DOI: 10.4018/978-1-5225-3987-2.ch002
ABSTRACT
This chapter examines issues about key concepts and aims of management control. Based on a review of relevant academic literature, the chapter provides an overview of some among the most popular definitions of management control, summarizes different approaches to management control and describes some influential theoretical frameworks.
INTRODUCTION
Several researchers (e.g. Abdel-Maksoud & Abdel-Kader, 2007) have suggested that many firms have responded to the challenges of global competition in several ways. For example, introducing new management and production techniques; investing in advanced manufacturing and information- processing technologies; prioritizing quality, innovation, and flexibility to meet customer needs; developing capabilities that allow them to provide services and solutions that supplement their traditional product offerings (servitization in manufacturing). Within an increasingly dynamic context, the importance of implementing effective management controls is widely acknowledged.
From a structural perspective, management control can be considered as part of the operating systems of a firm. Operating systems allow establishing the running procedures complementing the organizational structure, and mainly
Management Control Systems:
Concepts and Approaches
include (Airoldi, Brunetti & Coda, 1994): strategic planning; information systems; management control; human resources management.
The operating systems have the following general purposes:
• To influence, together with the organizational structure, the behavior of employees, by identifying and assigning objectives to be achieved and resources to be used for each organizational unit;
• To provide information for supporting decisions taken at the different organizational levels;
• To determine policies and practices regarding human resources aspects, including recruitment, appraising, training, competence development;
• To carefully design reward and incentive systems in order to enhance employee motivation.
From a process perspective, management control is the back end of the management process. Basically, managers in the different functions, using different types of resources, carry out three major groups of activities (work of management) along a process continuum: planning, directing and motivating, and controlling (Noreen, Brewer & Garrison, 2011). These activities shape the so-called planning and control cycle. Planning mainly involves how to use the resources (human, physical, financial) to meet organizational objectives:
it results in the selection of a course of action among possible alternatives, and consequent decisions on how to implement the action. Directing and motivating involves mobilizing employees to carry out selected plans and perform routine operations. Then, control involves ensuring that the plans are actually carried out and are properly modified as required by continuously changing circumstances.
Generally, management control takes the perspective of managers and is concerned with driving firms towards the achievement of organizational objectives. It relates to two main issues: design of the information and responsibility system of the operating activities (information issues) and the behavioral concerns of motivating managers and employees to achieve organizational goals (behavioral issues) (Demartini, 2014).
In the extant literature, there are several definitions of management control, and a universally accepted one has yet to come. Further, the concept of management control is a multifaceted one and embraces a variety of issues.
This chapter has the following aims:
• To introduce some of the most popular definitions and conceptualizations of management control in the academic literature and highlight how the meaning of management control has changed over time, moving from a traditional to a behavioral perspective;
• To summarize different theoretical approaches to management control;
• To provide an overview on some theoretical MCS framework that are highly debated in scholarly literature and are influencing substantial piece of research work in the last years.
MANAGEMENT CONTROL: CONCEPTS AND DEFINITIONS The term management control is sometimes used interchangeably with other terms, such as management control systems (MCS), management accounting (MA), management accounting systems (MAS), and organizational control (Chenhall, 2003). However, despite the fact that these concepts partially overlap, some differences also can be identified. According to Merchant and Van der Stede (2007), devices, mechanisms and practices that managers use for control purposes are generally called management controls, while the collection of control mechanisms is generally considered as a management control system.
MASs provide information to assist managers in planning and control, and MA activities mainly include collecting, preparing, processing, analyzing and reporting financial and non-financial information to managers. Information should be relevant and designed to support decision-making within the firm (Kaplan & Atkinson, 1998). Chenhall (2003) refers to MASs as the systematic use of MA practices (e.g. budgeting, product costing) to achieve some goal, and suggests that MCS encompass MASs, together with other types of control, such as personal or clan controls.
Organizational control has been defined as the process of influencing the behavior of people as members of a formal organization, through processes and techniques designed to increase the probability that people will behave coherently with the attainment of organizational objectives (Flamholtz, Das
& Tsui, 1985).
Focusing on the meaning of management control, Strauss and Zecher (2013) noted that the meaning of management control was initially centered upon the provision of formal, financial information to support managerial decision making, while over the years it has embraced broader views.
A traditional (conventional) view of management control is that developed by Anthony (1965), who defined it as “the process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of the organization’s objectives” (p. 17). In Anthony’s theoretical framework, management control is seen as a link between strategic planning and task (operational) control. In particular, strategic planning is concerned with long-term goals and the decisions on the plans to achieve those goals, focusing on environmental issues, while task control is concerned with daily operations within the organization (Otley et al., 1995). Management control is concerned with formal reporting on the performance of all aspects of organizational activities on a routine basis for the monitoring of resources used to achieve strategic objectives. Here, management accounting information provides the foundations of management control, as such information assists in performance measurement, as well as comparisons between actual and planned performance.
Basically, the traditional perspective regards MCS as passive tools providing information to support managerial decision making (Chenhall, 2003) and confines the scope and practices of MCS to economic-based issues and financially measurable aspects, to attain high profits (e.g. budgetary control, which was the dominant control technique). Further, the cybernetic concept of control deeply influences the traditional perspective of management control. Cybernetic controls are based on a feedback loop (Malmi & Brown, 2008; Lerner, 2012). Preliminary to the process, measurements are needed that enable quantification of an underlying phenomenon, activity or system.
Then, as explained by Green and Welsh (1988), the feedback loop involves the following stages:
• There are standards of performance or targets to be met;
• Performances are measured as the outcome of the activities or system;
• Actual performance is compared with the standard;
• The comparison feeds back information about variances (deviations) between actual and standard performance;
• The results of variance analysis determine taking corrective actions to modify the system’s behavior or underlying activities.
The cybernetic concept of control also informed Lowe’s (1971) definition of MCS. This author, widening Anthony’s view, depicted MCS (p. 5) as “…
a system of organizational information seeking and gathering, accountability, and feed-back designed to ensure that the enterprise adapts to changes in
its substantial environment and that the work behavior of its employees is measured by reference to a set of operational sub-goals (which conform with overall objectives) so that the discrepancy between the two can be reconciled and corrected for.” The Italian scholar Giorgio Brunetti (1979) delivered another relevant conceptualization of management control derived from the traditional thinking. For Brunetti, management control is the managerial activity of steering the organization by applying the feedback mechanism and management accounting, with the aim to obtain and use resources efficiently and effectively for achieving the economic objectives.
Hared, Abdullah & Huque (2013) provide a review of the traditional perspective on management control, which remains important both in scholarly literature and in managerial and accountants practice. However, some authors have strongly questioned its effectiveness, arguing that it is too restrictive and underlining its limitations. For example, Merchant & Simons (1986) noted that the traditional view of MCS is based on two main features that have lost relevance over time due to changes in the business and social environment: (1) a context of large, hierarchically structured organizations;
(2) an emphasis on formal financial and accounting-based controls, that cannot meet the whole set of needs of firms.
Actually, the concept of management control has evolved since its origins along with the changes of the business environment. At the beginning, with mass production, the focus was on internal matters such as products and production capacity. MCS mainly addressed manufacturing and internal administration, emphasizing cost determination and financial controls. In the 1970s, technological changes affected both manufacturing processes and information processing within firms. New markets developed and firms experienced pressures to adopt structures and managerial styles more flexible and responsive to changes. The design and use of information systems became very important for effective management (Ashton, Hopper & Scapens, 1995).
Since the 1980s firms have faced the challenges of global competition and more complex environments by introducing new production and management systems such as Total Quality Management, Just-in-time, Lean Production, with a focus on processes. Quality of products and services, together with the orientation toward continuous improvement and meeting customers’ needs, became a strategic competitive variable (Deming, 1982; Feigenbaum, 1986;
Chenhall, 1997). The use of non-financial MCS and the adoption of a wider view of control, also embodied in tools such as the Balanced Scorecard (Kaplan & Norton, 1992), is partly due to the shift from controlling the results to controlling the processes. Later, this tendency increases with world-class
production and service economy. In a similar vein, Johnson and Kaplan (1987) stated that, in a time of rapid technological change, increased global and domestic competition, and expanded information processing capabilities, traditional management accounting systems are not providing useful and timely information for the control process, product costing and performance evaluation. Management accounting information, driven by the procedures of the financial reporting system, is too aggregated, short-term-focused and past-oriented to be relevant and appropriate for managers’ planning processes and control decisions.
Further, a common position taken in the accounting literature is that traditional accounting theory and practice, which lie at the basis of conventional management controls, result from an application of the paradigm of realism, whereby accounting information is assumed to represent real world phenomena.
If realism is accepted as a paradigmatic base, then management accounting information can be regarded as objective, neutral and unbiased. As such, it can also be considered as reliable, relevant and valid. However, from a constructivist perspective, management accounting information cannot represent any ontologically objective base and inevitably involves estimation, subjectivity and judgement (Nứrreklit, Nứrreklit & Mitchell, 2010). In fact, in organizational environments, management accounting and control concerns (such as performance measures and indicators) are not material and objective in the same way as natural science objects. They are human constructs that are embedded in social structures aimed at achieving specific organizational goals and fulfilling purposeful actions. Thus, they are perceived by organizational actors to possess a high degree of facticity and to be opaque due to the network of complex relationships among multiple actors pointing to carry out a set of functioning activities. These also involve technologies and institutional processes. To enable purposeful actions, management control must convey the subjective values that motivate the people involved, be within the range of the factual possibilities, and communicate among people the integrated structure of facts, possibilities, and values, that have to be monitored (Trenca, 2016).
Thus, a consensus emerged about the necessity to develop a more comprehensive view on management control and its use. In other words, management control concepts moved from the traditional perspective towards a more social and behavioral perspective, incorporating informal types of control, together with strategic and environmental considerations, to be implemented in more flexible organizations (Demartini, 2014; Hared et al., 2013).
From this perspective, organizational actors and objects such as processes, technologies and management accounting and control devices need to be
coherently integrated to result in functioning activities. Further, interactions between actors and these objects are always in the process of becoming, revealing the unfolding ontology (Bohm, 1980) of management accounting and controls and their sensitivity to actors’ interventions (Trenca, 2016).
For example, Otley (1999) stressed the need to study management accounting and control as part of a wider organizational control system.
Management control is extended to provide a wider set of mechanisms intended to assist firms in regulating themselves, through a framework focusing on performance measurement and performance management. In particular, he suggests that MCS are related to providing information that is intended to be useful to managers in performing their jobs and to assist organizations in developing and following viable patterns of behavior. This opinion stems from an awareness that the internal and external context facing firms is constantly changing and appropriate performance measurements are beneficial in coping with new operating environments and increased uncertainties, as well as supporting new strategies.
Simons (1995a) also emphasized informational aspects of management control. He delineates MCS as information-based routines and procedures used by managers to maintain or alter patterns in organizational activities.
In Simons’ framework, management controls are represented as a range of formal devices that serve as levers for the implementation of business strategy and the achievement of profit objectives (see section “Management control systems frameworks”) for the description of the levers of control framework).
Many authors emphasize behavioral issues of management control, supporting the idea that control is about managers ensuring that the behavior and the decisions of employees are consistent with the organization’s objectives and strategy. This behavioral emphasis has become an area of agreement in recent scholarly literature and among managers and controllers.
For example, Merchant and Van der Stede (2007) suggest that management controls serve the purpose of protecting organizations from the possibility that people will do something the organization does not want them to do or fail to do something they should do. For example, they assert that three main causes related to behavioral concerns require the adoption of MCS: lack of direction, motivational problems, and personal limitations. On this basis, they develop a framework where control should have different objects: results (financial and non-financial), actions, and personnel/culture.
Malmi and Brown (2008), distinguishing between decision-support (information) systems and control systems, notice that “those systems, rules, practices, values and other activities management put in place in order to
direct employee behavior should be called management controls. If these are complete systems, as opposed to a simple rule (for example, not to travel in business class), then they should be called MCS. Accounting systems that are designed to support decision-making at any organizational level, but leave the use of those systems unmonitored, should not be called MCS and instead termed management accounting systems” (p. 290). Anthony and Govindarajan (2007) integrate behavioral and explicit strategic concerns in their view of management control, regarded as the process by which managers influence other members of the organization to implement strategies.
Finally, Bedford and Malmi (2015) align behavioral issues with goal congruence consideration. In their view, management control refers to a set of processes and mechanisms used by managers to influence the behavior of individuals and groups and guide them towards the achievement of predetermined organizational objectives.
The aforementioned definitions encompass distinct views and elements as they were developed by different scholars at different moments in time.
However, the identification of some key points arises from this concise presentation: (a) the central issue in management control is helping to ensure that an organization achieves its objectives. As such, management control is essentially about supporting the implementation of strategy (Nixon & Burns, 2005); (b) the way the central issue of management control is expressed has changed over time, according to changes in the context within which organizations operate (Otley, 2003). Actually, the control needs of firms in the contemporary (internal and external) environment, progressively more uncertain and complex, are significantly different from those advanced in earlier periods; (c) the different definitions suggest that management control can be regarded as a multifaceted concept, encompassing a variety of concerns (such as, for example, employee behavior, organizational issues, informational issues, performance measurement)1; (d) the dissimilar but coexisting definitions and conceptualizations reveal that the field of management control research is still characterized by a fragmented status (Strauss & Zecher, 2013).
Table 1 summarizes the control issues emphasized by the different definitions of MCS proposed before, showing the evolution of the concept of management control and its focus over time.
Through an extensive review of researches on MCS, Chenhall (2003) reports a thorough synopsis of the wide array of controls encompassed in MCS firms’ practices. A well-established classification, rooted in organizational theories, distinguishes between two opposing forms of management controls:
mechanistic and organic controls. The former mainly rely on formal rules,
standardized operating procedures and routines. The latter are more flexible, responsive, entail fewer rules and standardized procedures and tend to be richer in data (Chenhall, 2003).
Moreover, a distinction can be drawn between management control and financial control (Otley, Broadbent & Berry, 1995). Financial control involves the management of finance functions in the organizations and uses financial information to monitor financial flows and other aspects of financial performance. Management control is a general management activity aimed at achieving overall organizational objectives and uses financial information conveniently to measure and evaluate performance connected to more complex dimensions. As such, financial control can be regarded as a facet of the overarching management control structure.
Other authors (e.g., Merchant & Van der Stede, 2007) also highlight the difference between management control and strategic control. In a broad sense, strategic control involves managers ensuring that the strategies are implemented as planned and that the results of strategies are those intended (Schendel & Hofer, 1979). Strategic control and management control use different tools and have different focuses. While management control has primarily an internal focus (employee behavior and operational results), strategic controls are primarily externally oriented (industry and competitive results). In strategic controls, information should be collected to analyze industry and competitors, opportunities and threats, and monitor the validity Table 1. A summary of the control issues emphasized by the definitions of MCS
Author (Year) Emphasis
Anthony (1965) Cybernetic controls
Lowe (1971) Cybernetic controls, behavioral issues
Brunetti (1979) Cybernetic controls
Flamholtz (1985) Behavioral issues
Simons (1995) Information and strategic issues
Otley (1999) Information issues
Chenhall (2003) Information issues, behavioral issues Merchant & Van der Stede (2007) Behavioral issues
Anthony & Govindarajan (2007) Behavioral and strategic issues Malmi & Brown (2008) Behavioral issues
Bedford & Malmi (2015) Behavioral issues Source: The Authors
of strategy assumptions in dynamic environments. For example, Bhimani (2013) stresses the role of strategic management accounting (SMA) for assisting strategic control efforts.
MANAGEMENT CONTROL SYSTEMS APPROACHES Contingency-Based Theory of MCS
The contingency-based approach to management control posits that there is no universally appropriate system of management control but that the choice of appropriate controls will depend on the circumstances in which an organization operates (Otley, 1999). That is to say, the design and the application of management control systems is contingent on the context surrounding the firm, supporting the idea that an appropriate fit between the contextual (contingency) variables and the control system is assumed to result in improved organizational performance.
As Chenhall (2003) suggested, the stream of contingency-based research has a long tradition in the study of MCS, and the identification of contextual variables affecting the design of effective MCS can be traced to the contingency frameworks proposed by organizational theory. In fact, contingency theory of MCS took inspiration from the contingency theory of organizational structure, which had been developed earlier to understand which types of organizational structures were most appropriate to specific circumstances (Otley, 2016).
Chenhall (2003) has reviewed the empirical contingency-based studies regarding the development and structure of management control systems published since the early 1980s in a broad selection of accounting and management journals. His purposes were to provide a critical assessment of this research strand and to consider a variety of theoretical foundations that may be useful for future research. He recognized a set of typical key contextual variables as they have evolved in the literature. The examined variables, considered for their influence on MCS, are the following: external environment, technology (both traditional and contemporary), organizational structure, size, strategy and national culture.
Focusing on the period 1980-2014, Otley (2016) also provides an overview of research on management accounting and control which has adopted a contingency-based approach. Otley notes that contingency studies on management control have typically involved three levels of analysis2. At a first