Management Control 2007-2008
Prof. dr. W. J. Scheper
wim@cs.uu.nl
Wim Van der Stede
Objective of the course

Gain understanding of Management Control:
–
–
–
–

what is management control?
how can control be implemented?
what managementinformation is needed?
which organizational conditions?
Get students actively involved by using the case
method
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Structure of the course



7 sessions
Take-home cases
Final examination:
– Take home case
– Due date: 30 september 2008

Literature:
– K. A. Merchant & W.A. van der Stede, 2003, Management
Control Systems, Prentice Hall, ISBN 0 273 65596 5
OR
– K. A. Merchant & W.A. van der Stede, 2007, Management
Control Systems, Prentice Hall, ISBN 0 273 7080 15

Website
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Structure of the course in detail
1. Introduction
Ch. 1
April 21
2. Control system design
Ch. 2 & 3
May 6
3. Control tightness & side effects
Ch. 4 & 5 & 6
May 19
4. Planning & budgetting and setting
performance targets
Ch. 7 & 8 & 9 & 10
Ch. 7 & 8 & 9
June 2
5. Problems with accounting measures
Ch. 11 & 12
Ch. 10 & 11
June 9
6. Management control roles & ethical
issues
Ch. 14 & 15
June 16
7. Situational influences
Ch. 16 & 17
June 23
Writing in blue: 2nd edition differs from 1st edn.
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Management Control Systems
Chapter 1: Management and Control
Wim Van der Stede
Management control ...

The process by which management:
– … ensures that people in the organization carry
out organizational objectives and strategies;
– … encourages, enables, or, sometimes “forces”
employees to act in the organization’s best interest.

Management control includes all the devices / mechanisms
managers use to ensure that the behavior of employees is
consistent with the organization’s objectives and strategies.
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Function and benefit of Management Control

Purpose / function ...
– get done what management wants to be done;
– influence behavior in desirable ways.

Benefit …
– increased probability that the organization’s
objectives will be achieved.
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Management and its components ...

Management …
– … the process of organizing resources and directing
activities for the purpose of organizational objectives.

Process-breakdown …
» Objective setting; what goals do we want to achieve?
» Strategy formulation; how are we going to realize these
goals?
» Control: are we on track in realizing these goals?
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Objective setting ...

Objectives are …
» a necessary prerequisite for any purposeful activities.

Without objectives, it is impossible …
» to assess whether the employees’ actions are purposive;
» to make claims about an organization’s success.

Objectives can be …
» financial versus non-financial;
» quantified, explicit versus implicit;
» economic, social, environmental, societal.
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Strategy formulation ...

An organization must select any of innumerable
ways of seeking to attain its objectives.

Strategies define how organizations should
use their resources to meet their objectives.

Hence,
… strategies put constraints on employees to
focus activities on what the organization does
best or areas where it has an advantage over
competitors.
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Control ...

Strategic control …
» Is our strategy (still) valid?
» Strategy revision -- “intended” vs. “emergent” strategies.

Management Control …
– Are our employees likely to behave appropriately?
(design)
» Do they understand what we expect of them?
» Will they work consistently hard and try to do what
is expected of them?
» Are they capable of doing what is expected of them?
– Do our employees behave as expected? (execution)
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Planning and control ...
OBJECTIVE SETTING
PLANNING
Strategy Formulation
Strategic Control
CONTROL
Strategy Implementation
Management Control
 predominantly external focus;
 predominantly top-management
responsibility;
 sometimes very unsystematic,
implicit and/or emergent.
 predominantly internal focus;
 relevant for every superiorsubordinate relationship;
 more systematic and rhythmic.
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The planning / control cycle ...
Goals
Objective Setting
Strategy Formulation
Strategy Implementation
Strategic Control
Management Control
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The basic control problem ...

Management control is about encouraging
PEOPLE to take desirable actions,
» i.e., it guards against the possibilities that employees will
do something the organization does not want them to do,
or, fail to do something they should do.

Hence, management control has a ...
… BEHAVIORAL ORIENTATION !

If all personnel could always be relied on to do what is
best for the organization, there would be no need for a
management control system.
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Recall that ...

Management Control is about taking steps to help
ensure that the employees do what is best for the
organization.

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
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Lack of direction ...

Employees do not know what the organization
wants from them.

When this lack of direction occurs, the likelihood
of the desired behaviors occurring is obviously
small.
Remedy: COMMUNICATION + REINFORCEMENT !
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Motivational problems ...

When employees ‘choose’ not to perform as
their organization would have them perform.

Because …
– Lack of goal congruence
» Individual goals do not coincide with organizational goals.
– Self-interested behavior
Statement!!
» Generally, individuals are prone to being “lazy” ...

e.g., take long lunches, overspend on things that make
life more pleasant, use of sick leaves when not sick, etc.
Remedies? » More extreme examples of motivational problems:

Employee crime (fraud and theft).
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Personal limitations …

Sometimes, people are “unable” to do a good job because of
certain personal limitations they have.

Some examples / causes:
–
–
–
–

lack of requisite knowledge, training, experience;
employees are promoted above their level of competence;
some jobs are not designed properly;
etc.
Remedies:
– Training
– Job assignment / promotion
– Job design
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Management control is more than ...

A simple cybernetic control system involving
a single feedback loop, like a thermostat …
» Detector
» Assessor
» Effector

 measure performance;
 compare with pre-set standard;
 take corrective action.
Many controls don’t focus on measured performance ...
» e.g., direct supervision, employee hiring standards,
codes of conduct.

Many controls are proactive rather than reactive …
» i.e., they are designed to prevent control problems before the
organization suffers any adverse effects on performance.
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Control and “good” control ...

Again, … management controls include all the devices
managers use to ensure that the behaviors and decisions
of people are consistent with the organization’s objectives
and strategies.

“GOOD CONTROL” is said to take place when there is …
– a “high” probability that the firm’s objectives will be achieved;
– a “low” probability that major unpleasant surprises will occur.

Therefore, controls must be:» Future-oriented
» Objectives-driven
» Economically desirable
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Control can be achieved through ...
 Control
Problem Avoidance
 Management
Control Systems
» Action Controls;
» Results Controls;
» People Controls.
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Control-problem avoidance ...

Three strategies …
– Activity elimination
» e.g., subcontracts, licensing agreements, divestment.
– Automation
» Computers / robots eliminate the human problems
of inaccuracy, inconsistency, and lack of motivation;
» Only applicable to relatively easy decision situations;
» Automation can be very costly.
– Centralization
» Superiors reserve for themselves the most critical
decisions.
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Control alternatives …

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 ...
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Depending on ...
Excellent
Action Control
and/or
Action Control
Results Control
(e.g., large projects)
Results Control
Poor
(e.g., movie director,
SBU-manager)
High
People Control
(e.g., research lab)
Low
Knowledge of which specific actions are desirable
Ability to measure results on important performance dimensions
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Overview ...
Can people be avoided?
(e.g., automation, centralization)
Yes
No
Can you rely on people involved?
No
Yes
Yes
Can you make people reliable?
Control-problem
avoidance
People controls
No
Have knowledge about what Yes Able to assess whether
specific actions are desirable?
specific action was taken?
Yes
No
Have knowledge about what
results are desirable?
No
Action controls
Yes
Able to measure results?
Yes
Results controls
?
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