Effective Management Control Systems

Ravneet Gill | 996680783

Effective Organizational Control -Flamholtz An effective organization is one where managers manage and understand how the control system helps motivate and direct employees in their roles and responsibilities. Understanding organizational control systems is vital for the long-term effectiveness of an organization. Without enough control systems in place, confusion and chaos can overwhelm a company. However, if control systems are "choking" an organization, the company will suffer from erosion of innovation, morale and entrepreneurship. Flamholtz does an exceptional job of identifying the key components of a framework for an effective management control system. These core components include: the core control system, organizational structure and organizational culture. The greatest strength of Flamholtz model is that it clearly describes what the components of this ideal framework are. However, in reality, merely outlining the components of a model does not truly provide in-depth understanding. From examining the way in which this model is portrayed, it becomes apparent that Flamholtz was more focused on describing what the actual components are rather than how they link back to the ultimate objective. Flamholtz main objective for utilizing this particular model was for the purpose of successfully influencing the behaviour of people within an organization. Now, influencing behaviour is not an easy objective to achieve because people are biased and these biases are difficult to change. The problem with this model is that it does not truly take the time to further justify how each component is necessary in altering someones behaviour to conform to the organization as a whole.

Beginning with the core control system, Flamholtz summarizes five processes: planning, operations, measurement, feedback, and evaluation and reward. As mentioned previously, Flamholtz does not do an adequate job of linking each element of control back to the ultimate objective (to influence behaviour). The model provides very basic definitions of what these five processes entail. This is useful to know so that organizations understand what to implement. However, in order to ensure true efficiency of a management control system, management must understand how and why these elements contribute to achieving efficient control. Due to Flamholtz lack of elaboration, many questions remained unanswered. Planning is associated with the determination of objectives and goals, as outlined by the model. However, how can objectives and goals, which sprout from top managements ideals, influence the behaviour of lower members of the organization? Operations are daily functions that are performed and must coincide with performance standards. Although, how can performance standards alter the way in which organizational members behave, if those very members interpret those standards differently? Measurement is the process of assigning numbers to represent organizational performance. The benefit of measurement is that it allows management to determine rewards from the evaluation process. Evaluation and rewards are the most obvious ways of attaining control by influencing behaviour. Flamholtz devotes a great deal of time and justification for this, which seems to be unnecessary because it is obvious that people will change the way in which they perform and behave if there is a reward system in place. Secondary to rewards, feedback is the next best way to help ensure that people behave in such a way that is beneficial to the organization. Unfortunately, Flamholtz did not spend a great deal of time emphasizing the importance of feedback within the model.

One important aspect within the model that Flamholtz fails to portray to the reader, is the idea that effective communication must be present in all five core system processes in order for the model to be successful. There is no use in setting objectives and goals if people within the organization have no idea what they are as well as why they are what they are. The same logic applies to operational performance standards. An organization should take the time to clearly and concisely communicate these standards to ensure maximum conformity. The model does seem to touch upon the communication element through the organizational culture component of control. It explains that culture is a set of values and norms which guide worker behaviour. Similarly, this section is also a broad summary of what organizational culture is as opposed to how to create a culture that can actually influence the way people behave. For example, the value and norms that top management believes in may not be in agreement with the value and norms that individual workers posses as their own beliefs. Thus, it is not only necessary to establish this informal system of control, but it is necessary to get workers to understand this belief system and make it a part of their own. Flamholtz model is concerned mostly with a formal system of control and does not explicitly express the importance of an informal system of control. The informal system through organizational culture is a powerful control tool. The informal system is where people within the organization interact in a way that is more casual. If an organization sets up an open and friendly environment, this informal system will gain control over and influence peoples casual behaviour which will reinforce the formal system that is meant to influence peoples professional behavior. Another aspect that the model fails to mention is that idea that control is not just a one way street from management to other organizational members. The model should also include a

suggestion regarding the influence of organizational members on top management. If organizational members feel as though they are not a part of the organization, this may help cause inefficiency in the control system because people will be less willing to conform to the ideals of the organization. In order to achieve control amongst different people within an organization, management must ensure that these people do not feel as though they are being dictated but rather they are a part of a unit that functions through communicative reciprocity. To conclude, the model does cover the major elements of an effective control system and goes into detail of other control elements such as the organizational structure and environment. In general, it provides structure to a concept that is intangible to begin with. The model itself is a good solution for managing peoples self-interested behaviours. In theory, the concepts are realistic and logical. However, at the end of it all, it seems as though the model is just a description of a control system rather than an understanding or justification of how all the elements come together to achieve control. Flamholtz Model and the Birch Paper Company There is one main problem when it comes to Birch Paper Companys case. Each division is operating under a decentralized approach and this is causing the transfer pricing system to be dysfunctional, as will be discussed later. The issue is that it is possible for each internal division to price their product above the going market price. This ability for individual price setting deters the divisions from making purchases internally, which is beneficial to the firm as a whole. Consequently, the company is facing a problem in their management control system because there is a mismatch between the goals of the company and the goals of individual managers.

The question of whether or not the vice president of the company should take action in this matter is difficult. If top management gets involved, the company may have to face the peril of undermining the autonomy of each individual division manager. However, by not getting involved they will lose the economic cost savings associated with internal purchasing. Management has three options they could exercise. Firstly, they could force internal purchasing. Secondly, they could completely allow managers to make autonomic decisions regarding purchasing. Finally, they could simply change the transfer pricing policy to an organization-wide standard. Transfer pricing and management control are interrelated. Both consist of common elements. Transfer pricing is the determination of an exchange price for a product or service when different business units within a firm exchange. The objectives of transfer pricing include: motivating managers, providing an appropriate incentive for managers to make decisions consistent with the firms goals, and to provide a basis for fairly rewarding managers. As we can see here, a main objective of transfer pricing is similar to that of a management control system making decisions consistent with the firms goals. Flamholtz model is helpful because it gives us an indication of where control is being lost and where there is conflict between divisional goals and organizational goals. This particular model emphasizes evaluation and rewards as an element of control. Currently, each division is being judged independently based on their respective profit and ROI. The problem here is that this evaluation system can create a bias among managers to perform in the interests of their own divisions rather than the company as a whole. Another option that management can exercise is changing the reward system so that managers are evaluated based on their contributed profit and ROI as a percentage of the organizations total profit and ROI. This would decrease the gap

between divisional goals and organization goals. Although, this measure may be unfortunate to divisions who may be allocated certain costs that are beyond their control and negatively affect their perceived performance. Currently the management for the Thompson division is not following the market for the pricing of its product. The Flamholtz model objective is to ensure that control is achieved by influencing peoples behaviour so that they conform to organizational objectives rather than just individual divisional objectives. The model is further useful in understanding Birch Paper Company, because it allows us to see that the main concern here is that decentralized decision making with regards to transfer pricing is causing managers to make decisions that are not in the best interests of the company. Decentralization in general is not a total failure. It has the benefit of giving other organizational members the feeling of being a part of the organization because they have the ability to make decisions that are direct contributions towards the company. However, because the transfer pricing system is dysfunctional at this point, management needs to step in and take control over the situation. As mentioned previously, the company has three options: force internal purchasing, allow full autonomy of decision making and implementing a firm-wide transfer pricing strategy. The first option would undermine autonomy, frustrate managers and eliminate the benefits of decentralized decision making. The second option, although it will retain the benefits of decentralization, it will reduce organizational harmony. From the Flamholtz model, Birch Paper Company should implement a system whereby subordinate divisions must adhere to a firm-wide pricing strategy that reflects current market prices. This strategy would increase internal

purchasing and help to align each divisions goals with that of the companys. The point of this strategy is to still retain decentralization within the organization and also exercise control over the divisions to ensure that each divisional manager understands that the firms overall needs are far greater than any individual division. This will lead to better performance for the company as a whole. Since the Flamholtz model emphasizes the effectiveness of an organizational as a whole, this solution would allow top management to assess and reward each divisional manager based on how they perform in relation to both divisional goals, as well as overall company goals. The problem with using the Flamholtz model for assessing the Birch Paper Company is that it does emphasize an organization as a harmonious unit that needs to conform to overall company objectives. The model does not integrate with a decentralized structure because decentralization does not necessarily achieve maximum conformity. This may hinder understanding of Birch Paper Companys specific case because it may allows someone to think that decentralization is not the way to go for the company and that it should be eliminated completely because divisional managers will not be looking into the best interests of the company as a whole. Due to this, someone might not understand that decentralization can be beneficial as long as the company takes the time to ensure goal congruence among the divisions. RIM, Corporate Governance and Dynamic Markets Once the industry leader with a promising outlook, RIM has now suffered a serious downgrade in both financial performance and overall creditability. The obvious problem from a consumers perspective is that the company fails to engineer and deliver newer, innovative products on a timely basis. However, so many other factors are determinants of RIMs demise which make it seem as though the company may never recover at this point. On June 30th, 2011,

an alleged anonymous senior RIM employee penned an open letter to the company's senior management. The writer's main objective was getting co-CEOs Mike Lazaridis and Jim Balsillie to seriously consider his or her suggestions and complaints on the current state and future direction of the company. Many of the concerns outlined in this letter included the following: a disengaging organizational culture with bitter employees, the inability to meet product launch deadlines, a miscommunication regarding end-user needs, a lack of synchronization between management and knowledge workers, pathetic marketing campaigns, and the cause that started this downward spiraloverconfidence. The list of issues is long, however they can all be related to one central aspect management control. All of these concerns stem from a deficiency in the companys internal management control system. From examining these issues, the initial cause of the companys continuing collapse is a result of it capturing the market with a bang at the end of 2006. A small Canadian company out of Waterloo, Ontario made it big in an industry that is constantly changing, which gave its management that feeling of being unbeatable. Overconfidence is a dangerous characteristic from a managerial perspective. A management control system is supposed to help influence behaviour in order to achieve organizational goals. It is apparent that the company failed to realize that its own management team needed a wake-up call. In an industry where Apple and Google have now greatly surpassed RIM in the blink of an eye, the companys management team is left with no one to blame but themselves. A company should never associate itself with overconfident managers, especially in the IT field.

Overconfident managers tend to perceive their abilities to be greater than they actually are. Self-perception often does not match objective reality. By indulging in the mental gymnastics of overconfidence, such leaders can discount others perceptions and thus easily overlook the insights and talents of other people, which is exactly what the anonymous writer alluded to in his or her letter to the company (bitter employees). The IT field is exponentially transitioning as newer, and more valuable technological products are made available. The problem is that RIM took their success for granted and assumed that the way in which they were operating was going to reap the same rewards in the future. They basically sat back and let competitors pass them by. From a management control point of view, they failed to communicate effectively with their knowledge workers. Top management may be sitting in the drivers seat, but in reality it is the engineers who truly make the car run. An effective management control system is one where managers have the ability to influence other workers while these same workers have the ability to influence managers. This is not how the organizational structure at RIM is designed. RIM is the epitome of a top-heavy company; a company weighed down by so much upper level management that the foundation of knowledge workers can barely support it. It is this unbalanced management structure that has led RIM into this mess, and until the company is willing to cut really deep and also consider getting rid of its co-CEO structure, nothing will change. Recently, the company has in their opinion made justifiable layoffs, but none of them came from management. RIM has taken the initiative to restructure its management team by broadening the job responsibilities of its senior members so that they are overseeing newly consolidated departments. In doing so, RIM has just allowed itself to be thrown into a pool of counter-productivity. In contrast, the better choice would have been to use a decentralized

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approach in order to give those knowledge workers the ability to exercise their talents and transform the state of the company, by allowing them to have a voice in operations. These people need to have a voice because they are the ones who are on the front lines of production and are equipped with specialized knowledge that management lacks. Due to the fact that the company appears not to be making any decision that is beneficial to its operations, it seems as though it will unlikely recover. The major concern for this company is that they need to invest more into research and development as well as marketing. Marketing is probably the key component for success at this point because technology has so far advanced now that the only way RIM can gain back its customer base, is by convincing people of the value of its products. Unfortunately for RIM, they have lost a chunk of their credibility due to their delayed product launches which has left consumers dissatisfied. If anything, what they need to do at this point is go back to basics and focus on their target market which is business people, and come up with new mobile solutions for this market. This will allow them to at least gain back their creditability and re-build. The other option that could help RIM gain back its reputation is through an acquisition or a partnership. The top two players in the smart phone industry, Google and Apple could easily buy RIM with their immense cash positions. Buying RIM in order to increase market share, improve technology, buy a brand name, and acquire what may be a bargain at these levels, makes RIM an appealing takeover. The largely unmentioned player in this space, however, is Microsoft. Google and Apple may be the dominant players by far, but Microsoft has the Windows Phone. The Windows Phone market share may be negligible compared to the Droid and the iPhone, but a RIM takeover could help Microsoft catapult itself into the smart phone battle. For one, buying RIM brings Microsoft to the forefront of the smart phone battle. RIMs

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technology and products together with Microsofts strong financials and global outreach could help it become huge competition for Google and Apple. The other potential benefit of this is that it could strike a bidding war over the company, which in the end would actually increase RIMs stock price.

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