Management Control Systems Chapter 6: Designing and Evaluating mcs

Management Control Systems

• Chapter 6: Designing and Evaluating MCS

Designing control systems ...

• Two basic questions:

• What is desired ?
• What is likely to happen ?

• If what is likely is different from what is desired, then two basic MCS-design questions must be addressed:

• What controls should be used ?
• How tightly should each be applied ?

What is desired ?

• Start from objectives and strategies ...

• They should be important guides to the actions that are expected, especially if they are specific …
• e.g., “Become a leader in the industry ” vs. “15% ROI and 20% sales growth.”

• Identify the key actions (KA)

• i.e., actions that must be performed to provide the greatest probability of success.

• Identify the key results (KR)

• i.e., the few key areas where things must go right for the business to flourish.

What is likely ?

• Three questions:

• Do employees understand what they are expected to do (key actions) or to accomplish (key results)?
• lack of direction
• Are they properly motivated?
• lack of motivation
• Are they able to fulfil their desired roles?
• personal limitations

• The discrepancy between what is desired and what is likely will determine the choice and the tightness of the management control systems.

Choice of controls ...

• The different types of controls (action, results and people controls) are not equally effective at addressing each of the control problems.

Start with people controls ...

• People controls …

• Must always be relied on to a certain extent;
• Have relatively few harmful side-effects;
• Involve relatively low out-of-pocket costs.

• However, it is rare that people controls will be sufficient. In most cases, it is necessary to supplement them with …

• action controls;
• results controls.

• Maybe, you just shouldn’t put all your trust in people !?

Pros and cons of action controls ...

• 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.

Pros and cons of results controls ...

• Behavior can be influenced while allowing significant autonomy.

• They yield greater employee commitment and motivation.

• They are often inexpensive.

• e.g., performance measures are often collected for reasons not directly related to management control.

Choice of control tightness ...

• What are the potential benefits of tight controls?

• In any organization, tight control is most beneficial over areas most critical to the organization’s success.

• What are the costs?

• Are any harmful side-effects likely?

Control system change ...

• As firms grow, their controls evolve, usually towards …

• Increased formalization of procedures ...
• for action accountability purposes; and/or
• Development of more elaborate information systems ...
• for results control purposes.

Keep a behavioral focus ...

• There is no one best form of control ...

• What works best in one company (or area within a company), may not work in another ...
• e.g., accounting personnel vs. design engineers.

• Therefore, it is important to keep the focus on the people involved, because …

• It is their responses that will determine the success or failure of the control system !

• The benefits of controls are derived only from their impacts on behaviors!

Cases

• Disctech, Inc. (p.207 ff.):

• What went wrong?
• What shoud Bill Winslow do to restore confidence at Disctech and prevent similar occurrences in the future?

• Airtex Aviation (p. 238 ff.):

• Did Airtex need a nes control system at the time of the takeover?
• Evaluate the control system that Frank and Ted implemented. Should anything be done differently?