When is it Worth it?
Chapter 5
Kent Thorén INDEK / KTH. Builds on Merchant and Van der Stede
Recall that

Controls benefit is a higher probability that
people will both work hard and direct their
energies to serve the organization’s interests.

However, there are also costs of controls:

Direct out-of-pocket costs

Harmful side-effects
2
Effectiveness of Control

Control system effectiveness depends on
whether the direct and indirect costs of
control are reasonable considering:
1.
The (behavioral) benefits of the controls
2.
The cost of not having control
3
Direct Costs

The direct monetary costs related to operating control
systems.

For example:

Investments in information systems.

Managerial time spent on reporting and monitoring.

Other administrative costs.

Costs of rewards to make results controls and action
accountability effective.
4
Direct Costs (cont.)

Quantification of direct costs can be more or
less straightforward:
 Easy
to quantify:
cost of cash bonuses, internal audit staffs, etc.;
 Difficult
to quantify:
time spend on planning and budgeting activities,
on pre-action reviews, etc.
5
Indirect Costs

Dysfunctional effects linked to different control
systems

Behavioral displacement

Gamesmanship

Operating delays

Negative attitudes
6
Negative Attitudes

Job tension, conflict, frustration, resistance, etc.


Action controls often “annoy” professionals, but
also lower-level personnel …


Are often coincident with many harmful behaviors, such
as, gaming, lack of effort, absenteeism, turnover, etc.
Sometimes difficult to avoid: e.g., it is difficult for people to enjoy
following a strict set of procedures for a long period of time ...
Results controls ...

Lack of employee commitment to the performance targets;



targets are too difficult, not meaningful, not controllable.
Performance evaluations are perceived as being unfair;
The controls are implemented in a people-insensitive, nonsupportive way.
7
Design & Evaluation
Chapter 6
A Framework for Making Control
Systems Trade-offs
9
Control System Trade-offs II


What is desired!?

Key actions - i.e., actions that must be performed to
provide the greatest probability of success.

Key results – i.e. the few key areas where things must go
right for the business to flourish.

depend on strategy etc.
What is likely!?

Investigate potential for each control problem:

Lack of direction,

Motivational problems,

Personal limitations.
10
Control System Trade-offs III

Whenever “what is likely” differs form “what is
desired”, two sets of design questions should be
addressed:
1. Select types of controls
2. Choose how tightly to apply each type of control
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A Simple Strategy Formulation
Process
1.
Identify KSFs of the industry
2.
Review the firm in terms of how it meets the KSF
3.
Compare with e.g. the largest rival (or several rivals) to
make a more objective scoring
4.
Project the future-state scoring to illustrate gaps
5.
Use either the likely or the desired future state
6.
Prioritize each KSF and draft high-level actions to maintain
strong points, close critical gaps etc. This provides a starting
point for strategy formulation
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A Simple Strategy Formulation
Process cont.
Industry KSF
Weakness
Strength
Raw material access
Strategy
Implications
Secure raw material
partnership
Gap
Manufactring yield
R&D effectiveness
Gap
Improve R&D
Gap
Review and enhance
sales network
Time-to-market
Sales network
-2
-1
Equal
+1
+2
Current position vs. main rival
Desired future position vs. main rival
Define Desired
Behaviors
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What is Desired?
Customer buying
process
Awareness
Appeal
Prefer
Purchase
Direct influence
Desired salesperson
behavior
Mention
Advocate
Compare
Book
14
Start Outlining Control System
Needs
What is desired?
Mention
Advocate
Compare
Book
What is likely?
-Motivation
-Direction
-Limitations
Mention of our
products
Poor
promotion
Not likely
today
On customer
request
Control system
candidates?
-
(Tools and)
(Tools and)
(Tools and)
Training
Training
Training
Performance
measurements
Rewards
PC + RC
PC + RC
Control system types
PC
15
Then Set Performance Areas,
Target Levels etc.
Increase Activity Levles
% of sales situations
100
Current
90
Target next FY
80
70
60
50
40
35-40%
30
20
10-12%
10
Mention
Advocate
Compare
Book
16
Pros and Cons of Control
Mechanisms
Action
controls
Direct link between action and control
Documentation and learning
Efficient coordination (if technology is
simple and stable)
Proactive
Stifling creativity and fast
adaptation
Foster sloppiness
Negative attitudes
Behavioral displacement risk
Often costly (indirect costs)
Results
controls
Feasibility due to monetary focus
Can be used to enhance autonomy
Relatively inexpensive
Imperfect link to actions
Shift risk to employees
Risk of gamesmanship
Motivation vs communication
Costly (direct & indirect costs)
Reactive
Personnel Relatively inexpensive
or cultural (except selection and training)
controls Proactive
Difficult to change quickly
(particularly cultural controls)
Requires significant trust
17
Pros and Cons of Control Mechanisms II

The different types of controls (action, results and
people controls) are not equally effective at
addressing each of the control problems.
Results accountability
Action controls
- Behavioral constraints
- Preaction reviews
- Action accountability
Lack of
direction

Lack of
motivation






Personal
limitations


People controls
- Selection / placement
- Training
- Provision of resources
- Strong culture
- Group-based rewards










18
Conclusions III
Can people be avoided?
(e.g., automation, centralization)
Yes
Control-problem
avoidance
No
Yes
Can you rely on people involved?
No
Yes
Can you make people reliable?
People controls
No
Have knowledge about what
specific actions are desirable?
Yes
Able to assess whether
specific action was taken?
Yes
No
Action controls
Have knowledge about what
results are desirable?
No
Yes
Able to measure results?
Yes
Results controls
?
19
Questions chapter 4 & 5


Consider how controls of gaming operations at
Bellagio, if technology could be applied to
monitor dealers work as proposed in the case;
what control systems could be removed and
why?
What could the potential indirect costs be?
20
Questions chapter 6

AirTex does not really have a strategy. What if
it was given a growth mission. What would the
desired behavior be at each department?
What potential control problems would be
candidates for addressing with new control
systems?
21
Strategic Missions

The Four Missions:
Build
Hold
Invest in MS even
at the expense of
ST-earnings / CFs
Harvest
Divest
Maximize
ST-earnings / CFs
even at the
expense of MS
Protect MS and
competitive position
Outright sale Slow liquidation
22