9 Integrated Performance Management through Effective Management Control
WERNER BRUGGEMAN
Performance measurement and performance management are vivid themes in the literature on management control. So, it is only natural that we investigate how this literature has contributed to the field of Integrated Performance Management. The purpose of this chapter is to describe how management control systems can be used to effectively manage company and business performance. First, we define the scope of management control and describe the link with organizational strategy. Then, we focus on the three elements of the management control system: (1) the management control structure; (2) the control process; and (3) the management control culture (beliefs systems). We will describe these three elements in greater detail and give an overview of the findings in mainstream contingency research studying the effectiveness of control systems in various environmental and organizational contexts.
From the definition above, it follows that management control plays a central role in managing the company’s performance and the implementation of its strategies. Therefore, it is of vital importance that management behaviour, which is stimulated by the management control system, is consistent with the strategy to be implemented (the so-called
‘intended strategy’ – see also Chapter 6).
The starting points of the management control process are the mission, the vision and the strategies of the organization. We refer to Chapter 6 for a more thorough discussion of each of these concepts, but recapitulate them very briefly here. The missionof an organization is a description in general terms of the role of the company towards its stakeholders. It describes the reasons for the company’s existence, its strategic focus and values, as well as how the long-term goals should be realized. The goals are descriptions of the long-term desired future of the company. The mission and goals translate into strategies, which specify the way in which the vision aspired to should be reached. The strategy in turn is translated into concrete performance objectives or targets. This is usually done through formalized action plans.
Management control and goal congruence
The purpose of management control is to maximize congruence among the goals of the organization, its various entities and its individual managers. This is called goal congruence. The way in which managers react to management control information depends to a large extent on their personal goals. For effective management control, it is important to be able to measure the impact of these motivators, because they largely determine the behaviour of people in an organization, as well as the desirability of the consequences of their behaviour. The management control system should be designed in such a way that, whenever managers take decisions that fit into their personal goals, these decisions should also be in the interests of the company as a whole. In other words, the management control system must create the conditions to foster a feeling within the members of the organization that they can best realize their personal goals by contributing as much as possible to the realization of the general company goals. It is clear that the way in which managers are evaluated and financially rewarded for their performance plays a significant role in reaching ‘goal congruence’ (see also Chapter 13).
Goal congruence is an important condition for effective performance management. The problem of goal congruence can be described in more detail in the following way. Corporate goals are translated into departmental goals, and in these departments people are working who also have their personal goals. A first problem that can arise is a lack of congruence between the corporate and departmental goals. For example, a department or division of a company can have a long-term vision that says it is desirable to stay small and be profitable (in other words ‘small is
beautiful’). On the other hand, top management might be striving for a company goal of strong growth and therefore wants the division to grow.
In this case, there is a lack of congruence between the different visions, and a number of meetings will have to be organized to align the goals and strategies.
However, there is also the possibility that the division manager is opposed to the growth of his division because he is personally reluctant to make the required efforts. In this case, there is a conflict between the personal goals of the manager and the goals of the company.
Role of management control in performance management
Verifying whether the company (or the business unit or department) is on track is an important management function. Management control is an important instrument for motivating personnel to act in accordance with the goals and strategies of the organization. This motivation is one of the major driving forces of the performance and the value of the company.
The management control system must be adjusted to the goals and the strategies of the company and it must be optimally aligned.
The contribution of control to strategy implementation Robert Simons (1995) has outlined how management control can contribute to effective strategy implementation. In his book, Levers of Control, he introduced four key constructs that must be analysed and understood in order to implement strategy successfully: core values, risks to be avoided, critical performance variables and strategic uncertainties. Each construct is controlled by a different system, or lever, the use of which has different implications.
These levers are:
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Beliefs systems, used to inspire and direct the search for new opportunities.•
Boundary systems, used to set limits on opportunity-seeking behaviour.There are three broad categories of boundary systems: business conduct boundaries, internal controls and strategic boundaries.1
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Diagnostic control systems, used to motivate, monitor and reward achievement of specified goals. Diagnostic control systems attempt to measure output variables that represent important performance dimensions of a given strategy: critical performance variables. These factors must be achieved or implemented successfully for the intended strategy of the business to succeed. Diagnostic variables should be measured, monitored and controlled, but reporting on them to higher management is on an exception basis only, when a value falls outside a normal control limit and corrective actions must be taken.•
Interactive control systems, used to stimulate search and learning, allowing new strategies to emerge as participants throughout theorganization respond to perceived opportunities and threats. As a fourth lever of control, these systems focus attention on strategic uncertainties and enable strategic renewal (i.e., emergent strategies).
Control of business strategy is achieved by integrating these four levers of control. The power of these levers in implementing strategy does not lie in how each is used alone, but rather in how they complement each other when used together. Two of the control systems – beliefs systems and interactive control systems – motivate organizational participants to search creatively and expand the opportunity space. These systems create intrinsic motivation by creating a positive informational environment that encourages information sharing and learning. The other two levers of control – boundary systems and diagnostic control systems – are used to constrain search behaviour and allocate scarce attention. These systems rely on extrinsic motivation by providing explicit goals, formula-based rewards and clear limits to opportunity-seeking. These four levers create tension between creative innovation and predictable goal movement. This tension requires managers of effective organizations to know how to achieve both high degrees of learning (innovation) and high degrees of control (efficiency) (Simons, 2000: 304).
Levers of control and the organizational lifecycle
Developing an integrated control system does not happen overnight.
Managers of small entrepreneurial firms perform their strategic control
Figure 9.1 Levers of control Source:Simons (1995: 159)
rather informally. As the business grows larger, however, informal processes become inadequate. Simons (1995, 2000) illustrates how the levers of control can be successfully implemented as a business grows and matures (see Figure 9.2).
In their most recent book, Kaplan and Norton (2001) point out the importance of using the Balanced Scorecard (see Chapter 3) as an interactive control system. It is clear from Figure 9.2 that an organization must have some experience with other control systems before it can exploit the Balanced Scorecard in this way.
Diagnostic systems, boundary systems, and internal control systems are all necessary, but they do not create a learning organization aligned to a focused strategy. Some Balanced Scorecard implementation failures occurred because organizations used their scorecard only diagnostically, and failed to get the learning and innovation benefits from an interactive system. The CEOs of successful Balanced Scorecard adopters succeeded because they use the scorecard interactively, for communication and to drive learning and improvement. They set overall strategy and then encouraged people within their organization to identify the local actions and initiatives that would have the highest impact for accomplishing the scorecard objectives. (Kaplan and Norton, 2001: 350)
Management control versus task control
Anthony and Govindarajan (1995) distinguish management control, which ultimately is about implementing strategies, from strategic planning and control and task control:
Figure 9.2 Introduction of control systems over the lifecycle of a business Source:Simons (1995: 128)
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Strategic planning and control is the process of determining and evaluating the goals of the organization, and formulating or reformulating the broad strategies to be used in attaining these goals.Strategic control refers to the maintenance of the environmental conditions of strategies. Strategic control is used to evaluate the background of existing strategies and the environmental assumptions on which the strategies were formulated. It can also involve the reformulation of strategies.
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Task controlis the process of ensuring that specific tasks are carried out effectively and efficiently. For example, internal audit and internal control are often associated with task control.Elements of a management control system
In the previous paragraphs, we have described the importance of management control for strategy implementation and for performance management. In the remainder of this chapter, we go deeper into the details of the management control system and focus on its compounding elements. A management control system consists of three basic elements: (1) the management control structure; (2) the management control process;
and (3) the management control culture.
The first element, the management control structure, deals with the division of the organization into ‘responsibility centres’. A distinction needs to be made among the various types of responsibility centre, such as ‘revenue centres’, ‘expense centres’, ‘profit centres’, and ‘investment centres’.
Determining the optimal structure is part of the task of management control.
The second element in a management control system, the management control process, comprises the cycle of: planning for the expected input and output; measuring the results; comparing plan to reality; and, finally, adjusting if necessary.
The third element is the management control cultureor the beliefs systems.
This is the combination of communal values and behavioural norms, which determine the behaviour of managers and staff.