Session 6A: Management Control

1
Session 6A Management Control

• Dr. Frank Selto
• CURISES
• Cost and Managerial Accounting

2
Objectives

• Rationale for management control
• Types of management controls
• Concept of control fit

3
Bounded Rationality

• Economic rationality Incentives are solutions to
  goal incongruity and opportunism
• Behavioral literature Individuals have limits to
  their ability to form and solve complex problems
• Individuals are boundedly rational
• Incentives necessary but not sufficient
• Management control Apply organizational
  knowledge to guide, constrain and motivate proper
  choices
• More than incentives
• Response to bounded rationality

4
Organizational Problem

• Make or Buy?
• Internalize or outsource activities?
• Generic activities outsource control by
  market forces (price, quality, reputation)
• Customized activities internalize or outsource
  control by management controls
• Bureaucracy or contracts

5
Types of Management Controls

• All policies practices to improve decisions
  (Anthony Govindarajan)
• Levers of strategy implementation (Simons)
• Insure that employees understand tasks and work
  consistently (Merchant van der Stede)
• Merchant van der Stedes concrete typology of
  controls
• Personnel controls
• Cultural controls
• Action controls
• Results controls

6
Personnel Controls

• Preventive in nature, including
• Selection of personnel
• Placement of personnel
• Training of personnel
• Education, Certification, Update
• Job design, resources
• Boundaries, Decision rights
• Codes of conduct

7
Cultural Controls

• Preventive and/or corrective
• National culture
• Language, social practice
• Power sharing
• Risk taking
• Individualism
• Organizational culture
• Business practices (meetings, controls,
  compensation, evaluations, etc.)
• Management style

8
Action Controls

• Preventive and corrective
• Direct constraints on
• Industry, size, value range, etc.
• Review of planned actions
• Also can be corrective
• Review of actions taken
• Existence of ex post control has ex ante effect
• Culture of accountability

9
Results Controls

• Corrective and/or incentive
• Existence also has preventive effect
• Rational view Only this control is needed
• Pay for performance
• Action ? Result ? Reward
• Perceived and actual linkages are important to
  effectiveness

10
Management Control Fit Contingencies

• Control success depends on integration or fit
  of controls to context
• Contingent fit intuitively appealing, but
• Contingencies are many and endogenous
• Cannot measure fit
• Finality allows multiple dimensions of fit
• Concept of fit not operational

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How Does One Design a Management Control System?

• Management culture
• Pay for performance
• Pay for tenure
• Management style
• Laissez-faire
• Bureaucratic rules
• Hierarchical or network?
• Top-down
• Bottom-up
• By the numbers
• Trust

12
National and Organizational Culture

• National culture by Hofstede
• Individuality
• Power distance
• Masculinity
• Future orientation
• Organizational culture by Hofstede
• Practices and procedures
• The GE Way
• Finality
• Clan control by Ouchi

13
Normative Prescriptions

• Many and idiosyncratic
• Good illustration of finality
• Also heavy reliance on the financial logic of
  accounting
• Does the company way reliably lead to superior
  profits?
• Is this causality or finality?

14
Management Control Summary

• Firms use portfolio of controls
• Culture, Personnel, Action, Results
• Controls perform multiple functions
• Communication
• Motivation
• Incentives and rewards
• Basis for contracting internally and externally
• Properly done ? control solutions