CHAPTER 3

Management controls’
Structures and Types
Introduction
 Management control systems must fit an
organization’s structure.
 An organization whose structure is
decentralized has additional issues to
consider for its management control system
to be effective.
Centralization Vs. Decentralization
 Centralization and Decentralization are two
modes of working in any organization.
 In centralization, there is a hierarchy of formal
authority for making all the important decision
for the organization.
Centralization Vs. Decentralization….

 Centralization is a structure in which all the key

decisions are made at top management levels.
 Centralization inevitably exists to some extent in all
organizations, as well as at all levels of management
within organizations, as managers tend to reserve for
themselves many of the most crucial decisions that fall
within their authority.
Centralization Vs. Decentralization….
 A simple way to understand if an organization is
working in a centralized or decentralized manner is
by looking at two important aspects:
1. The place of the decision-making authority in the
hierarchy of the management i.e. Centralized.
2. The degree of decision-making power at the lower levels
in the organization i.e. Decentralized.
Advantages of Centralization
 The organization can strictly enforce uniformity of procedures
and policies.
 It can help in the elimination of overlapping or duplicate
activities and save costs.
 The organization has a better chance of utilizing the potential
of its outstanding employees.
 It offers a better control over the activities of the organization
by ensuring consistency in operations and uniformity in
decision-making.
Decentralization
 Decentralization is the freedom for managers
at lower levels of the organization to make
decisions. Autonomy is the degree of
freedom to make decisions.
 The greater the freedom, the greater the
autonomy.
Benefits of Decentralization
 Supporters of decentralizing decision making and granting
responsibilities to managers of subunits advocate the following
benefits:
1. Creates greater responsiveness to needs of a subunit’s customers, suppliers,
and employees.
2. Leads to gains from faster decision making by subunit managers.
3. Increases motivation of subunit managers.
4. Assists management development and learning.
5. Sharpens the focus of subunit managers, broadens the reach of top
management.
Costs of Decentralization
 Advocates of more-centralized decision making point
to the following costs of decentralizing decision
making:
1. Leads to suboptimal decision making.
2. Focuses manager’s attention on the subunit rather than the
company as a whole.
3. Results in duplication of output.
4. Results in duplication of activities.
 Factors determining the Degree of
Decentralization
 The degree of Centralization or decentralization depends
on a wide range of factors which are different for different
organizations, here is a common list:
1. Significance of the decision
2. Size of the Enterprise
3. The Attitude and Philosophy of the Management
4. Control Techniques
5. Availability of Capable Executives, and
6. External Environment Influences.
1. Significance of the decision
 Decisions which are costly either in terms of money,
goodwill of the company, employee morale and other
such decisions which are significant to the
organization are centralized at the top-levels of the
organization.
 Therefore, even in a decentralized organization, these
decisions are made in a centralized manner.
2. Size of the Enterprise
 The size of the organization is an important factor which
determines the degree of decentralization.
 A larger firm needs more decisions.
 Also, a large-sized company has numerous departments
and levels.
 Coordinating all of them and consulting several
specialists and executives can take a lot of time, delaying
the decision.
 3. The Attitude and Philosophy of the
Management
 Decentralization is the dispersal of authority.
 Therefore, the attitude of senior management plays an
important role in the extent and mode of authority
dispersal.
 Usually, senior executives with a traditional mindset
are a little skeptical about decentralizing authority.
4. Control Techniques
 In most organizations, senior management believes that
some vital aspects like the price of the product, credit
offered, etc. must have a uniform policy.
 And centralization is the best way to achieve this.
 This desire to control these aspects discourages the
organization from allowing even the regional offices to
make decisions about these aspects.
5. Availability of Capable Executives
 Many times, senior executives are willing to disperse
authority but are unable to find qualified and capable
junior managers to do so.
 This dearth (lack) of capable executives can restrict the
nature and extent of decentralization.
 Further, many organizations train the junior managers to
bring them up the curve. Interestingly, decentralization
offers many opportunities to impart the training too.
6.External Environment Influences
 Many external forces also play an important role in
determining the mode of decentralizing authority.
 External forces like government control, unions, fiscal
policies, etc. are some examples.
 In the real world, these factors deter (discourage) the
management of an organization from dispersing authority
since these external forces control many factors.
Organizational ambidexterity
 The term “organizational ambidexterity” was first used
by Duncan (1976), who argues that organizations need
to change their structures over time to enable
innovation and efficiency.
Formal Control
 The organization has clear procedures, rules and guidelines in place to
explain the different managerial requirements.
 These guide, motivate and direct the management, as well as the
subordinates, to perform their tasks in a manner that helps achieve the
operational goals.
 They are also used to co-ordinate behaviors of superiors and subordinates.
 Security guards, locked storerooms, vaults, computer passwords, television
surveillance, and other physical controls may be part of the control
structure.
 .
Examples of Formal Control
 An example of a formal system would be the
rules and guidelines used by the human
resource department in terms of functions such
as hiring and developing staff.
Informal Control
 The organization will also have informal and unwritten
processes in place for management control.
 These are aimed to provide higher motivation amongst
the employees and ensure organizational goals and
strategies are appropriately implemented.
 Informal control systems also boost goal congruence.
Example of Informal Control
 An example of informal control system would
be the good behavior expected from managers
and subordinates, such as loyalty towards the
organization and respect of the organizational
culture.
Types of MCSs
 Literatures categorized MCS into five:
1. Cultural controls,
2. Planning controls,
3. Cybernetic controls,
4. Reward and compensation controls, and
5. Administrative controls.
1. Cultural controls
 Malmi and Brown (2008) argue that
culture can be used to regulate behavior
and can therefore serve as a control
system.
2. Planning controls
 Planning directs behavior and effort by providing
standards and goals.
 The planning process allows for the coordination of
goals throughout the organization and ensures the
alignment of activities with the organization’s strategy
(Malmi and Brown 2008).
3. Cybernetic controls
 Cybernetic controls direct behavior by setting targets,
measuring activities and assigning accountability for
performance (Malmi and Brown 2008).
 Malmi and Brown (2008) identify budgets, financial
measures, non-financial measures and combinations of
both financial and non-financial measures as basic
cybernetic systems.
4. Reward and compensation controls
 Reward and compensation controls aim to establish
congruence between the goals of the organization and those
of employees by motivating them by means of, for instance,
bonus payments (Malmi and Brown 2008).
 However, Grafton et al. (2010) explain that reward systems
can result in employees focusing their efforts on those
measures used for their evaluation and not on those that
would be most appropriate, which can endanger the
achievement of the organization’s objectives.
5. Administrative controls
 Malmi and Brown (2008) argue that administrative
controls can direct employee behavior by organizing
and monitoring behavior and by determining
responsibilities and the conduct of processes.
End of CH3

Thank you!