The meaning of the control

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Course project

"The meaning of the control"

2013

Contents

Introduction

1. Controls. The meaning of the control

1.1 The meaning of the control

2. Two stage rationality

3. Management behavior. Organization of control

3.1 Behavioral aspects of the control

3.2 Individual behavior

3.3 Organizational performance

3.4 Elements of a control

4. Forms of control

5. Characteristics of an effective control

6. Management control and two-stage rationality

7. Special cases of management control

Conclusion

Used literature

Introduction

This paper will look at management control from the viewpoint of enhancing human cooperation within an organization. As control is about human behavior a perspective on control will be founded on a view on human agency. A general framework of cooperative control will be built based on two-stage rationality. This framework will make it possible to characterize cooperative control as the way in which human behavior is coordinated in line with organizational goals. Rule following behavior gives meaning to self-interest and in doing so coordinates behavior in an organization. Introducing the role of management, the framework draws up a picture of management control in its role of making members of an organization work together instead of only directing self-interested employees with given goals.

1. Controls. The meaning of the control

How do you combine the various resources in an organization, like human workforce and brainpower, capital, entrepreneurial capacities and financial recourses, such that they work together in a way that serves the goals of the organization? Of course, this is one of the fundamental questions of business, organization and economics. Within the domain of this question is another question: how do we make individuals work together such that the organizational goals are served? On an even more specific level we have the question: how do we make self-interested individuals with diverging goals work together. And finally we can ask: what financial rewards and punishments drive goal congruence within an organization?

These are questions that are closely related to a number of conceptions of control.

In the literature we can find various forms of control. For instance, governance has to do with control of stakeholders on an organization. Management control is concerned with the way in which management influences and directs the organization in its attempt to reach goals. Within management control we can find a whole host of partly overlapping control concepts and systems. For instance, we can mention machine controls in which management tries to regulate as much as possible, boundary controls in which management stipulates what to do not, what to avoid and exploratory controls in which ill-defined non programmable activities are coordinated. On another front we have behavioral controls, stipulating behavioral rules and soft controls, aimed at the social context of an individual or organizational part. A widely known form of control is the formal planning and control perspective. In this view an organization can be directed through a feedback mechanism that constantly compares targets with performance. It works like a thermostat. Based on strategic goals of the organization as a whole, goals are determined for organizational parts. These goals are made measurable. Performance is compared to targets and through the mostly financial rewards and punishments the organizational parts are directed such that their goals are subsidiary to the strategic goals. The budgeting cycle is a frequent example. We can add feed forward controls, situation specific controls and so on.

1.1 The meaning of the control

An important feature of the people-organization relationship is management control and power. Control systems exist in all spheres of the operations of the organization and are necessary part of the process of management.

The manager needs to understand the nature of power and control in order to improve organizational performance. Control is an integral part of the process of management.

Management control is primarily а process for motivating and inspiring people to perform organization activities that will further the organization`s goals. It is also а process for detecting and correcting unintentional performance errors and intentional irregularities, such as theft or misuse of resources.

Control is also often associated with the act of delegation. However, this does not imply that control is undertaken only by the manager. The person to whom the task is delegated can also often effectively identify and operate day-to-day controls.

The process of control is at the center of the exchange between the benefits that the individual derives from membership of an organization and the costs of such benefits.

Unfortunately, 'control' often has an emotive connotation and is interpreted in а negative manner to suggest direction or command by the giving of orders. Control systems are concerned with the regulation of behaviors. People may be suspicious of control systems and see them as emphasizing punishment, an indication of authoritarian management, and а means of exerting pressure and maintaining discipline.

This is too narrow an interpretation. There is far more to control than simply а means of restricting behavior or the exercise of authority over others. Control is not only а function of the formal organization and а hierarchical structure of authority. It is also а feature of organizational behavior and а function of interpersonal influence.

Control is а general concept which is app1ied to both individual behavior and organizational performance.

2. Two stage rationality

If we now want to address the question of `what makes them work together' then we need some idea of how individuals in organizations act and behave. If we don't want to be limited by the notion of the economic man in advance we should have some broader conception of human agency that on the one hand allows for instance social and cultural aspects of human behavior, but on the other hand does not declare rational choice behavior obsolete. Rather could we look for a notion of human behavior that puts rational choice behavior in a context. If we don't want to take refuge to images of human behavior like random behavior or non-rational behavior, we should stick to some form of rationality. There were developed a great number of rationality concepts in the past decades. For instance, there is unbounded rational behavior, which means that the ultimate optimum is reached, and there is bounded rationality that retains rationality but within cognitive and cultural bounds. Furthermore, we could point to irrational behavior, which is strongly associated to random behavior, procedural rationality, in which the process is deliberate instead of the result, substantive rationality, which is associated to unbounded rationality, intuitive rationality and so on. In this paper we will draw on the notion of two-stage rationality that is similar to institutional rationality. To introduce two-stage rationality we will start from the classical idea of individual choice behavior. Having available such a notion we will broaden the concept to the surroundings of the individual and to the coordination of individuals.

Let's have a look at an individual decision maker who makes a choice from a number of alternatives on the basis of preferences. If the preferences and choice alternatives are given and if the individual has enough capacity for solving the problem, a decision can be reached.

What's more, we can build a framework and predict choices and perhaps even prescribe choices that are considered optimal. In such a framework we can ask questions like: what would happen if the set of choice alternatives would change, for instance price or income changes, or, what would happen if the preferences of the decision maker were to change, for instance because of changes in norms and values. This will give contents to the relationships between variations in given factors and the decisions made. As long as we adhere to the assumption of methodological individualism this is how far the neo-classical analysis of choice goes. In various branches of economics the specifics of this approach are elaborated to a high degree, including uncertainty, fanning out of preferences, inter temporal effects. For all the variants it holds that if the given decision problem in terms of set of choice alternatives and the preferences is formulated correctly a decision can be reached by the decision maker on his own.

There are two characteristics of this image of rational decision-making we want to draw attention to. Firstly, another formulation of the decision problem would in general render another optimal decision. If you are allowed enough degrees of freedom in determining the choice alternatives and the preferences, any decision can be explained as being optimal. Therefore, if we want to explain a given decision as being an optimal choice we should examine the set of choice alternatives and the preferences that formed the decision space of the decision maker. Rather, the formulation of the choice problem, of the decision space, is the explanation for decisions reached. Secondly, knowing that a given decision problem can be solved by an individual decision maker on his own, in isolation; we can ask where the interaction with other individuals comes in. This would be one of the major issues when looking at control in an organization. Both considerations require us to go beyond the bounds to the decision problem.

Addressing the first point mentioned above, we will have a closer look at the framing of the decision room of decision makers in terms of the set of choice alternatives and the preferences defined on this set. What determines the bounds to the decision problem? From the literature we know a number of factors. Legal rules will have an effect on the set of decision alternatives either as some behavior is prohibited or by defining cost, penalties and risks connected to various choice alternatives. However, legal rules can also influence preference of individuals, for instance when legal rules, like with respect to smoking behavior or reporting requirements, become entrenched in the norms and routines of individuals in an organization. Obviously, group effects can have a major impact on the decision room of decision makers. They can form the perceived decision space, influence norms, values and routines and define what actions are attainable and which are not. The same holds for cultural values and norms. But there are more factors. The past can be a major determining factor for the current decision room. Investments made in the past will have an effect on the current production possibilities of an industry. We can also mention past crises within organizations with current consequences or the effect of a past replacement of the corporate CEO with an effect on the current reporting rules and corporate ethics. Of course we know that financial conditions will have a powerful influence on the set of decision alternatives through market prices, budgets etc.

Besides, working routines existent within an organization will considerably influence the decision room of decision makers as well. These determine how `things are done around here', sometimes stipulation possible courses of action and sometimes effectively prohibiting forms of behavior. So, harking back to the argument in the previous paragraph, understanding bounded rational choices requires us to understand the determinants of the decision room of the individual in an organization, which not only stem from the legal, social and cultural surroundings of the decision maker, but also from the past development of the organization and from the economic conditions. In effect we now have an image of decision making in two stages. The factors that shape the set of choice alternatives and preferences can be seen to bring about rules used for formulating the decision problem in the first stage. In the second stage the decision problem is solved in a bounded rational manner.

Now, if management control is about coordination of individuals in an organization, the question is where does the interaction between individuals come in? This was the second issue we wanted to address. If a given decision problem can be solved by the decision maker on his own it will be clear that the fact that this decision maker is part of an organization in which he works together with others does not come into the picture during the problem solving. How then does coordination of various decision makers affect the individual? It are precisely the rules that determine the decision problem through which coordination can take place, so through cultural rules, group effects, financial conditions, routines etc. That is, the interaction between individuals has its impact in the first phase of the decision process in which it forms and molds the decision problem that is solved in the second phase. Shared rules will synchronize behavior. For instance, legal rules synchronize individual behavior. They tell us in what ways we can engage others and what is prohibited. Besides, legal rules tell us what to expect and in particular what not to expect from others. Reporting requirements to a high degree determine how reports are assembled, with whom they are files, at which moments in time etc. These kinds of requirements are meant to coordinate the way in which individuals in an organization see their situation and courses of action. Cultural rules are another example of rules with a strongly coordinating function. They determine common view on the world and on each other, on the one hand disciplining our behavior and on the other hand making decision-making and behavior possible. Other examples of coordinating factors were mentioned in the previous section, for instance working routines in an organization allow us to start activities without continuous deliberation with others, which is a serious coordinating function.

3. Management behavior. Organization of control

3.1 Behavioral aspects of the control

People are the integral element of the control and all other stages of management. Therefore developing the process of the control the manager should consider behavior of people.

3.2 Individual behavior

Control can stand for reliabi1ity, order and stability. Whenever а person inquires 'I would like to know how well I am doing, this in effect can be seen as asking for control. Members of staff want to know what is expected of them and how well they are performing.

This places emphasis on the exchange of information, and feedback and comparison of actual resu1ts against planned targets. Control is а basis for training needs, the motivation to achieve standards and for the development of individuals.

3.3 Organizational performance

At the organizational level, management needs to exercise 'control' over the behavior and actions of staff in order to ensure а satisfactory level of performance. Managerial control systems are а means of checking progress to determine whether the objectives of the organization are being achieved.

Control completes the cycle of managerial activities. It involves the planning and organization of work functions, and guiding and regulating the activities of staff. Control provides а check on the execution of work and on the success or failure of the operations of the organization.

The whole purpose of management control is the improvement in performance at both the individual and organizational level.

Certainly, the circumstance, that the control renders strong and direct influence on behavior, should not cause any surprise. Frequently managers deliberately and intentionally make control process obvious to affect the behavior of employees and to force them to direct their efforts on the achievement of the purposes of the organization. Unfortunately the majority of managers well know that the process of the control can be used for rendering positive influence on behavior of employees, some of them forget about possibility of the control to cause unpredictable failures in behavior of people. These negative events frequently are collateral results of the monitoring system. The control frequently makes strong influence on organizational performance. Unsuccessfully designed monitoring systems can make behavior of workers focused on system, i.e. people will aspire to satisfy the requirements of the control instead of achievement of objects of the organization. Such influences can lead also to deliver the incorrect information. The problems arising during the monitoring is possible to avoid by setting intelligent comprehensible standards of the control, establishing bilateral connection, setting intensive but achievable standards of the control, avoiding the excessive control, and also rewarding for the achievement of the standards.

3.4 Elements of a control

Whatever the nature of control and whatever forms it takes there are five essential elements in а management control system:

· planning what is desired;

· establishing standards of performance;

· monitoring actual performance;

· comparing actual achievement against the planned target;

· rectifying and taking corrective action.

Planning what is desired involves clarification of the aims to be achieved. It is important that people understand exactly what should happen and what is required of them. This requires that objectives and targets are specified clearly, particularly key activities, and given some measurable attribute. Planning provides the framework against which the process of control takes place.

Related to planning is the establishment of defined standards of performance against which the level of success can be determined. This requires realistic measurements by which the degree and quality of goal achievement can be determined. There can be no control without them.

Objectives and targets, and standards of performance, should be stated clearly and communicated to those concerned, and to those who are subject to the operation of the control system. management behavior control element

Thе third element of control is the need for а means of monitoring actual performance. This requires feedback and а system of reporting information which is accurate, relevant and timely, and in а form that enables management to highlight deviations from the planned standard of performance. Feedback also provides the basis for decisions to adjust the control system, for example the need to revise the original plan. Feedback should relate to both the desired end-results and the means designed to achieve them.

Next, it is necessary to compare actual performance against planned targets. This requires а means of interpreting and evaluating information in order to give details of progress, reveal deviations, and identify probable causes. This information should be fed back to those concerned to let them know how well they are getting on.

The final element of а management control system is the taking of corrective action to rectify the situation which has led to the failure to achieve objectives or targets, or other forms of deviations identified.

This requires consideration of what can be done to improve performance. It requires the authority to take appropriate action to correct the situation, to review the operation of the control system and to take any necessary adjustments to objectives and targets or to the standards of performance.

4. Forms of control

· Control is far-reaching, it can serve а number of functions and can be manifested in а number of different forms.

· Control systems can focus on the measurement of inputs, outputs, processes or the behavior of people.

· Controls can be concerned with general results or with specific actions.

· Controls can be concerned with an evaluation of overall performance of the organization as а whole or with major parts of it. This requires broadly based standards of performance and remedies for corrective action. Total quality control, concerned with an areas of the organization, can be seen as part of Total Quality Management programs.

· Controls can be concerned with the measurement and performance of day-to- day operational activities. This calls for more specific standards of performance and speedy corrective action.

Some authors identify three main forms of control:

Direct control by orders, direct supervision and rules and regulations.

Direct controls may be necessary, and more readily acceptable, in а crisis situation and during training. But in organizations where people expect to participate in decision making, such forms of control may be unacceptable.

Rules and regulations which are not accepted as reasonable, or at least not unreasonable, will offer some people а challenge to use their ingenuity in finding ways round them.

Control through standardization and specialization. This is achieved through clear definition of the inputs to а job, the methods to be used and the required outputs. Such bureaucratic control makes clear the parameters within which one can act and paradoxically makes decentralization easier.

Provided the parameters are not unduly restrictive they can increase the sense of freedom. For example, within clearly defined limits which ensure that one retail chain store looks like another, individual manager's may have freedom to do the job as they wish.

Control through influencing the way that people think about what they should do. This is often the most effective method of exercising control.

It may be achieved through selective recruitment of people who seen likely to share а similar approach, the training and socialization of people into thinking the organization's way, and through peer pressure. Where an organization has а very strong culture, people who do not fit in, or learn to adapt, are likely to be pushed out, even though they may appear to leave of their own volition.

5. Characteristics of an effective control

People's behavior, naturally, is not the unique factor determining efficiency of the control. In order to achieve the purposes of the organization the control should possess several important characteristics:

· It must be understood by those involved in its operation.

· Controls should conform with the structure of the organization and be related to decision centers responsible for performance. Information should be supplied to those managers who have the responsibility for specified areas of activity and who are capable of using this information to evaluate the degree of success in achievement of objectives: for example, the cause of excess expenditure in а manufacturing operation.

· An effective control system should report deviations not the desired standard of performance as quickly as possible. Ideally, indications of likely deviations should be discovered before they actually occur.

· Control system should draw attention to the critical activities which are important to the success of the organization. An unnecessary number of controls over comparatively unimportant activities are uneconomic and time-consuming; they can have а demoralizing effect on staff and may possibly result in lack of attention to the key control points.

· Tо be effective, а control system must be flexible. It must yield information which is not influenced by changes in other factors unconnected to the purpose of the control system. Control systems should be designed to improve the operations of the organization and Be adaptable to changing environmental circumstances.

· The control system should be consistent with the objective of the activity to which it relates. In addition to locating deviations from the planned standard of performance, the control system should be sophisticated enough to indicate ways in which performance can be improved.

· Control systems should themselves be subject to а continual review to ensure that they are effective and appropriate in terms of the results they produce. They should not be too costly or elaborate, but should satisfy the characteristic features.

6. Management control and two-stage rationality

In what kind of position does management in an organization find itself in when taking cooperative controls into account? Although management is endowed with formal and informal capacities to direct, the development path of the organization is for a part autonomous and it will be no clear-cut job for management to bring organizational goals and the activities in an organization in line with each other. Focusing too much on deliberate design would prevent us from seeing the whole picture. That would not only result in management being unaware of developments in a number of coordinating principles in the organization, it would also lead to overconfidence in the manipulability of an organization.

The combination of both would result in a confidence in manipulability and an unawareness of other developments in an organization having an impact on cooperation of individuals. Which parts of the coordinating rules and routines can be influenced or even directed by management and to which degree? It seems that some of the largely external driven changes are given for a manager, for instance changes in legal or cultural rules. However, even then movements under the discretionary power of management can sometimes make sharp changes possible, like when a merger with a foreign organization brings in a new legal system or culture instantaneously. Lower level coordinating principles and rules, for instance accounting requirements, will obviously be more under the discretionary power of managers then others. One of the means available for a manager to direct would be the fact that he or she is a part of the organization and the various groups within the organization. Leadership style and evaluative behavior will be a part of management control then. In general the manager will not so much be busy with designing the organization but more with merging into an development of the organization, influencing where possible and only sometimes designing controls.

In such a process there the cooperative controls, forming and molding the decision space of individuals in the first phase that operate in conjunction, which the manager should take into account. Some of the coordinating rules could strengthen each other and others will work in different directions. Management will `manage' the combination of cooperative controls such that a coherent development of the organization will emerge. It will be precisely the fact that the manager is a part of the organization that will provide the opportunity to direct. The discretionary power of the manager is determined by his hierarchical position, by his position in social groups, by his or her influence on organizational norms and values and by the possibilities to determine accounting rules and systems of incentives and remuneration in the organization. In most instances it holds that management cannot manipulate these factors in an exogenous way, but merely influence a relatively autonomous development process.

When looking at goal setting and self-interest we can see that two-stage rationality implies here that management through its influence on the formation of the decision space of individuals is closely engaged in goal determining and goal setting activities in an 14 organization. These goals could be self-interested but they need not. Cultural and social processes could lead to an altruistic attitude in which an individual's preferences not only depend on his or her own well-being but on the well-being of others in an organization as well. The first phase of two stage rationality is concerned with coordination and therefore it goes beyond self-interested or altruistic behavior. It is about determining the way in which individual decision-making is set. In fact, in this phase of decision making management is explicitly not concerned with the question of given goals of self-interested individuals, but with processes that come precede that, for instance sense making processes and taking these into account in the coordination of activities in the organization.

In sum, when seen from the perspective of cooperative control, management control of two stage rational behavior entails influencing the development path of the organization of which management is a part. It means coordination through participating in the formation of the decision space of members of the organization and with it setting the stage for decision making.

7. Special cases of management control

The traditional view on management control is prescriptive of nature. It tells us what to do if we want to design the best controls. Of course that fits the neo-classical economics or new institutional economics kind of theories in which optimization is of overriding importance. This is the area in which the bulk of research in management control was taking place in the past thirty years. When we look at the management control from the perspective of cooperative control and two stage rationality, we can see the traditional view as a special case of management control in which we suppose individual preferences and self-interested as given and in which we see management control as a design activity of financial controls. If we make such assumptions we have the advantage of an economic perspective that deals largely with financials giving us optimal solutions.

Cooperative control, management control and the traditional view.

In this paper we looked at management control from the perspective of enhancing human cooperation in organizations. As control is about human behavior, a perspective on control will be founded on a view on human agency. We built a general framework of cooperative control based on two-stage rationality. This framework made it possible to characterize cooperative control as the way in which human behavior is coordinated in line with organizational goals. Rule following behavior gives meaning to self-interest and in doing so coordinates behavior in an organization. Introducing the role of management, the framework allowed us to draw up a picture of management control in its role of making members of an organization work together instead of only directing self-interested employees with given goals.

Controls often are not deliberate or consciously designed. However, management can perform an important role in the formation of controls. Management control of two-stage rational behavior entails coordination through participating in the formation of the decision space of members of the organization. Management control is about influencing the development path of the organization of which management is a part, rather than designing control systems. The traditional view on management control appears to be a special case when management control is viewed from the perspective of cooperative control. Our framework of cooperative control is not so much general in the sense of spanning all incidents, but general in the sense of spanning a number of special cases. In general the framework generates an increased attention for other factors than the financial ones in controlling the activities in an organization. A great number of instances of such other factors emerge from empirical research. Because these instances are now combined within a general framework, each of them is positioned against the others and therefore more entrenched than before.

Conclusion

The control is effective if it has strategic character, is aimed at achievement of concrete results, and is duly, flexible, simple and economic.

When the organizations carry out the business in the foreign markets, function of the control gets an additional degree of complexity.

The control over the international scale is especially difficult business because of the big number of various spheres of activity and communication barriers.

Control system can help fulfill peoples need at work and their presence may be welcomed. Often control over behavior is resented and perceived as a threat. The manager should, therefore, enlist the co-operation of control systems. The effective function of control systems is influenced by: motivation of staff; the operation of groups and the informal organization; organization structure; leadership style and systems of management.

Used literature

1. BURNS J., EZZAMEL M., SCAPENS R.W., 2003, The Challenge of Management Accounting Change. Behavioral and Cultural Aspects of Change Management.

2. CHOW C.W., KATO T., SHIELDS M.D., 1994, "National Culture and the Preference for Management Controls: An Exploratory Study of the Firm-Labor Market Interface".

3. HOGARTH R.M. AND REDER M.W., 1986, Rational Choice. Chicago University Press, Chicago.

4. KAMMINGA P.E. AND MEER-KOOISTRA J. VAN DER, 2007, "Management control patterns in joint venture relationships: A model and an exploratory study".

5. NOEVERMAN J., 2007, Management Control Systems, Evaluative Style, and Behavior: exploring the concept and behavioral consequences of evaluative style, Erasmus Research Institute of Management (ERIM).

6. REDMOND W.H., 2004, "On Institutional Rationality.", Journal of Economic Issues.

7. FUSFELD D.R., 1996, `Rationality and Economic Behavior', Journal of Economic Methodology.

8. ELSTER J., 1989, `Social Norms and Economic Theory', The Journal of Economic Perspectives.

9. MERCHANT K.A. AND STEDE W.A. VAN DER, 2007, Management control systems: performance measurement, evaluation and incentives. Prentice Hall, Harlow.

10. KAMMINGA P.E. AND MEER-KOOISTRA J. VAN DER, 2007, `Management control patterns in joint venture relationships: A model and an exploratory study', Accounting, Organizations and Society.

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