Summary Management Control Systems: Performance Measurement, Evaluation and Incentives, 3rd Edition. Prentice-Hall/Pearson

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Management Control Systems

Management control failures can lead to large financial losses, reputation damage, and possibly even organizational failure. However, adding more controls does not always lead to better control. Some MCSs in common use often stifle initiative, creativity, and innovation.

The term “control,” as it applies to a management function, does not have a universally accepted definition. An old, narrow view of an MCS is that of a simple cybernetic system involving a single feedback loop, analogous to a thermostat. Thermostats include a single feedback loop: they measure the temperature, compare those measurements with the desired standard, and, if necessary, take a corrective action (turn on, or off, a furnace or air conditioner). In an MCS feedback loop, managers measure performance, compare that measurement with a preset performance standard, and, if necessary, take corrective actions.

This book, however, like many other writings on management control, takes a broader view. It recognizes that many management controls in common use, such as direct supervision, employee-hiring standards, and codes of conduct, do not focus on measured performance. They focus instead on encouraging, enabling, or, sometimes, forcing employees to act in the organization’s best interest. This book also recognizes that some management controls are proactive, rather than reactive. Proactive means that the controls are designed to prevent problems before the organization suffers any adverse effects on performance. Examples of proactive controls include planning processes, required expenditure approvals, computer passwords, and segregation of employees’ duties. Management control, then, includes all the devices or systems managers use to ensure that the behaviors and decisions of their employees are consistent with the organization’s objectives and strategies. The systems themselves are commonly referred to as the management control systems (MCSs).

Designed properly, MCSs influence employees’ behaviors in desirable ways and, consequently, increase the probability that the organization will achieve its goals. Thus, the primary function of management control is to influence behaviors in desirable ways. The benefit of management control is the increased probability that the organization’s objectives will be achieved.

1. Management-the processes of organizing resources and directing activities for the purpose of achieving organizational objectives.

To focus on management control, we must distinguish it from objective setting and strategy formulation.
A. Objective Setting- in any organization employees must have some understanding of what the organization is trying to accomplish. Knowledge of objectives is a necessary prerequisite for the design of any MCS indeed, for any purposeful activities. In most organizations, the objectives are known. That is not to say that all employees always agree unanimously as to how to balance their organizations’ responsibilities to alt of their stakeholders –compromise mechanisms developed

B. Strategy Formulation-define how organizations should use their resources to meet their objectives (can also be viewed as: constraints that organizations place on their employees so that they will focus their activities on what their organizations do best). Strategies can be specified formally or left largely unspecified ( relying on spontaneous interactions btw management, employees & the environment).Nonetheless, if some decision-making consistency exists, a strategy can be said to have been formed, regardless of whether managers planned or even intended that particular consistency. The actual strategy an organization enacts may be different from its formal strategic statements- due to obsolete the formal strategy and employees have decided to take actions that are better.

The formal strategic statements make it...
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