Introduction to Management Control

Systems

What is a contract? What is an employee contract? What do you think it means to have an

incomplete contract?◦ http://en.wikipedia.org/wiki/Contract_theory#Inco

mplete_contracts

Contracts

The “Compensation” Portion of our Contract

Grading BreakdownComponent %

Final Project (group) 30%

Initial Assignments 20%

Class Participation (3 days x 10% each) 30%

In Class Assignments and Quizzes 20%

Risks if too much group work (versus individual)?

Risks if I make class participation 5% of grade? 50% of grade?

In information systems we talk about using information to gain strategic advantages and manage the organization better◦ In and Management Control Systems (MCS) we think about

how to effectively execute on whatever strategy we are given and decide exactly what information will help manage the organization better

In information systems we think about the technology that carries that information and how it is changing the way we do business◦ In MCS we think about getting the right information to aid in

execution◦ Two types of management information (interrelated)

Decision-facilitating Decision-influencing

Why I love the info sys and management control connection?

You will be given book chapter(s) and a case You will be given specific questions to answer for each case

A typical unit in AMC

We discuss the chapter

We discuss the case

Put together

the theory and reality

Management and its components

Strategy Formulation

Management Control

Objective Setting What we want to do

How we will do it

Execution

Without objectives, it is impossible to assess whether the employees’ actions are

purposive to make claims about an organization’s

success Objectives can be

financial or non-financial quantified, explicit or implicit economic, social, environmental, societal

Objective setting

Strategies define HOW organizations shoulduse their resources to meet their objectives.◦ Specified◦ Emerging

Hence:◦ Strategies put constraints on employees to

focus activities on what the organization does best or areas where it has an advantage over competitors.

Strategy formulation

The process by which management EXECUTES on strategy:◦ ensures that people in the organization carry

out organizational objectives and strategies;

◦ encourages, enables, or, sometimes “forces”employees to act in the organization’s best interest.

Management control includes all the devices/mechanisms managers use to ensure that the behavior of employees is consistent with the organization’s objectives and strategies.

Management Control System

Strategic control (HOW do we continue to meet our objectives over the long run?)◦ External Focus

Do we add value for the customer?◦ Is our strategy (still) valid?◦ Strategy revision

“intended” vs. “emergent” strategies. Management Control (HOW do we EXECUTE on our

strategy)◦ Internal Focus◦ Are our employees likely to behave appropriately?◦ Key Questions

Communication - Do employees understand what we expect of them?

Motivation - Will they work consistently hard and try to do whatis expected of them?

Capabilities - Are they capable of doing what is expected of them?

Management Control vs. Strategic Control

Do they understand what we expect of them?

Lack of direction

Will they work consistently hard and try to do whatis expected of them?

Lack of motivation

Are they capable of doing what is expected of them?

Personal limitations

Basic control questions and resulting problems

Management control is about encouragingPEOPLE to take desirable actions

Hence, management control has a Behavioral Orientation

Agency Problem (basic psychology in an economic setting)

◦ Agents and Principals act in their own interests sometimes to the detriment of the organization

MCS aim to mitigate agency costs

The basic control problem

Employees do not know what the organization wants from them.

When this lack of direction occurs, the likelihood of the desired behaviors occurring is obviously small.

How to control?◦ Communication+ Reinforecment

Lack of direction

When employees ‘choose’ not to perform astheir organization would have them perform

Lack of goal congruence◦ Individual goals do not coincide with organizational goals

Self-interested behavior◦ Generally, individuals are prone to act in their self interest

agency problem and costs different objectives take long lunches, overspend on things that make

life more pleasant, use of sick leave when not sick, etc.

◦ More extreme examples of motivational problems: Employee crime (fraud and theft).

Motivational problems

Sometimes, people are “unable” to do a good job because of certain personal limitations they have.

The Peter Principle◦ lack of requisite knowledge, training, experience◦ employees are promoted above their level of

competence http://www.amazon.com/Peter-Principle-Laurence-J/dp/1568

491611◦ some jobs are not designed properly

Possible policies/control to mitigate the Peter Principle◦ Training◦ Job Assignment◦ Job Design

Personal limitations

“GOOD CONTROL” is said to take place when there is a “high” probability that the firm’s objectives will be achieved;

◦ a “low” probability that major unpleasant surprises will occur.

◦ No such thing as Perfect control

Therefore, controls should be:◦ Future oriented – proactive not reactive◦ Objective – driven◦ Economically desirable

“Good” control

Control Problem Avoidance◦ Activity elimination

e.g., outsourcing, divestment

◦ Automation Computers/robots eliminate the human problems

of inaccuracy, inconsistency, and lack of motivation

Only applicable to relatively easy decision situations

Automation can be very costly

◦ Centralization Superiors reserve for themselves the most critical

decisions

Management Control Systems

Control can be achieved through:

Results Controls (Chapter 2) – Atlanta Home Loan, Armco, Inc. AirTex

Action Controls (Chapter 3) - Atlanta Home Loan, AirTex

Personnel Controls (Chapter 3) – Atlanta Home Loan, Alcon Labs, AirTex

Management Control Systems

To get you started with case discussions we will have our first discussion on Blackboard before you come to campus ◦ Read the questions (found in Blackboard under

“Case Questions.docx”) for the case entitled Atlanta Home Loan and prepare to comment in the discussion board in Blackboard

◦ Read all comments on the discussion board including those of other students. You can comment on their comments too

This is like a “pseudo” case discussion that will get you prepared for class

To Do - Prework

Read All Chapters in MCS section (they are short)

Read the questions for each case and read each case (schedule explains suggested reading order)

Jot down notes on each case and answer the questions

Bring those answers to class so we can have fruitful case discussions

To Do before you arrive on campus

Balanced Scorecard Group Project◦ Find an IPO firm of your choice and develop a

balanced scorecard and a strategy map for◦ Write up a report◦ Present your project to the class on “exam” day◦ Start thinking of IPOs you may be interested in

from the last 2 years. Your group will have to choose a company before you get to campus

You will get a separate correspondence related to this project

To Do while on campus