MANAGEMENT AND CONTROL

Objective setting
Knowledge of objectives is a prerequisite for the design of any MCS and, indeed, for any
purposeful activities. Objectives do not have to be quantified and do not have to be
financial, although that is how they are commonly thought of in for-profit organizations.

In any organization, however, employees must have a basic understanding of what the
organization is trying to accomplish. Otherwise, no one could claim that any of the
employees’ actions have purposes, and no one could ever support a claim that the
organization was successful.

Having a simple and easily understood statement of intent is vital for setting clear objectives
and targets.

Strategy formulation
Having set the firm’s strategic intentions or objectives, strategies then define how
organizations should use their resources to meet these objectives. A well-conceived
strategy guides employees in successfully pursuing their organization’s objectives; it
conveys to employees what they are supposed to be doing.

Formal strategic statements are not a sufficient condition for success, however. It is on the
execution side of the management process that MCSs play a critical role.

Management control
Management control focuses on execution, and it involves addressing the general question:
Are our employees likely to behave appropriately?

This question can be decomposed into several parts:

 First, do our employees understand what we expect of them?

 Second, will they work consistently hard and try to do what is expected of them –
that is, will they pursue the organization’s objectives in line with the strategy?
 Third, are they capable of doing a good job?
 Finally, if the answer to any of these questions is negative, what can be done to
solve the management control problems?

All organizations who must rely on their employees to accomplish organizational objectives
must deal with these basic management control issues. Addressing management control
issues, therefore, involves reflecting on how to influence, direct, or align employees’
behaviors toward the achievement of organizational objectives consistent with the
espoused strategy.

Page 1 sur 9
From a management control perspective, strategies should be viewed as useful but not
absolutely necessary to the proper design of MCSs. When strategies are formulated more
clearly, more control alternatives become feasible, and it becomes easier to implement
each form of management control effectively. Managers can, however, design and operate
some types of MCSs without having a clear strategy in mind.

That said, there is some evidence that organizations with formal systems for managing the
execution of strategy outperform those that do not.

Characteristics of good management control

To have a high probability of success, organizations must maintain good management
control. Good control means that management can be reasonably confident that no major
unpleasant surprises will occur. The label out of control is used to describe a situation
where there is a high probability of poor performance, either overall or in a specific
performance area, despite having a sound strategy in place.

Perfect control is obviously not a realistic expectation because it is virtually impossible to

install MCSs so well designed that they guarantee good behaviors. Furthermore, because
MCSs are costly, it is rarely, if ever, cost effective to try and implement enough controls
even to approach the idealized perfect control.

Control alternatives
For the control problems that cannot be avoided, and those for which decisions have been
made not to avoid, managers must implement one or more control mechanisms that are
generally called management controls. The collection of control mechanisms that are used
is generally referred to as a management control system (MCS).

MCSs vary considerably among organizations and among entities or decision areas of any
single organization. That said, they commonly include a combination of action, results, and
personnel/cultural controls,

Elements of results controls

The implementation of results controls involves four steps:

1. defining the dimension(s) on which results are desired;

2. measuring performance in the chosen dimensions;
3. setting performance targets for employees to attain for each of the measures; and
4. providing rewards for target attainment to encourage the behaviors that will lead to
the desired results.

Conditions determining the effectiveness of results controls

Results controls work best only when all of the following conditions are present:

Page 2 sur 9
 1. Organizations can determine what results are desired in the areas being controlled;
2. The employees whose behaviors are being controlled have significant influence on
the results for which they are being held accountable; and,
3. Organizations can measure the results effectively.

To evoke the right behaviors, in addition to being congruent and controllable, results
measures should be precise, objective, timely, and understandable. Even when a measure
has all of the above qualities, it should also be cost efficient.

Other forms of control

Results controls are not the only form of control. Organizations can supplement or replace
results controls with other forms of control that will make employees act in the
organization’s best interest.

1- One such type of control, action controls, involves ensuring that employees
perform/do not perform certain actions known to be beneficial/harmful to the
organization. Although action controls are commonly used in organizations, they are
not effective in every situation. They are feasible only when managers know what
actions are desirable/undesirable and have the ability to ensure that the
desirable/undesirable actions occur/do not occur.
2- Other forms of control, personnel controls, are designed to make it more likely that
employees will perform the desired tasks satisfactorily on their own because the
employees are experienced, honest, and hard-working and derive a sense of self-
realization and satisfaction from performing tasks well.
3- Related, cultural controls exist to shape organizational behavioral norms and to
encourage employees to monitor and influence each other’s behaviors.

Action, personnel, and cultural controls are part of virtually every management control
system (MCS). In some organizations, they are so important they can be said to be the
dominant form of control.

Elements of action controls

Action controls are the most direct form of management control because they involve taking
steps to ensure that employees act in the organization’s best interest by making their
actions themselves the focus of control. Action controls take any of four basic forms:
behavioral constraints, preaction reviews, action accountability, and redundancy.

Behavioral constraints

Behavioral constraints are a “negative” or, as the word suggests, a “constraining” form of
action control. They make it impossible, or at least more difficult, for employees to do things
that they should not do. The constraints can be applied physically or administratively.

Page 3 sur 9
 - Most companies use multiple forms of physical constraints, including locks on desks,
computer passwords, and limits on access to areas where valuable inventories and
sensitive information are kept.
- In addition to, or in lieu of, physical constraints, administrative constraints can be
used to place limits on an employee’s ability to perform all or a portion of specific
tasks or actions. One common form of administrative control involves the restriction
of decision-making authority.
- Another common form of administrative control is generally referred to as separation
of duties.
- Sometimes physical and administrative constraints can be combined into so-called
pokayokes that are designed to make a process or system foolproof. A poka-yoke is
a step built into a process to prevent deviation from the correct order of steps; that is,
where a certain action must be completed before the next step can be performed.

Preaction reviews

Preaction reviews involve the scrutiny of action plans. Reviewers can approve or
disapprove the proposed actions, request modifications, or ask for a more carefully
considered plan before granting final approval. A common form of preaction review takes
place during planning and budgeting processes, characterized by multiple levels of reviews
of planned actions and budgets at consecutively higher organizational levels.

Action accountability

Action accountability involves holding employees accountable for the actions they take.

The implementation of action accountability controls requires:

1. defining what actions are acceptable or unacceptable,
2. communicating those defined actions to employees,
3. observing or otherwise tracking what happens, and
4. rewarding good actions or punishing actions that deviate from the acceptable.

The actions for which employees are to be held accountable once properly defined are
typically communicated through
- work rules,
- policies and procedures,
- contract provisions,
- company codes of conduct.

It is common in fast-food franchises to prescribe and communicate through procedures and

clarify and reinforce through training how virtually everything should be done, including how
to handle cash, how to hire personnel, where to buy supplies, and what temperature to
keep the oil to fry chips.

Page 4 sur 9
For example:

At McDonald’s, a memo from the vice chairman stated:

“While we don’t want to limit your creativity, from an operations standpoint there are
three must-dos:
1. Staff your fry station all day long.
2. Check times and temperatures three times a day.
3. Remember to salt your fries properly.”

Similarly, nurses use preoperative checklists to help ensure that they prepare patients
thoroughly for surgery.

Although action accountability controls are most effective if the desired actions are well
communicated:

- Communication is not sufficient by itself to make these controls effective.

- The affected individuals must understand what is required and be confident that their
actions will be noticed and rewarded or punished.

Actions can be tracked in several ways:

 Employee actions can be observed directly and nearly continuously, as is done by

direct supervisors on production lines. This is called direct supervision or monitoring.
 They can be tracked periodically, such as retail stores’ use of undercover mystery
shoppers to evaluate the service provided by store clerks.
 They can also be tracked by examining evidence of actions taken, such as activity
reports or expense documentation. Examining evidence about compliance with pre-
established action standards is a key function of internal audit.

Technological advances have allowed greater monitoring in terms of both scope and
frequency.

Action accountability is usually implemented with negative reinforcements; that is, with
punishments instead of with rewards.

For example:

 Employees late for their shift might lose a day’s bonus, and those who miss their
shift may lose their bonus for the week.
 Truck drivers whose every move is tracked with a GPS device can be disciplined for
driving unsafely or for taking extra time on their lunch breaks.

Redundancy

Redundancy, which involves assigning more employees (or equipment) to a task than is
strictly necessary, or at least having backup employees (or equipment) available, also can

Page 5 sur 9
be considered an action control because it increases the probability that a task will be
reliably completed. Redundancy is common in computer facilities, security functions, and
other critical operations.

However, it is rarely used in other areas because it is expensive. Further, assigning more
than one employee to the same task usually results in conflict, frustration, and/or boredom.

Prevention vs. Detection

Action controls can also be usefully classified according to whether they serve to prevent or
detect undesirable behaviors. This distinction is important.

Prevention controls are, when they are effective, the most powerful form of control because
the costs and harm stemming from the undesirable behaviors will be avoided.

Detection controls differ from prevention controls in that the former are applied after the
occurrence of the behavior. Still, they can be effective if the detection is made in a timely
manner and if it results in a cessation of the behavior and a correction of the effects of the
harmful actions. Also, the promise of prompt detection of harmful actions is itself
preventative; it discourages individuals from purposefully engaging in such behaviors.

Most action controls are aimed at preventing undesirable behaviors. The exception is action
accountability controls.

Although action accountability controls are designed to motivate employees to behave

properly, one cannot verify whether proper actions were taken until evidence of the actions
is gathered. However, if the evidence-gathering is concurrent with the activity, as it is with
direct supervision and real-time monitoring, then action accountability control can approach
the desired state of prevention of undesired actions.

For example, truck drivers are monitored by way of so-called “critical event reports”
generated by a truck’s computers, recording things such as hard braking, activation of the
vehicle’s stability control system, or other events that might indicate unsafe driving; and

Page 6 sur 9
traders in banks are monitored by “transactions reports,” which use aggregated data to spot
insider trading and market manipulation.

Table 3.2 shows examples of common forms of action controls classified according to
whether their purpose is to prevent or detect problems.

Conditions determining the effectiveness of action controls

Action controls cannot be used effectively in every situation. They are effective only when
both of the following conditions exist, at least to some extent:

1. Organizations can determine what actions are (un)desirable; and,

2. Organizations are able to ensure that the (un)desirable actions (do not) occur.

However, like results controls, action controls usually cannot be made near-perfect, or at
least it would be prohibitively expensive to make them near-perfect. As a consequence,
organizations use personnel and cultural controls to help fill some gaps. These controls
motivate employees to control their own behaviors (personnel controls) or to control each
other’s behaviors (cultural controls).

Elements of personnel controls

Personnel controls Personnel controls build on employees’ natural tendencies to control or
motivate themselves.

Personnel controls serve three purposes.

- First, some personnel controls help clarify expectations. They help ensure that each
employee understands what the organization wants.

Page 7 sur 9
 - Second, some personnel controls help ensure that each employee is able to do a
good job; that they have all the capabilities (e.g. experience, intelligence) and
resources (e.g. information and time) needed to do the job.
- Third, some personnel controls increase the likelihood that each employee will
engage in self-monitoring.
Self-monitoring is an innate force that pushes most employees to want to do a good
job, to be naturally committed. Self-monitoring is effective because most people have
a conscience that leads them to do what is right, and they are able to derive positive
feelings of self-respect and satisfaction when they do a good job and see their
organization succeed.
Self-monitoring has been discussed in the management literature under a variety of
labels, including intrinsic motivation and loyalty.
Personnel controls can be implemented through
(1) selection and placement,
(2) training, and
(3) job design and resourcing.
In other words, finding the right people to do a particular job, training them, and
giving them both a good work environment and the necessary resources is likely to
increase the probability that the job will be done properly.

Elements of cultural controls

Cultural controls Cultural controls are designed to encourage mutual monitoring; a powerful
form of group pressure on individuals who deviate from group norms and values.

In some collectivist cultures, such as Japan, incentives to avoid anything that would
disgrace oneself and one’s family are paramount. Similarly, in some countries, notably
those in Southeast Asia, business deals sometimes are sealed by verbal agreement only.
In those instances, the dominant social and moral obligations are stronger than legal
contracts. But strong cultural controls produced by mutual monitoring processes also exist
within single organizations.

Cultures are built on shared traditions, norms, beliefs, values, ideologies, attitudes, and
ways of behaving. The cultural norms are embodied in written and unwritten rules that
govern employees’ behaviors. Organizational cultures remain relatively fixed over time,
even while goals and strategies necessarily adapt to changing business conditions.

To understand an organization’s culture, ask long-time employees questions like: What are
you proud of around here? What do you stand for? What does it take to get ahead?

If a strong organizational culture exists, the seasoned employees will have consistent
answers to these questions even when the answers are not otherwise codified. When that
is the case, strong organizational cultures can prompt employees to work together and be
aligned. It also implies, however, that despite the benefits of direction and cohesiveness,

Page 8 sur 9
strong cultures sometimes can become a source of inertia or create blind spots, which can
get in the way of needed change and adaptation in rapidly changing environments.

Organizational cultures can be shaped in many ways, both in words and by example,
including by way of codes of conduct, group rewards, intra-organizational transfers,
physical and social arrangements, and tone at the top.

A company’s culture is likely to affect every aspect of how the organization operates and
how people work. Research from the Chartered Institute of Personnel and Development
(CIPD) has consistently found that culture will affect a business’s success because, unlike
strategy, it is hard to imitate and can differentiate organizations from their competitors.

In the words of management guru Peter Drucker, “culture eats strategy for breakfast.”

As such, personnel/cultural controls can have distinctive advantages over results and action
controls. They are usable to some extent in almost every setting, their cost is often lower
than more obtrusive forms of controls, and they might produce fewer harmful side effects.
Moreover, “soft” personnel/cultural controls have also been shown to make “economic
sense” as surveys and evidence suggests that “it pays to be nice to employees.”

Management Control Systems - Performance Measurement, Evaluation and Incentives -

Kenneth A. Merchant, Wim A. Van der Stede, - Fourth Edition - Pearson Education
Limited, 2012, 2017.

Page 9 sur 9