Management Control System in Use - Research Paper Example

? Management Control System in Use Review and Application A number of different management perspectives and business environments have led to the development of differing management control systems over the years. Businesses and companies must keep a careful track of what management control techniques and strategies they are implementing in order to remain relevant to the needs of the stakeholders. Given that human resource is one of the most important stakeholders in the overall business environment, there is need to keep them motivated and aligned to business objectives. Recent years have seen the careful demarcation of different management control systems that need to be looked into detail before choosing what kind suits an organisation and its business environment as the best. 2. Table of Contents 3. Introduction A management control system (MCS) refers to a framework or mechanism that is used to gather, segregate and analyse information in order to evaluate the performance of various organisational resources. The organisational resources being scrutinised may include (but are not limited to) human, financial and physical resources as well as the entire organisation in the context of organisational strategies. MCS is also critical in influencing the behaviour of organisational resources in order to implement and sustain organisational strategies. The implementation of MCS in an organisation may be carried out under a formal or an informal umbrella (Otley, 1994). Management control has been defined as the process used by managers in order to influence the behaviour of other organisation members in order to implement organisational strategies. MCS can be seen as the tools used to navigate the organisation in the direction of its strategic objectives and hence to competitive advantage. The management controls used are just one of the tools that can be utilised by management in order to implement the required strategies to drive strategic advantage. However, it must be borne in mind that strategies could be implemented using a number of different avenues such as management controls, human resource management, organisational structure and culture (Anthony & Govindarajan, 2007). In contrast to this view, it has been argued that management control system is a black box i.e. it is an operation whose exact nature is not decipherable. It is argued that management control systems rely on the behaviour of managers and this behaviour cannot be properly expressed through equations so it is predictable yet unquantifiable (Anthony & Young, 1999). Others have defined management control systems as a set of integrated techniques that can be utilised for collecting and using information in order to motivate employee behaviour and in order to analyse their performance (Horngren et al., 2005). This text will investigate the nature of management control systems further using an appropriate literature review but will not implement the findings of this review as access to a workplace could not be secured. 4. Introduction to Management Control Systems Control has been defined in different ways over time (Redda, 2007). The more traditional research carried out on the issue tends to define control as an exercise carried out in order to monitor division managers (Otley, 1995). However, it has also been argued that such a point of view may not be applicable and up to date in today’s more flexible environment. More modern reflection on this issue reveals that monitoring employees is not enough in itself but instead it is necessary to support the employees in archiving the goals and objectives of the business. Essentially management control system is an interdisciplinary issue as shown in the diagram below. Figure 1 - Management control system as an interdisciplinary phenomenon In contrast to this view, Merchant and Otley (2007) contend that “a management control system is designed to help an organization adapt to the environment in which it is set and to deliver the key results desired by stakeholder groups, most frequently concentrating upon shareholders in commercial enterprises.” On the other hand still Merchant and Van der Stede project the idea that control systems are implemented in order to achieve two basic functions: strategic control; management control. The strategic control facet determines if the strategy chosen and implemented by the organisation is valid enough for the chosen goals and objectives. In contrast, management control places the question: “Are our employees likely to behave appropriately?” In itself this question can be broken down into various parts as below (Merchant & Van der Stede, 2007): 1. Do employees understand what is expected of them? 2. Will employees work hard consistently and will they try to accomplish what is expected of them? 3. Are employees capable of doing a good job? The real point in installing a MCS in an organisation is so that the questions listed above can be answered affirmatively. In addition, Merchant and Van der Stede have developed a reputed framework in order to classify MCS by building on previous models. The presented model can be seen as being built on the models presented by Ouchi (1979, 1980)1. In contrast to the Ouchi models, the controls in the Merchant and Van der Stede (2007) models are distinguished depending on the object of control. Management controls have been defined into four broad categories that are: results controls; action controls; personnel controls; culture controls. Additionally some researchers have also added patrimonial controls to complement the cultural controls of Merchant and Van der Stede (2007) to make them more capable (Sujuko & Hopper, 2007). Some other researchers have also presented the idea that management controls can be framed using two different formats namely the Balanced Score Card concept (Norreklint, 2003) as well as the Tableau de Bord concept or a mixture of both concepts (Epstein & Manzoni, 1998) (Bourguignon et al., 2004). The views expressed in this approach are also consistent with ideas presented by other researchers working on this issue (Catasus et al., 2007) (Mundy, 2010). The application of MCS can be seen as efforts to make various aspects of strategy operational. In order to optimise the results achieved in this manner, it is essential that both the resulting management control system and the strategy ought to be compatible with existing organisational culture. A number of different control systems are presented below that were found in literature and need to be treated as different control systems rather than as a conglomeration. 5. General Management Control Systems The contention behind a management control system is to control employee behaviour such that the displayed behaviour is acceptable to organisational framework(s). When management control is effectively implemented then the management is assured that no “major unpleasant surprises” are coming their way. A perfect control would imply that the various parts composing the control system would perform in a foolproof manner. This would imply that all employees would tend to behave in an appropriate manner at all points in time. Management control systems are costly to install and implement and so it is rare that an implemented perfect control system would have a cost effective solution to support it. Instead of tabulating the costs required to implement the management control system, it is preferable to estimate the costs that are induced due to the lack of a perfect control system. This cost is better known as control loss. Optimal control is achieved when the control loss tends to be smaller than the costs required in order to implement one or more strong forms of control (Merchant & Van der Stede, 2007). Generally as the size of a company increases (either due to organic means or due to acquisitions and mergers) the need for greater formalisation of procedures especially for action accountability becomes greater. Consequently, the company may also introduce greater and more elaborate systems in order to regulate results controls (Merchant & Van der Stede, 2007). As a result of this change it is typical for organisations to place greater emphasis on written communications that tends to consume more time. It has also been suggested that the introduction and use of written communication in place of oral communication tends to increase the amount of misunderstandings present therefore leading to greater chance for conflict. The implementation of newer more elaborate control systems and the resulting increase in written communication should be considered in the light of increases in efficiency. The trade off between increases in costs and increases in the likelihood of achieving organisational objectives should be balanced well against each other. Only when a fitting compromise is achieved should the organisation move to implement further controls. There is a general understanding that when things get measured then they get done as well. Although this method of thinking is highly accepted but this belief is questioned by certain researchers who hold that “mobilisation” must be accounted for as well (Catasus et al., 2007). The use of the term “mobilisation” refers to beckoning attention, resources and strategies in a manner such that action results from this mobilisation. It has been argued thus that the effects of MCS can be compromised if the management tends to mobilise the organisation for any actions that stand in opposition to or compromise the actions promoted by the control system. Based on these ideas, it could be argued that frequent mobilisation tends to indicate that the set of company strategies, the MCS or a combination of both have been insufficient or ineffective in dealing with the business environment. However, this may not be the only explanation and it could alternatively be argued that frequent mobilisation indicates that the company’s business climate is altering rapidly for already established systems and plans to deal with it effectively. 5.1. Results Controls The facet of results controls is based on influencing employee behaviour through the use of information extracted from measures of employee work outcome. The implementation of results controls ensures that only the most talented and hardest working employees are rewarded instead of employees who have good relations in the organisation structure or employees with greater seniority levels. According to Merchant and Van der Stede: “The combinations of rewards linked to results inform or remind employees as to what result areas are important and motivate them to produce the results the organization rewards. [...] The organization does not dictate to employees what actions they should take; instead employees are empowered to take those actions they believe will best produce the desired results.” However, it is not possible to use results controls all the time. As per Merchant and Van der Stede (2007) results controls “are effective only where the desired result areas can be controlled (to a considerable extent) by the employee(s) whose actions are being influenced and where the controllable result areas can be measured effectively.” Result controls could be a highly effective method of dealing with management control as these methods tend to focus on the produced results not on the control of employee’s individual and collective actions. One of the largest advantages offered by results controls is the fact that it enables effective control even if the management is not totally clear about the best possible line of action. This is extremely fitting for situations where the market is highly turbulent and may demand “on the feet thinking”. This line of action also provides employees with a greater degree of autonomy that in turn augments the overall motivation they have. It has been suggested that results controls are highly effective in dealing with situations where the business environment is rapidly modifying or where creative environments may be required (Merchant & Van der Stede, 2007). When placed in this context it must be noted that a combination of loose tight controls would also serve to enhance the overall creativity and innovation. However, on the darker side of the picture it must be noticed that using the results controls approach the employees are strained further. This occurs as there is greater demand from employees for competence, motivation, ability as well as morals and ethics. Without these accelerated demands there is little probability for the overall scheme to succeed. 5.2. Action Controls In contrast to results controls, action controls span the domain of actions that should be taken by employees. It has been suggested that action controls tend to ensure “that employees perform (do not perform) certain actions known to be beneficial (harmful) to the organization”. However, there is a strict limitation to the use of such controls because “they are feasible only when managers know what actions are (un)desirable and have the ability to ensure that the (un)desirable actions (do not) occur.” (Merchant & Van der Stede, 2007) The authors have also mentioned two distinct forms of action controls as behavioural constraints and action accountability. Behavioural constraints have been described as “a negative form of action control. [...] The constraints can be applied physically or administratively. [...] One common form of administrative control involves the restriction of decision-making authority.” (Merchant & Van der Stede, 2007) This indicates clearly that the employee’s decision-making powers are limited as per their vertical position in the organisation so that any important decisions must be taken in consultation with the boss. In contrast to this, the domain of action accountability “involves holding employees accountable for the actions they take.” (Merchant & Van der Stede, 2007) In this sense it becomes important to demarcate what kinds of actions should or should not be taken and these ideas should be clearly communicated to the employees. In general practice, codes of conduct are carved out in order to appraise employees as to what actions they will be held accountable for. As per Merchant and Van der Stede (2007) the direct most type of control possible are action controls. This form of controls strategy allows to control employee behaviour on a highly direct level and is also useful in formulating behavioural constraints, pre-action reviews, redundancy and action accountability. Action controls have a number of advantages to offer when compared to other forms of control such as the effective documentation of past successful practices that an organisation implemented. Furthermore, it has been felt that if there is the need for greater standardisation or if employee effectiveness needs bolstering or if there are harmonisation based issues between employees then action controls are the natural choice (Merchant & Van der Stede, 2007). However, it must be borne in mind that there are inherent disadvantages carried by action controls due to their very nature. For one thing a number of employees could be expected to react negatively to action controls as these controls are the most overt form of control. This kind of control strategy tends to provoke the greatest opposition too and so inertia to change can be seen as bolstering as a result. 5.3. Personnel Control The domain of personnel controls is based entirely on the employee’s intrinsic predisposition to both control as well as motivate themselves. In this respect, two of the most prominent methods of implementing personnel controls include the selection and training of employees (Merchant & Van der Stede, 2007). On a more practical note, personnel controls are nearly always present in organisations. This type of control scheme depends heavily on the will of the employees to internalise these controls. This takes place using the process of identification. Trainor (1997) describes this as resulting from the employee or ritualised agent merging his sense of self with that possessed by the organisation. This enables the employee or ritualised agent to naturally strive in a manner that is in the best interest of an organisation. In this manner every single employee effectively controls and motivates themselves. It has been found that such controls are highly effective because most people already want to do a good enough job. When employees are able to do a job well, it provides them with the positive feelings of self respect and satisfaction (Merchant & Van der Stede, 2007) (Jarnegin & Slocum, 2007). It must also be noted that employees who are employed in their work with a strong sense of satisfaction require very little leadership and formal control. This finding has also been corroborated by other research on the matter (Drucker, 1999) that describes the knowledge workers’ overwhelming responsibility for their inputs. 5.4. Cultural Controls The last form of controls expounded by Merchant and Van der Stede’s (2007) provided framework are cultural controls. According to the authors, these controls “are designed to encourage mutual monitoring; a powerful form of group pressure on individuals who deviate from group norms and values.” These controls can be seen as mutual accountability as well as social or group pressure tactics that encourage employees to remain in line with the organisational objectives. Culture tends to exert a powerful influence on organisations in their ability to carry out their objectives and goals with success. It has been recognised for quite some time now that organisational culture has a dominant part to play in organisational outcomes (Schwartz & Davis, 1981). The rule of conduct being used by an organisation depends largely on the ideas that the conduct is intended for. It can be inferred that means are being shaped by the ends they must achieve and these in turn are dependent on the prevalent ideology in society which can be classified simply as culture (Redding & Witt, 2010). Much similar to the explanation presented before Merchant and Van der Stede (2007) contend that the organisational culture is built upon norms, shared traditions, attitudes, common ways of behaving, values, beliefs and ideologies. In contrast to organisational aims and objectives that evolve with time, the facet of culture is far more persistent and tends to remain near constant over time. Culture tends to remain as is even though the organisational strategies, objectives, goals and even organisational leaders might change. There is a lot of inertia associated to changing organisational culture and efforts to change organisational culture require time, awareness as well as efforts directed to this effect. Organisational culture carries with itself the intrinsic property of having coercive elements that can be utilised for implementing control on subordinates. The subordinates on the other hand have a clear option of either complying with cultural expectations by adapting to the required cultural values or they must face exclusion from the group in the form of loss of employment (Schein, 1999). It can be surmised from this that cultural controls rely overwhelmingly on powerful forms of group or peer pressure that tends to be as strong as close the group members are to each other (Merchant & Van der Stede, 2007). A number of organisations tend to purposely form their organisational culture through the use of means such as codes of conduct, code of ethics or through using statements of vision and mission along with a management philosophy of some kind. Cultural controls are strengthened using methods such as providing rewards on collective achievement. When cultural controls are evaluated closely in the organisational context it becomes clear that they follow the same principles as cultural controls in society do. When a member of society breaks a cultural norm, he or she is excluded from the group or is ostracised. Similar to this principle, members of organisations are ostracised through firing mechanisms in case they fail to live up to the organisational expectations. One major difference is that cultural controls are used more explicitly on control group members. Patrimonial controls are also related to cultural controls. These forms of control are highly influential in societies that have been affected by Confucian teachings such as China. The employees of organisations in these cultures tend to view the organisation’s owner or manager as a father like figure. This allows the organisation owner or manager to retain either most of or the entire amount of authority while the subordinate staffs are expected to be highly obedient such that they do not question the father figure’s authority. In these forms of controls, the power is not distributed throughout the organisation and if it is distributed then it is provided only to the most trusted employees. The leader of the organisation is seen as the absolute authority that is not to be challenged but he is also seen as responsible for the overall well-being of employees. Within the domain of these controls, a personal approach is more favourable that is often implemented at the expense of more formal methods of control. The implementation of patrimonial controls often leads to the growth of greater adaptability, obedience and goal congruence in employees. However, on the other hand such an approach can also lead to producing negativity such as nepotism, promotion of a culture of secrecy, classifying certain people as outsiders and providing them with low authority as well as restricted opportunities to advance in the organisational structure. Possibly the greatest disadvantage offered by this approach is the discouragement of employees who want to take risks. On the other hand, this approach also tends to restrict the chances of conflict amongst employees (Sujuko & Hopper, 2007). 6. Application of Management Control System This text will concentrate on the application of MSC to Clas Ohlson which is a large retailer for do it yourself (DIY), leisure, electronics and other related products. Founded in the aftermath of the First World War, the Clas Ohlson brand has expanded into multiple new markets over the years including Norway, Finland, United Kingdom and China (Clas Ohlson, 2012). The company has managed to growth at the rate of ten to twenty new stores per annum after the eighties under its most recent CEO. The management control system in use at Carl Ohlson is a combination of different principles that have been carved out through practice over the years. Given the nature of the business it makes a lot of sense to provide employees with group rewards because they tend to work as large teams in managing retail stores. In this context, Carl Ohlson tends to distribute profits in the forms of bonuses and other rewards to employees based on the performance of the store they work at. However, this retribution is far removed from the more liberated models in use for example at John Lewis Partnership. Instead, the distribution of profits as bonuses in the form of group rewards are more limited to the particular store that performed well although the store’s staff may have nothing to do with the marketing that brought the clients through the doors. These forms of collective reward techniques are geared in general for the lowest level of employees who serve customers as sales staff. In contrast to these strategies, the managers at Carl Ohlson are paid fixed salaries along with bonuses based on their achievement of performance targets. This seems more close to the overall results control method given the fact that this tier of employees is provided with rewards based on their actual performance levels. In addition to this, Carl Ohlson also employs cultural controls through the promotion of a similar corporate culture throughout all of Carl Ohlson’s enterprises. Furthermore, all new Carl Ohlson employees (near managerial grade) must train at the native Insjon facility in order to acquire Carl Ohlson values for implementation in management control. This promotes a uniform Carl Ohlson corporate culture wherever the stores may be located and operating. Also this tends to provide common ground for employees moving from one Carl Ohlson establishment to the other. The domain of action controls and personnel controls is more or less limited at Carl Ohlson because it tends not to fit well with their overall management control strategy. However, there is limited application of such principles based on the store manager’s personal preferences. 6.1. Methodology In order to discern the management control system in use at Carl Ohlson a number of interviews were conducted with various employees serving at various levels in the organisation. This ensured that a holistic picture was created in order to address the concerns of which management control systems were in use. The upper management was provided with interviews using questionnaires that they could fill out and return while middle level management and lower level management were interviewed in person. This ensured that the interview process did not interfere with the day to day activities of the employees at Carl Ohlson. 6.2. Analysis The results of the interviews conducted at Carl Ohlson provided a glimpse in to the combinations of different management control systems being used in the organisation. The interviews with the middle and lower management and the base level employees showed the use of group rewards in order to manage the employees and to keep them motivated. This result conforms to the other studies on the issue that advocate the use of group rewards to deal with large clusters of employees such as in the retail business (Merchant & Van der Stede, 2007). However, it was felt that not all employees were completely satisfied with these forms of control as they provided equal remuneration to all employees at a level without considering the actual input from the individual employee. This tended to produce some unsatisfied employees as well as a larger cluster of satisfied employees which was in line with previous studies on the issue (Redda, 2007). This stood in contrast to the interview results for higher management at Carl Ohlson who felt that a reward based system on performance was just. Carl Ohlson’s strategy to reward higher level management based on store performance has been successful judging from their expansion in a small period of time. This also serves to confirm previous studies on the issue that relate the positive aspects of such reward strategies (Anthony & Young, 1999) (Catasus et al., 2007). 7. Conclusion Based on the arguments presented above it is obvious that a multitude of different management control systems exist and can be implemented and explored in various organisations. All of the various management control systems detailed are based in large part on the framework provided by Merchant and Van der Stede (2007). All of the different approaches presented are possible but possess their own advantages and disadvantages. In order to maximise the benefit from different management control systems, the best practice would be to implement a fitting mixture that is able to cater to the demands of the employees and the business alike. 8. 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