Performance Management. Ch. 2 The Evolution of the Concept of Management Control

Performance Management

Ch. 2 – The Evolution of the Concept of

‘Management Control’

Chiara Demartini

[email protected]

Structure of the course and

materials

•

First part:

–

Principles of Financial Accounting

–

Principles of Financial Statement

Analysis

•

Second part:

–

Performance Management

•

http://economia.unipv.it/pagp/pagine_personali/cdemartini/

Teaching notes & Demartini C. (2013),

Performance

Management Systems. Design, Diagnosis and

Part Two:

A PMS is the set of “evolving formal and informal mechanisms,

processes, systems, and networks used by organizations for conveying the key objectives and goals

elicited by management, for

assisting the strategic process and ongoing management through analysis, planning, measurement, control, rewarding, and broadly managing performance, and for supporting and facilitating

organizational learning and change”

A PMS is the set of “evolving formal and informal mechanisms,

processes, systems, and networks used by organizations for conveying the key objectives and goals

elicited by management, for

assisting the strategic process and ongoing management through analysis, planning, measurement, control, rewarding, and broadly managing performance, and for supporting and facilitating

organizational learning and change”

(Ferreira and Otley 2009: 264).

Key features

1. Types

of mechanisms

(formal and informal)

2. Effectiveness

in strategy

accomplishment

3. Enabling role in goal

achievement, through

learning

and

change

Evolutionary Paths in Organisational Control

•

From

formal

to

informal

control

•

From

control

to

strategy formulation

and

implementation

•

Change in Performance Management

meaning

Organisational theories of control

Operating rules

Enforcement rules

Coalition of agents that implements a

set of coordinated and cooperative

actions in order to perform individual

objectives by means of the

organizational objectives

Economic theories of

organisational control

•

Economic theories (

Theory of the firm

):

–

Principal-agent theory

–

Transaction cost theory

Ownership

Control

Organisational contracts

Market transactions

Sociological theories of organisational control

•

Sociological approaches to organizational

control try to explain and

prescribe organizational behaviour by

emphasizing the central tendencies of

groups

•

Organizational control exerted by

SOCIAL

STRUCTURES

RULES,

POLICIES,

HIERARCHIES

FUNCTIONALISM • Three main organisational levels (technical, managerial, institutional) • Delegation and specialisation GENERAL SYSTEMS THEORY • Environment causes deviations from equilibrium • Control should adjust deviations CONTINGENCY THEORY • Fit between environmental and organisational variables (culture, size, strategy, environmental uncertainty, etc.) THEORY OF BUREAUCREACY • Rational economic action • Principles: • Jurisdiction areas • Hierarchy • Written documents • Training • Full working capacity • General rules

Psychological theories of organisational control

Recruitment, Selection,

Training, Allocation

Authority, Influence,

Psychological contact

Job specialisation,

Individual identification

Behavioural theories of organisational control

Behavioural theories focus on:

1. firm as its basic unit,

2. firm behavior with respect to such

decisions as price, output, and

resource allocation as its objective,

3. Emphasis on decision making

Process of

choice which

leads to

action

From Control Theories to Management Control

Approaches

•

Assumption of “one best way”

•

Control is the “central idea” of scientific

management

•

Relationship between control and planning

•

57 different meanings of control

1911

1920 1914

STRATEGIC PLANNING MANAGEMENT CONTROL OPERATIONAL CONTROL

Strategic Planning

Objectives

of the organization, on changes

in these objectives

Resources

used to attain these objectives

Policies

that are to govern the acquisition,

use, and disposition of these resources

Strategic

planning

is the

process

of

deciding

on

Management Control

Management control is the process by which

managers assure that resources are obtained and

used effectively and efficiently

•

Efficiency

•

Effectiveness

•

Economy

Purposes of Management Control

Extent to which an organisation or programme produces particular outputs (which are concrete and

measurable) or outcomes (which may not be measurable).

Extent to which an organisation maintains a particular level of production with fewer resources or increases

the level of goods or services it produces with a less than proportionate increase in the resources used

Economy is an input measure and is normally based around the expenditure of the organisation.

Operational Control

Operational control is the process of

assuring

that specific tasks

are carried out effectively and

efficiently

STRATEGIC PLANNING MANAGEMENT CONTROL OPERATIONAL CONTROL

•

Control is exerted by and on

people

(Argyris,

1950; Hoefstede, 1968; Schiff & Lewin, 1970)

•

Social psychology

is the source discipline of MC

(Anthony, 1965)

•

Types of control (Hopwood, 1974):

–

administrative

,

–

social

and

–

self-control

•

having one basic function: to help ensure the

proper behaviours of people in the

organization [… by]

influencing

people’s

behaviour

•

Ouchi addressed three mechanisms of control:

1. the

market

,

2. the

bureaucratic

and

3. the

clan mechanism

(Ouchi, 1979, 1980).

Organic association which resembles a kin network but

may not include blood relations

Contract relationships that enable different agents to exchange different goods or services at certain conditions specified within the contract

Bureaucratic mechanisms solve to some extent the market failures, in that they

simplify the contract.

Clan Control

•

MCS should effectively match environmental

variables:

1.

technology

,

2.

environment

,

3.

size

,

4.

organizational

structure

and

5.

strategy

•

A strategic MCS is

Strategic MCS

“A system to support managers in assessing the relevance of

the organization’s strategy to its progress in the

accomplishment of its goals and, where discrepancies exist, to

support

areas needing attention

” (Lorange et al., 1986: 19).

•

Starting in the '70s a stark change in management philosophy

affected the management control discipline

Internationalisation

New MC

techniques

(extended

boundaries)

Relevance Lost

•

COPQ is the cost or price a company pays when all of its

products are not perfect. In other words, COPQ would go

away completely if the products are made perfectly and

without any need to rework them whatsoever.

Costs of non-conformities

Cost of inefficient processes

Cost of lost opportunities for sales

• These costs are due to deficiencies discovered

before delivery of the product, with the product not being able to meet stated and perceived needs of the customer

Internal Failure

Cost

• These costs are associated with deficiencies found after product is delivered to the customer.

External

Failure Cost

• These are costs associated/incurred to meet the degree of conformance or determine the degree of conformance to customer requirements.

Prevention

Cost

• Prevention costs are incurred to keep the Appraisal

Appraisal Cost

•

The economic order quantity (EOQ) is the order quantity that

minimizes total holding and ordering costs for the year.

Economic Order Quantity

Assumptions:

Relatively uniform & known demand rate

Fixed item cost

Holding and Ordering Costs

A = Demand for the year

Cp = Cost to place a single order

Ch = Cost to hold one unit inventory for a year

Total Relevant Costs = Yearly Holding Costs + Yearly Ordering Costs

•

[t]he choice of the term

performance measurement

reflects an

attempt to avoid more traditional accounting terms like control or

performance evaluation. If management accounting and the

environment in which it operates are currently facing a paradigm

shift [Shank 1989; Porter 1990], it is best to use a term without

strong connections to the old paradigm (Nanni et al., 1992: 9).

BUT

what

is a performance?

•

“[p]erformance is a

social construct

” since it is defined by the

organization and its environment (Lebas and Euske, 1992: 71).

Subjective

v

objective

performance

Local

v

global

performance

Causal

v

isolated

performance

Strategic

v

operational

performance

Integrated

v

stand-alone

performance

Measurement

v

management

of performance