Podcast
Questions and Answers
What is one of the main examples of management control?
What is one of the main examples of management control?
The primary goal of a manager is to achieve the best possible results through control.
The primary goal of a manager is to achieve the best possible results through control.
True
Name one responsibility that is delegated by management.
Name one responsibility that is delegated by management.
Delegation of authority
The shareholder view, as described by Milton Friedman, emphasizes that managers are responsible for maximizing _______.
The shareholder view, as described by Milton Friedman, emphasizes that managers are responsible for maximizing _______.
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Match the following terms with their definitions:
Match the following terms with their definitions:
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Linking performance to rewards is an example of which management function?
Linking performance to rewards is an example of which management function?
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The goal of management includes controlling decisions to achieve expected results.
The goal of management includes controlling decisions to achieve expected results.
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What is a responsibility of managers related to performance?
What is a responsibility of managers related to performance?
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What is the primary objective of a company according to the shareholder view?
What is the primary objective of a company according to the shareholder view?
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The stakeholder view prioritizes the interests of shareholders above all others.
The stakeholder view prioritizes the interests of shareholders above all others.
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Which group of individuals does management have obligations to in the stakeholder view?
Which group of individuals does management have obligations to in the stakeholder view?
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The main objective of a company is to give a return on the owners' __________.
The main objective of a company is to give a return on the owners' __________.
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According to the stakeholder view, whose input is crucial for the company’s survival?
According to the stakeholder view, whose input is crucial for the company’s survival?
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The owners of a company can legally decide to close the business if they choose.
The owners of a company can legally decide to close the business if they choose.
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What view emphasizes obligations to a wider range of groups besides owners?
What view emphasizes obligations to a wider range of groups besides owners?
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Match the views with their key characteristics:
Match the views with their key characteristics:
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Which model focuses on the behavior of groups?
Which model focuses on the behavior of groups?
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What is a key benefit of results controls in organizations?
What is a key benefit of results controls in organizations?
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The psychological model emphasizes self-interested utility maximization.
The psychological model emphasizes self-interested utility maximization.
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What is the key control issue for the economic model?
What is the key control issue for the economic model?
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Decentralized organizations do not empower employees to make decisions.
Decentralized organizations do not empower employees to make decisions.
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In the psychological model, control serves to motivate ______.
In the psychological model, control serves to motivate ______.
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What performance measure was used under Alfred Sloan's leadership at General Motors?
What performance measure was used under Alfred Sloan's leadership at General Motors?
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Which of the following is NOT considered a personnel or cultural control?
Which of the following is NOT considered a personnel or cultural control?
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Results controls focus solely on the actions of employees.
Results controls focus solely on the actions of employees.
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Results controls encourage employees to discover and develop their ______.
Results controls encourage employees to discover and develop their ______.
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Which statement best describes the focus of the sociological model?
Which statement best describes the focus of the sociological model?
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Match the following organizations or concepts with their descriptions:
Match the following organizations or concepts with their descriptions:
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Match the control issues with their corresponding models:
Match the control issues with their corresponding models:
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What is considered one central reason for the calamity in the financial services sector following the 2009 financial crisis?
What is considered one central reason for the calamity in the financial services sector following the 2009 financial crisis?
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_____ controls are derived from their impacts on behaviors.
_____ controls are derived from their impacts on behaviors.
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Good control practice in the economic model is about supporting managers' identities, values, and norms.
Good control practice in the economic model is about supporting managers' identities, values, and norms.
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What drives the motivation in the sociological model?
What drives the motivation in the sociological model?
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Match the control aspect with its description:
Match the control aspect with its description:
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Which of the following elements is encouraged for implementing personnel and cultural controls?
Which of the following elements is encouraged for implementing personnel and cultural controls?
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Soft controls have become less important in recent years.
Soft controls have become less important in recent years.
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What is a condition that determines the effectiveness of action controls?
What is a condition that determines the effectiveness of action controls?
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What is one of Trenitalia's strategic objectives for the coming years?
What is one of Trenitalia's strategic objectives for the coming years?
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Deutsche Bahn aims to achieve a 100% share of renewable energies in transportation by 2038.
Deutsche Bahn aims to achieve a 100% share of renewable energies in transportation by 2038.
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What is the main reason for Deutsche Bahn's initiative 'Strong Rail'?
What is the main reason for Deutsche Bahn's initiative 'Strong Rail'?
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By 2050, almost _____ of the population of Germany is expected to live in metropolitan areas.
By 2050, almost _____ of the population of Germany is expected to live in metropolitan areas.
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Match the following objectives with their corresponding transportation companies:
Match the following objectives with their corresponding transportation companies:
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Which of the following statements is true regarding the climate impact of rail transport?
Which of the following statements is true regarding the climate impact of rail transport?
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Deutsche Bahn is focused solely on improving rail transport and ignores other transportation means.
Deutsche Bahn is focused solely on improving rail transport and ignores other transportation means.
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What will a shift towards a strong rail system help in achieving for Germany?
What will a shift towards a strong rail system help in achieving for Germany?
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Study Notes
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
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