Untitled Quiz

Management Control

• This is a lecture on management control
• Professor Matthias Sohn from Europa-Universität Viadrina Frankfurt (Oder) is presenting
• The lecture covers various topics, including learning goals, overview, and specifics

Chapter 1: Introduction and Theory

• Learning Goals: What is management control? How is it related to the management process? Why do organizations need management control? What are the key theoretical foundations in management control research?
• Overview: Management and control, Accounting and control, Causes of management control problems, How economics, psychology, and sociology theory informs management control

Management and Control (Lecture 1)

• Management Control: (Merchant & van der Stede, 2017): Includes devices/mechanisms managers use to ensure employee behavior aligns with organization objectives and strategies.
• Management Control Systems (MCS): (Hartmann et al., 2020): Combination of practices designed by top managers to increase the probability lower-level managers/employees behave consistently with the organization's mission, goals, and strategies.
• Key elements: Management, Control, Processes of organizing and directing resources/activities for organizational objectives; Backbone/end of the management process

Overview

• Personnel controls
• Cultural controls
• Personnel/cultural controls and the control problems
• Effectiveness of personnel/cultural controls
• Control costs
• Choice of controls
• Maintaining good control

Personnel Controls

• Serve three purposes: Clarify expectations, Ensure that each employee can do a good job, Self-monitoring
• Personnel Controls Implementation: Selection and placement, Training, Job design and resourcing

Selection and placement

• Screening new employees, Matching job requirements with applicant skills

Training

• What actions/results are expected?
• How can the assigned tasks be performed?
• Positive motivational effects, increased professionalism

Job design and provision of necessary resources

• Employees need resources like information, equipment, supplies, staff support, and freedom from interruption

Cultural Controls

• Established to encourage mutual monitoring among individuals in organizations.
• A powerful form of group pressure on individuals who deviate from group norms and values.
• Based on shared traditions, norms, beliefs, values, ideologies, attitudes, and ways of behaving.
• Embodied in written and unwritten rules.
• Relatively fixed over time.
• Benefits: direction and cohesiveness

Cultural controls

• Value-based controls
• Symbol-based controls
• Clan controls

Codes of Conduct

• Most organizations above minimal size attempt to shape their organizational culture through: Codes of conduct, Codes of ethics, Statements of mission, Vision, Management philosophy
• Broad, general statements of organizational values, commitments to stakeholders.
• Effective codes aim to shape a shared culture, protect, or improve reputation.

Group Rewards

• Incentive plans based on collective achievement: Profit sharing, Gain sharing plans
• Compensation based on overall company/entity performance (rather than individual).
• Encourage broad employee ownership of company stocks.
• Creates a culture of ownership and engagement.

Other Approaches to Shape Organizational Culture

• Intra-organizational transfers or employee rotation
• Help transmit culture
• Physical arrangements (office plans, dress codes, architecture, interior design)
• Institutionalized habits
• Behaviors
• Setting the proper tone at the top: Statements consistent with the desired culture
• Role models: Creating a culture of integrity in organizations

Corporate culture

• Transparency and open information exchange
• Constructive critique and the power of the better argument
• Goal orientation and accountability

Sustainability integration

• 71% of large companies have a sustainability strategy
• 42% of successful companies have it
• 17% of less successful companies have it

Technology, Market, Regulation

• Innovation in product and processes, Big data, Social media, Rating agencies
• Changing demographics of investors, Rising power of customers/society
• Carbon emissions, Human rights, Globalization, standardization
• Incentives, Organizational structure, Performance measures, Sustainability performance, Sustainability reporting, Investors

Q1: Why do organizations need management control systems? Why don't employees naturally work in the best interest of the organization?

• Decentralization, Knowledge, Goal congruence, Lack of resources
• Lack of direction, Motivational problems (individuals are self-interested), Personal limitations

Causes of management control problems

• Decentralization
• Knowledge
• Goal congruence
• Lack of resources

Control Failures in the Banking and Insurance Sector

• Aggressive sales-based tactics (misselling financial services)
• Manipulation of interest rates (LIBOR)
• "Rogue trades
• Anti-money laundering violations

Top-down and bottom-up roles of management control systems

• Origin of the need: lower-level managers and employees may not automatically understand mission, goals, and strategies of the organization
• Top-down role: explain mission, goals, strategies, support coordination across business functions at a decentralized level, motivate lower-level employees, resource allocation
• Bottom-up role: report on goal achievement for feedback, facilitate coordination, support managers and knowledge employees

Behavioral Theories

• The standard economic model of human behavior (rational human actor, maximizing utility)
• Behavioral economics (systematic irrational behaviors, biases)
• Agency theory (principal-agent problems, adverse selection, moral hazard)
• Prospect theory (losses loom larger than gains, overestimation of low probability events)
• Sociological model of human behavior (influences of groups and environmental factors)
• The psychological model of human behavior (motivation, effort direction)
• Important psychological theories (bounded rationality, goal-setting theory, self-determination theory, stable values and traits)

How Economics, Psychology, and Sociology theory informs management control

• Economic model (Contracting, Agency problems)
• Psychological model (Motivation, Social needs (wants)
• Sociological model (Group behavior, Cultures, Norms)

Q1: What are the advantages and what are the challenges with controlling organizations via responsibility centers?

• Advantages: Decentralized authority, Accountability, Motivation, Facilitates budgetary control, Prevents performance issues of some employees
• Challenges: Narrow focus, Communication issues, Rivalry, Coordination problems, Transfer pricing

Introduction

• These are organizational units headed by managers responsible for unit performance
• Responsibility centers provide efficiency/effectiveness determination
• Four types of responsibility centers exist: Revenue, Expense, Profit, and Investment

Revenue Centers

• Responsibility center managers are held accountable for revenue generation
• Used in ways to encourage and retain customers
• Evaluation by comparing actual revenue to budget

Expense/Cost Centers

• Managers held accountable for costs (consumption)

• Two general types exist: Engineered cost and Discretioanry cost

• Engineered cost: Direct causal link between input and output (e.g., manufacturing production lines)

• Discretionary cost: Uncertain link and non-physical products/outputs (e.g., research and development, administrative activities)

Profit Centers

• Responsibility centers held accountable for profit outcomes
• Profits calculated after taking account for costs, expenses, and taxes

Investment Centers

• Managers held accountable for both profits and investments used

The Transfer Pricing Problem

• Transfer prices are negotiated between different profit centers
• Market-based approach is ideal when competitive external markets exist
• Cost-based approach is used when external markets do not exist
• Administered transfer prices are determined by the head or upper levels

Shared Service Centers

• Support functions (HR, accounting, IT) are centralized in a unit
• Reduces costs through economies of scale
• Typically are not given a fixed budget, but financed by fees charged to their customer business units

Summary

• Many businesses use responsibility centers to control activities
• Four types of responsibility centers exist (Revenue, Expense, Profit, and Investment)
• Coordination among them is vital but often complex
• Shared service centers are becoming more common

Financial Performance Measures

• Value-creation is the primary objective in for-profit organizations
• Market-based and accounting-based approaches to measure value creation
• Key financial return (Financial measures)
  • Profit margin
  • Return on investment (ROI)
  • Return on assets (ROA)
  • Earnings before interest and taxes (EBIT)
• Non-financial performance measures
  • Customer-orientated
  • Business process-orientated
  • Employee-orientated
  • Innovation and environment