Management Control System of TNA - Essay Example

Management Control System of TNA – An Analysis By Devangini Mahapatra Chauhan A control system in organizations largely influences its ability to recognize the social and cultural modes of control within it so as to lay down in clear terms the role of the entrepreneur when it comes to deliberating social control over the employees concerned. This paper will first of all outline the issues that have been dealt with by Paul M Collier in his Entrepreneurial Control and the Construction of a Relevant Accounting, where he studies the case of TNA as regards its management control system. Further, I will seek to put forth an analysis of this control system through the employment of two theoretical perspectives, thus demonstrating the differences between the outcomes arising from the two. For starters, Collier has identified the role of the entrepreneur as regards the social control he exercises over the employees, as a crucial factor in the control system that influences the overall operations of TNA. The success and credibility of this exercise of control on the entrepreneur’s part depends largely on the recognition of the importance of a set of beliefs and boundary systems that will decide what elements the control system will consist of as a package. A management control system essentially consists of various elements including the management accounting practices employed by a particular organization. In this regard, it is imperative to state that the control systems employed by the management are a result of evolution of various systems and beliefs over a period of many years. This is what formalizes and assists in the quantification of various information – financial and other. In doing so, the management identifies various elements of the control system that have to do with the external information relating to markets, consumers, competitors and their decision making mechanisms. This helps the management take decisions of its own. According to Collier, the organization’s control mix and the strategic choices arising out of the implementation of this mix to real time operations in the organizations are the basis of the various frameworks under which the organization’s management control system operates. While there are various frameworks for studying this management control system, Collier uses his paper to describe the 10 year old longitudinal field study of TNA through the frameworks laid down by Simons (1995) and Ferreira and Otley (2005), where both deal with formal systems based approaches as opposed to the informal, social or cultural forms of control. To begin with the facts, TNA is an owner-controlled multinational packaging equipment supplier with annual sales of $A60 million and 120 employees. In this regard, the formal framework laid down by Simons and Otley et al, has been used in context of the separation of the literature available on formal and social systems based approach to control. (Collier, 2005) This brings us to the two theoretical perspectives I will be applying to the analysis of this case study, as I will be laying down a summarization of Collier’s work through this analysis. Traditional Perspective: Even though the disciplinary separation between comparative policies and social relations within the organization has been regularly challenged, in the traditional theories it continues to persist as a result of institutional inertia and hiring practices. The traditional perspective describes control as a means of regulation and a means of setting certain standards for inspection. In this regard, the traditional perspective more often than not seeks to restrain rather than enable in order to manage and exercise control. Here, Collier makes use of the issue of democratization in an attempt to go beyond rhetoric and to develop a framework that integrates the role of transnational activism into the analysis of domestic regime change. This is where the systems based view of control fits in, as laid down by Otley et al and Simons. While Comparative research on democratization confirms that underlying socioeconomic conditions affect the long-term sustainability of democratic reforms. According to Collier, this systems theory leads to several gaps in the performance as regards decision making at the lowest rungs of operation. This is where the organization requires reforms in terms of training and motivation. The initiation of such reforms, as well as the process they take, can best be understood using an agency-based framework that links internal and external influences. Thus, with equal emphasis on external influences which constitute areas like social standing of an employee, the management exercises relevant social control through motivation of an employee to achieve the social standing he or she has in mind. While external interventions are a potent factor in the traditional perspective where challenging authoritarian practices is concerned, it is also interesting to note that they do not simply displace existing internal practices and conditions. In this regard, the management may make optimal utilization of resources by diverting the same towards effectively influencing the behavior of the employees in certain environments when they are in search of the ways of achieving certain goals. Even though management still pays a great deal of attention to the empowering role of networking and mobilization, the long-term effects of such interventions are still poorly understood where influencing behavior under certain circumstances and in certain environments is concerned. Therefore, as Collier tries to imply, the systems based view of control is more often than not a means of measuring process outputs through concerted efforts at influencing the internal factors at play. With the use of interactive control systems by top managers there has emerged a trend of regular and personal involvement in the decision activities of subordinates. This has been triggered by the recognition of a need that a diagnostic control system needs to follows an interactive model through a pattern of continuous and frequent top management attention and interest. Further, this process must be influenced by strategic uncertainties. In this case, the actions taken by newly-appointed top managers attempting revolutionary and evolutionary strategic change, irrespective of the fact that they used to exercise control systems interactively to overcome inertia. Therefore, there is a greater need for communication of the substance of their agenda, structure implementation timetables; ensure continuing attention through incentives, with a shift of focus towards awareness regarding organizational and strategic uncertainties. In this way, the traditional theories have put the management control systems in the perspective of information flows and the organizational and environmental dynamics through key performance measures at group and organizational levels. (Ferreira et al, 2005) This kind of perspective supports the flow of feedback and suggestions at every level. Economic Perspective: This perspective revolves around mainstream economic methodology, both in the sense of mainstream methodology and of mainstream economics. In this case, issues are identified in methodology. These, in turn, are the outcome of an increasing preference for descriptivism over prescriptivism, and in economics resulting from an increasing preference for fragmentation over axiomatisation. (Ditillo, 2004) Therefore, being based in a dualistic mode of thought, such a perspective denies any constructive role and removing any focus on the foundations for theorizing pattern for the methodology involved. From a systems theory perspective, management control comes across as an important tool in financial control where accounting has been described as a “pre-eminent technology by which to integrate diverse activities” (Collier, 2005). Owing to the existence of calls for a broader perspective of management control than accounting-based controls, the limitations of financial measures have found an outlet in the requirement for a return to the operations-based measures. This was the origin of management accounting systems and coupled with the requirement to devise a methodology that will rise beyond the limitations posed by financial measures, one will find the basis for the formulation of a wholesome economic perspective. This can explain the subsequent development of the Balanced Scorecard (Kaplan and Norton, 1992) and similar models. From the economic perspective, management control systems seems more like a process that consists of strategic plans, long-range plans, annual operating budgets, periodic statistical reports, performance appraisal, apart from policies and procedures (Daft and Macintosh, 1984). This spectrum also includes personnel controls that coordinate personal objectives with those of the organization so as to influence higher ranks in the organization as well as the action controls that influence various levels of organizational actors by prescribing actions to be taken which is true to the prescriptive nature of the economic perspective. Furthermore, these results control the influence over organizational actors so as to measure the results of their actions (Merchant, 1998); as well as objectives, strategies and plans, target-setting, incentive and reward structures, and information feedback loops. Thus it has been concluded that performance management provided an important integrating framework for the economic perspective unlike the traditional perspective. TNA never had formal, systems-based controls as a significant feature as it is a goal-oriented organization. While these goals may lean more towards short term profits than long term sales growth and market share it has been noted that the twin objectives of sales growth and continual R&D were clearly understood throughout the organization. Further, TNA demonstrated that the means of measuring achievement is via cash flow, monitoring actual sales levels apart from a concerted effort towards achieving sustained progress through R&D and patent registration in the technological department. These developments have led to the belief that management accounting and non-financial performance measurement were not valuable as a control device in TNA. It has been widely accepted that other than to a limited extent in terms of expense control, this performance measurement system has little use. In annual method of accounting, the matching principle was not applicable owing to the lead time between R&D, export market development and patent litigation and subsequent income flows. In this regard, accounting reports have not provided any significance in contribution to the measurement of TNA’s success. Yet, according to the performance management literature, it has been seen that non-financial performance measures are yet to take care of accounting’s limitations. With a scarcity of formal non-financial measures other than number of units sold and market share, there has been a shift of attention to qualitative aspects of performance, such as customer satisfaction, flexibility, quality and innovation, as suggested by models such as the Balanced Scorecard. However, these are not quantified. Information networked (Ansari, 1977) controls were visible in various spreadsheet models. These controls have acted as the critical control device within TNA as they demonstrate an emphasis on continual feed forward processes rather than on any post feedback. Further, in a trend that shrugs off the traditional profit and balance sheet presentation, TNA’s spreadsheet model is more of a historical record, a forecasting device and a decision-making tool. As a business model, this has funneled profits into TNA’s product build decisions apart from providing forecasts regarding the available and required cash flow that will support exponential growth. The advent of the revised spreadsheet found various elements of industry and market share modeling. Therefore, it was used to capture market share by targeting the customers of weaker competitors, apart from identifying TNA’s borrowing ability by linking his cash flow to the bank’s lending policies. Therefore, the economic perspective has shown the structuring of a relevant accounting which has ensured a discourse of future-oriented market share, sales growth and cash flow. In the terms used by Miller (1998), traditional accounting had been pushed to the margins, while the spreadsheet models developed by Taylor became central to TNA. Contrast and Comparison of the Two Perspectives: While the traditional perspective of management control was built on belief systems, Collier’s study addresses informal control processes such as group norms, socialization, and culture only through an economic perspective. This shows the gaps in the traditional and economic approaches when regarding this case study. Even though both are important elements of a management control system, it must be maintained that the traditional perspective does not leave any mark on organization charts, policies or procedures. Further, the economic perspective is reflected in financial and non-financial performance reports. For a better comparison of the two perspectives, it would be imperative to state that the interface between formal and informal or social-cultural aspects of control has received much attention since the advent of socio-technical systems. In his study, Collier has managed to shift power in order to buffer and modify the influence of formal, systems-based forms of control over social or cultural elements, thus showing the advantages of the economic perspective. By talking of power and control as complementary theories in a control management system, Collier has intertwined both perspectives to the extent that the proposed control system, through its control of information constitutes, restructures a base of power so as to come up with a framework that has elements of both. The critical view of control is laid down by Neimark and Tinker (1986) effectively when they describe the same as struggles attached to and legitimating concrete power interests instead of neutral mechanisms. When comparing both perspectives, it may be seen that the commonalities lie in the fact that controls have been found to be based on two basic features: an information network and a set of social relationships based on four components: structure, social, leadership, and rewards (Ansari, 1977). In this regard, models of control can be categorized to include formal, informal and crisis (Euske et al., 1993). According to the traditional perspective, formal and informal models are set aside in times of crisis. Ditillo (2004) has pitched socio-ideological control against technocratic control. While the first, as an element of the traditional perspective may be described as a method of controlling worker mindsets through social relations, identification of formation and ideology; the second as an element of the economic perspective is described as a methodology in operation where management basically works on plans, arrangements and systems focusing on behaviour and measurable outputs. In a bid to demonstrate that socio-ideological control is intimately tied to bureaucracy and output control, rather than an alternative to those forms, Ditillo (2004) has shown a key difference in the outcome of the application of both perspectives to the case of TNA when he defines socio-ideological control as “an effort to persuade people to adapt to certain values, norms and ideas about what is good, important and praiseworthy in terms of work and organizational life.” This not only pitches both perspectives against each other, but also demonstrates that TNA has found greater success in the performance based methods employed by the economic perspectives and spread sheets as opposed to the formal systems based approach of the traditional perspective which merely found a consensus regarding the belief system followed by the employees. The economic perspective on the other hand, found better performance measures for all aspects of the organization’s operations. Therefore, we may conclude that control cannot be seen as anything other than as a combination of formal, systems-based controls and the informal, socio-cultural or socio-ideological controls or social controls, as they are called in today’s day an age. While this social control as a part of the traditional perspective is particularly evident in organizations controlled by entrepreneurs in TNA and as the research focus of Collier’s paper, the economic perspective shows a shift of focus towards the measurement of the outcome of this social control in various departments. References: Ansari, S.L., 1977. An integrated approach to control system design. Acc. Organizations Society 2, 101–112. Daft, R.L., Macintosh, N.B., 1984. The nature and use of formal control systems for management control and strategy implementation.J. Manage. 10, 43–66. Ditillo, A., 2004. Dealing with uncertainty in knowledge-intensive firms: the role of management control systems as knowledge integration mechanisms. Acc. Organizations Society 29, 401–421. Euske, K.J., Lebas, M.J., McNair, C.J., 1993. Performance management in an international setting. Manage. Acc. Res. 4, 275–299. Ferreira, A, Otley, D., 2005. The Design and Use of Management Control Systems: An Extended Framework for Analysis, Social Science Research Network. http://papers.ssrn.com/sol3/papers.cfm?abstract id=682984. Kaplan, R.S., Norton, D.P., 1992. The balanced scorecard—measures that drive performance. Harvard Bus. Rev.(January–February). Merchant, K.A., 1998. Modern Management Control Systems: Text and Cases. Prentice-Hall, Upper Saddle River, NJ. Miller, P., 1998. The margins of accounting. Europ. Acc. Rev. 7, 605–621. Neimark, M., Tinker, T., 1986. The social construction of management control systems. Acc. Organizations Society 11, 369–395. Simons, R., 1995. Levers of Control: How Managers Use Innovative Control Systems to Drive Strategic Renewal. Harvard Business School Press, Boston, MA. Read More