Management Control System - Literature review Example

Running header: Management Control System Student’s Name: Name of Institution: Instructor’s Name: Course Code: Date of Submission: Introduction Conventional Management Control Systems (MCSs) mainly focus on operational efficiency. But this has become inadequate in creating sustainable competitive merit in the world today. In the increasingly competitive globalized world today, there is need for an organization to adopt strategies that go beyond technology acquisition and logistics that do not sufficiently serve its sustained long-term competitive advantage over its competitors (Armesh, et al., 2010). These strategies should extend to include managerial practices that create a healthy atmosphere for employee cooperation, creativity and development of novel business opportunities. In line with this Cusumano writes: “managers and designers… need to discover ways to divide tasks and products so that teams… can work and communicate both efficiently and creatively (1997, 77). This is where contemporary Management Control Systems come in. Anthony (cited by Langsfield-Smith, 1997) defined Management Control System (MCS) generally as the method and process employed by managers to ensure the acquisition, and effective and efficient use of resources in the process of accomplishing organizational goals and objectives. Equally, it is a system by which an organization collects information through certain techniques and tools, and uses that information to evaluate human resource performance. The purpose of this paper is to look into the various elements of MCSs. The Management Control Systems This section will look into three main MCSs: Reward Compensation, Values, and Non-Financial Measurement Systems. Reward and Compensation Rewards and compensation programs, virtually used in every organization, are greatly significant in the success of an organization. Through these programs, organizations attract capable employees, encourage high effort levels in the employees, get vital information and encourage employees to put more effort in the tasks with the highest values. But in order to maximize organizational returns, tensions in and between organizational systems and members should be properly understood and managed. Generally, it has been found that reward and compensation play four crucial organizational roles. Motivational role- ‘inducing employees to put more effort and time on the job’ (Fisher, et al., 2008, p.36) by rewarding employees for the hours they spend at work and their productivity during those hours; directing/information role- rewards employees for engaging in activities and tasks that yield high quantity and quality returns. Employees can either work simply as part of their jobs and routine, or take the effort and time to think about new and innovative ways to improve the products and boost the production process, i.e. quality and quantity; Information-extracting role- this is where rewards induces employees to provide valuable information that could help improve organizational strategies for achieving its goals; and attracting role- an organization can flaunt its rewarding programs to attract high talents. There are different ways of rewarding. Tournament Compensation. This is where a group of employees compete for a prize. The prize is awarded based on relative ranking of performance. This method is applicable where employees face the same uncertainty on an effort-performance relation. However, Fisher, et al. (2008) warns that while this method may motivate the winners, it may not necessarily encourage the losers to work harder. On the contrary, they may feel like failures and give up. Team-Based Compensations reward employees depending on the outcomes of group projects. Reward is given to the group and distributed amongst the members. They are mostly employed when individual abilities and contributions are easily identifiable and measurable. Team-based rewards motivate employees toward mutual monitoring and risk-sharing (Fisher, et al., 2008). But some may be motivated by what Fishers and colleagues (2008) calls ‘free ride’; letting others do the work while still expecting to share in the group prize. Budget-based Compensation is where an employee is given a fixed deposit as a reward for reaching a certain performance target, and a linear piece-rate for above-budget performance. This method, especially in relation to the assigned target per se is quite motivational. Unfortunately, the flip side may be that the organization sets the goal too high. Values The notion of values attempts to answer the question: besides the formal organizational systems, what other factors are behind employees’ commitment to their work and the organization? Generally, values refer to the acceptable standards of behavior that govern how individuals in an organization think and behave. While there may be clear behaviors in small organizations, those lines may not be so clear in large corporations. Instead, there are likely to be several sub-cultures. The organizational values are meant to draw the individuals and groups together in a unified line of thought. These values can be expressed through an organization’s value statement, vision and mission statements, etc. However, unlike rules, organizational values are somewhat subconscious. Schein (2004) notes that values are not ‘explicitly observable’. Instead, one only sees its manifestation. According to Brown (2006), values are instilled into employees through socio-ideological methods of control. These are basically defined as organizational efforts to persuade employees to adapt to certain ideas, norms and values about what is important, good, or worthy in relation to work and/or organizational life (Brown 2006). In other words, values underlie and influence employee behaviors and artifacts (Schein, 2004). Brown (2006) contends that values affect people’s mindsets. As mentioned already, values that a company champions are dependent on the organization’s set goals. For example, an organization whose long-term goals Efficiency, predictability and stability will largely promote a bureaucratic leadership. Values here may include enforcement of written rules and standards; strict obedience of defined tasks, roles, authority and production of processes. Employees may find that they value standardized goods and services (Quinn, 1988). An organization with customer-based approach, such as being sensitive to customers and has concern for people also fosters unity among employees through a thorough process of socialization, and promotes participation, teamwork and decision making through consensus. This kind of internal environment gets into the employees’ minds. They feel pride in their membership almost to an extent of feeling personal ownership over the organization, an idea or a product. As such, these values foster and boost members’ attitude and commitment, and they understand that their contributions go beyond the signed contracts. An organization that aims at providing new and unique services and products and rapid growth, promotes a culture of experimentation and innovation among its employees. For example, under the late Steve jobs, Apple led the way to smart phones with its iphone, as did its ipod in the music industry. And the ipad has become the latest sensation. By fostering freedom and flexibility, this situation encourages individual initiative (Quinn, 1988). Good reward for such creativity also motivates employees and encourages competition. All in all, organizational values allow employees to learn and understand an organization’s history as well as its current operation methods and act as control mechanism for the behaviors of employees. There is always need to promote those values that are consistent with the new changes. Consequently, argue Hooijberg and Petrock (1993), organizations constantly assesses which values should be preserved and which ones should be modified. For organizations to be relevant today, they must reconstitute organizational value to include organizational knowledge, image, relations, internal business operations, research and development, organizational structure, etc. (Kaplan & Norton, 1992). Non-Financial Measurement Systems These fall under what Kaplan and Norton (cited in Armesh, et al., 2010) refer to as Balanced Scorecard (BSC). These are designed as a tool with which organizations can translate strategic objectives into relevant performance measures. The general principle of BSC is that it is not appropriate to manage an organization using financial measures alone. “Financial measures should be supplemented by non-financial measures as well, and a range of other leading indicators of potential performances in the future” (Armesh, et al. 2010). These indicators are mostly non-financial in nature. Both financial and non-financial indicators show the extent of success of the strategies employed by an organization, as well as whether such strategic objectives are being met (Otley, 1980). BSC assesses performance from four perspectives, which are also the areas of performance that non-financial methods are meant to measure. These include: financial, customer, learning and growth and internal business process perspectives (Armesh, et al., 2010). The measurement of achievement of long-term goals is based on outcome and key driver-oriented indicators. Customer-oriented goals are measured by conducting survey on customer satisfaction. This also involves making substantial cultural adjustments so that the organization is ready to accept and/or deal with new trends and (Armesh, et al. 2110). MCS package: Case Study of IKEA Backebol The culture in IKEA Backebol is influenced by its history, the ancestry of Smaland and the labour culture in Sweden, which emphasizes on entrepreneurship, cost consciousness and equality. As such, IKEA focuses on sales. Ingvar Kamprad, the founder, remains a key symbol of the organization and largely influences the company’s corporate culture; manifested in dress code, employee commitment to work and compensation system. IKEA practices a strict hiring strategy that ensures only those with desired values are picked. This is especially makes it easy to maintain the corporate culture. Further, since the company’s culture is influenced and shares in the history of Sweden, the hire only those who have interacted with that culture: natives or foreigner who have lived in Sweden. ‘Almost every IKEA store has the same organizational and governance structure’ (Bergland & Rapp, 2010). This ensures a easy communication. Targets and guideline policies are passed to the different hierarchical levels through the communication channels. ‘Governance structure involves regular meetings’ (Bergland & Rapp, 2010). IKEA’s long-term business plan runs for a period of three years. This involves short-term action plans that run for short periods and are basically sections of the long-term plans. The scopes of the plans also differ. Generally, there is a global plan for all its stores within and outside Sweden. This global plan is then broken down into smaller relevant business plans, which are modified accordingly to fit within the contexts of the various countries in which other stores operate. This helps coordination and consensus. But as Malmi and Brown (2008) note, planning is different from building the commitment of employees. IKEA normally includes its department managers and sales staff in the building a business plan. As part of its cybernetic controls, IKEA has specific budget process, systems to forecast future business trends and moods, as well as both financial and non-financial systems of measurement. As is the case in business planning, IKEA’s budgeting is done in a broken-down process, is initially set in the head office. The overall budget is determined at the head office, then it is broken down: from continent, to region- if applicable- to country, etc. This breaking down is influenced by contextual factors such as opportunity, demand, etc. IKEA apparently employs Merchant & Van der Stede’s (2007) accounting-oriented financial measurement system. This is especially applicable in its case, being owned by a foundation. Sock and market values do not apply here (Bergland & Rapp, 2010). Sales are measured daily and weekly sales are weighed against the budget and the previous year’s sales in the same week. This sales follow-up is the link between the budget system and the financial system of measurement. One of the store’s largest costs is the personnel costs. The productivity of the personnel is measured against the sales ratio in each department and the hour worked. Also, they measure the productivity of the logistic function. For instance, they carry out weekly measurements of managed cubic meters vis-à-vis the numbers of the hired extra handlings and compare them to sales. This way, they can spot inefficiencies arising in the logistics process. On top of this, they measure damaged products and record the value. Then they try to recover as much of that value as possible (Bergland & Rapp, 2010). Being a large store with various articles, stock management is very important to IKEA. They use different strategies to control the level of stock, e.g. transfer pricing, which is to lower prices for certain products to facilitate their sales. Ultimately, IKEA uses a hybrid system of measurement; that is, it combines both financial and non-financial measurement systems Malmi & Brown, 2008). IKEA manifests the Kaplan and Norton’s (1992) four perspectives of viewing a company evident here: customer, internal, financial, and innovation/learning perspectives in its operations. This it achieves through an integrative MCS- hence MCS package. Conclusion There are changes in both the internal and external environment of an organization occurring constantly. Organizations must therefore adopt new MCSs and management accounting so as to cope with a first changing world. This is inevitable if the organization hopes to enhance its performance and competitive advantage in this century. Bibliography Armesh, H., Salarzehi, H. & Kord, B. 2010, ‘Management control system’, Interdisciplinary Journal of Contemporary Research in Business, vol. 2, no. 6, pp. 193-206. Bergland, M. & Rapp, G. 2010, The management control system package of IKEA Backebol: a case study. Bachelor Thesis in Business Administration, University of Gothenburg, Spring 2010, viewed 14 March, 2012 Brown, D.A. 2005, ‘Management control systems as a coupled package: an analytical framework and empirically grounded implications’, PhD Thesis. University of Technology, Sydney. Cusumano, G.M. 1992, ‘How Microsoft makes large teams work like small teams’, Sloan Management Review, Fall. 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E. 1998. Beyond Rational Management: Mastering the Paradoxes and Competing Demands of High Performance. San Francisco: Jossey-Bass. Schein, E.H. 2004, Organizational Culture and Leadership, John Wiley and Sons, New Jersey. Sorsanen, J. 2009, ‘Examining management control systems package and organizational ambidexterity- case Tekla Oyj’, Accounting Master’s Thesis, Helsinki School of Economics, Spring 2009, viewed 14 March, 2012 Read More