Levers of Control

What is management control?

formal, information-based routines and procedures managers use to maintain or alter patterns in organizational activities; process by which managers influence other members of the organization to implement the organization’s strategies

Controls to prevent and detect errors:

periodic reviews, inspections, budget variance analysis

What does error detection do?

starts the feedback process and allows the firm to address the issue

What is decision facilitating?

providing information that managers need to make informed decisions (too little is uninformative, too much is overwhelming)

What is decision influencing?

motivating managers to respond to information in particular ways

Controls and Agency Problem

Manager performs tasks on behalf of the shareholders, but incentives can diverge from shareholder goals. Controls are needed to align incentives (eg: stock based compensation)

Effects of empowerment (decentralization)

leads to innovation, higher employee satisfaction, higher revenue, lower costs

Too much empowerment (decentralization) leads to…

inconsistent processes and quality, increased variation, decisions not congruent with strategy, lack of focus, lawsuits and liabilities, redundant costs

Effects of control (centralization)

leads to consistent products and services, uniform processes, monitoring emergent trends, implementation of intended strategy

Too much control (centralization) leads to…

increased bureaucracy, increased costs/overhead, slower decisions, missed market opportunities, frustrated employees, increased employee turnover, resistance to change

4 Levers of Control

Beliefs system, Boundary system, Interactive Control System, Diagnostic control system

Positive levers of control

beliefs systems and interactive control systems

Negative levers of control

boundary systems and diagnostic control systems

beliefs systems

explicit set of beliefs that define basic values, purposes and direction, provides momentum and guidance to opportunity-seeking behaviors

How and when to implement beliefs systems

mission and vision statements; when there’s high uncertainty, organizational decentralization, and rapid growth

boundary systems

formally stated rules and limits tied to defined sanctions and credible threat of punishment to allow individual creativity within defined limits of freedom

How and when to implement boundary systems

codes of business conduct, operational guidelines, strategic planning systems; when reputation costs are high and when excessive search and experimentation can dissipate the resources of the firm

Interactive system

control systems that managers use to involve themselves regularly and personally in the decision activities of subordinates to focus attention on strategic uncertainties and provoke emergence of new initiatives and strategies

How and when to implement interactive systems

meetings, challenging data, assumptions, and action plans to ensure data becomes an important and recurring item; when strategic uncertainties require search for optimal solutions

diagnostic system

highly structured feedback systems that monitor organizational outcomes and correct deviations from existing performance standards to allow effective resource allocation, define goals, provide motivation, establish guidelines for corrective action, allow monitoring

How and when to implement diagnostic system

explicit standards, measurable outputs, link incentives to goal achievement, when performance standards can be preset and outputs can be measured, use to correct deviations from standard

Balance between levers of control

the four levers balance when they foster sufficient control to foster innovation while meeting firm objectives and creating shareholder value; adds tension to empowerment and control