated
and complete.
Detailed audits and constant direct supervision are some examples of tight action tracking system.
Control can be made tighter by making the rewards/punishment more significant for the employee
affected. But different individual may react variably to identical rewards.
Tight personnel/cultural controls
these controls can only effect companies with strong culture because cultural involves a set of shared
beliefs and values that employees use to guide behavior. Most personnel/culture controls are unstable. They
can break down quickly if demands, opportunities, or needs to change, and they provide little or no warning
of failure
multiple controls
to tighten controls, managers often use multiple forms of controls. The controls can either reinforce each
other or overlap, thus filling in gaps so that they, in combination can provide tight control over all the
factors critical to the organization’s success
summary of tight controls:
Type of control
Results/ action accountability
What makes it tight
Definition of desired actions/results:
 Congruent with the true organizational skills
 Specific
 Effectively communicated and internalized
 Complete (if accountability emphasized)
Measurement of results / tracking of actions:
 Congruent
 Precise
 Objective
 Timely
 Understandable
Rewards / punishments:
 Significant to person involved
 Direct and definite link to results or actions
Behavioral constraints
Preaction reviews
Personnel/cultural controls
Reliable
Restrictive
Frequent
Detailed
Performed by informed persons
Certainty and stability of knowledge linking personnel/culture
Characteristics with desired actions
Chapter 5
Cost of control
 Benefit of controls
Increase the probability that people will work hard and direct their energies to serve the
organization’s interest
 Cost of control
Direct out of the pocket cost
1. easy to quantify: cost of cash bonuses; internal audit staff
2. difficult 2 quantify: time spent on planning & budgeting activities + preaction control
harmful side-effects
1. behavioral displacement
 occurs when the control system produce behaviors that aren’t consistent w/
organization’s objectives
 w/ result control, it occurs when the result measures are incongruent w/ organization’s
true objectives because of:
 poor understanding of desired results; e.g: trailer decided to monitor the
number of trailers its sales people sold, as a result, the sales increases, but
many of the sales were made to poor credit risk, so the sales lot is quickly
filled up w/ overpriced trade-ins
 over quantification (2nd major cause of displacement in result control); e.g:
tendency to concentrate on matters that are concrete & quantifiable, rather
than intangible concepts that may be even more important
Solution: find acceptable quantified indicators of intangible concepts that may
be missing in order to alleviate the problem for which result control are being
criticized
 w/ action controls, it comes in form of:
o means-end inversion: pay more attention to what they do (means) & lose sight
of what they are to accomplish (the ends)
e.g: managers w/ low limit of capital expenditure authority only invest in small
investments, which creates small return which is also not optimal
o rigid, non adaptive, bureaucratic behavior, not creative
 w/ personnel/culture controls:
Strong culture can also cause displacement where the behavioral norms that groups use to
guide the behaviors of their members, or the measures used to provide group-based
rewards, aren’t totally in line with what the organization desires
The solution to the behavioral displacement problems:
 prompt & accurate recognition problem & diagnosing of problems are the keys to
solution
 the processes require thinking about whether there’s a difference between what
employees are supposed to do & what the control system motivate them to do
2.
gamesmanship
a. are actions managers take to improve their performance indicators without producing any
positive economic effect
b. creation of slack resources: consumption of organizational resources by employees in
excess of what is required, usually happened in the management level, in tight control,
therefore, they try to lower the target budget
The + side of slack: reduce manager tension, increase organizational resilience to change;
stimulate innovation
the – side: inefficient allocation of resources, information distortion, lower performance
c. Data manipulation( happens in accountability type control system): fudging control
indicators; falsification; data management (action changing reported result; sales, D/E
ratio) while providing no real harm to the organization
3.
operating delays
 cause by limiting access to a stockroom; requiring passwords
 action control often “annoy” professional, but also lower level personnel
negative attitudes
 job tension, conflict, frustration, resistance
4.