Conceptual Model Notes:

- Everywhere but not too strong a link; not well developed yet & not that much attention
- Need an “integrated conceptual framework to understand, visualize, and analyze
control issues, as well as to facilitate design of new and/or redesign existing control
systems” (p. 597)
- Organizational control: nature, role, functioning, design, effects; control =/= control
system/design it, as well as its importance in overall management process (managerial
lens)
- Target audience: managers, management theorists

Table of Contents:
1. Fundamental concepts
2. Framework for control
3. Case
4. Criteria for design
5. Evaluation of control systems

Key issues:
1. Nature of control
2. Managerial functions of control
3. Organizational control system
4. How to design/re-design control systems to be desirable

Nature of Control
- “Organizational control”: process of controlling or influencing the behaviour of people
as members of a formal organization to increase chance they will achieve
organizational goals – can be pretty random; not total behavioural control – not
feasible/desirable

Managerial Functions
- Because people are different and there is a need to integrate and have direction = need
control
- Want to align the individual and organizational goals with control systems to overcome
personal/selfish/ego behaviour
- Bigger the organization, the more complex the control mechanism – need optimized
balance
- Too loose = chaos; too tight = bureaucracy

4 Functions: to motivate people to behave in consistent ways with org. goals

1. Motivate people to make decisions and take actions consistent with organizational
objectives (cut costs vs. fly first class)
2. Control systems must integrate different parts of organization (e.g. avoid cross-
purposes; expedited sale vs. rush order that disrupts production schedule = inefficient)
 3. Provide info from results of operations and peoples’ performance: evaluates results +
not operating on daily basis with decisions reviewed (autonomy with control)
4. Facilitate implementation of strategic plans

Implementation of strategic plans

1. Goal emphasis: motivated to focus on org goals = goal congruence
2. Organizational integration: integrate everyone’s efforts; lack of coordination = loss
3. Periodic opportunities to assess progress to goals; oral/written reports – control; but
bigger = need more coordination
4. Autonomy with control: permit decentralization of daily operations while assuring
objectives; techniques of control over individual matters = how to optimize?
a. The answer: financial control – principle of return on investment, which is
important working instrument for measuring operations of divisions
b. Do your own thing, then evaluate results of decisions and actions depending on
rate of return on investment – autonomy but still controls the goals of
executives;
c. Maximized degree of control to be most efficient as possible per department
5. Implementation of strategic planning: implement strategy and planning process
a. Effective control system = need to fulfil plans
b. Planning is component of control process

Autonomy with control; how to run big organizations with less people
- Significance of global competitiveness and downsizing

Control vs. Control Systems:

- Control is the individual act; control systems is not just collection of controls;
- Organizational control system: set of mechanisms (process/techniques) designed to
increase chance of attaining organizational objectives; ultimate goal –not to influence
behaviour but actions and decisions where judgements are consistent with goals
- Not visible or metaphysical; they are real and permeate the organization

Control systems – not easily perceivable because complex set of ongoing organizational
processes:
1. Budgeting
2. Strategic Planning
3. Measurement
4. Performance Evaluation
5. Compensation system

Framework for Visualizing an Organizational Control System

- Framework to describe control system and evaluate its functioning and effectiveness
- Make control system more visible; managerial lens
- Major components, description, how to articulate to be achieved, practical value as tool
Framework:
- 3 parts of the Organizational Environment: macro-control system
o core control system – cybernetic structure of 4 subsystems linked by feedback,
feed-forward loops
 Planning
 Operations
 Measurement
 Evaluation-reward
o organizational structure – set of rules and interrelationships
o organizational culture – value system, beliefs, assumptions; patterned ways of
thinking; characteristics of the entity
- bounded by organization’s environment

The Core Control System – part of macro control system

- Focus on human behaviour to attain objectives
- Behaviour: object of organizational control; includes acquisition, allocation, utilization,
development, conservation, disruption of organizational resources = has to do with
resources
o Operational/behavioural system
- Based on 5 basic organizational processes: planning, operations, measurement,
feedback, evaluation-reward – separate system each but also sub-system of overall core
control system

A. Micro-Control System = model of core control system

a. The Planning Subsystem
i. Process of deciding objectives/goals of organization and members, and
how to attain the goals
ii. “Objectives”: things wanted to be achieved in given performance area
(like markets, products, personnel, fin. Results, etc.)
iii. “Goals: Quantitative level of aspiration sought to be attained for given
objective
1. Specific steps to get there: e.g. financial objective = satisfactory
return on net assets; goals = standard performance = specific 18%
of pre-tax ROI
iv. Activities to pre-defined objectives that are planned out: e.g
1. Ultimate objectives: most important reason/purpose for org.
2. Instrumental objectives
3. Ultimate objective = high level strategy
4. Instrumental objective = objectives to get to ultimate
5. Function of org. objectives in control system = direct/channel
human effort; the ends and means for directing people
v. Goal: what performance needed for objective (objective = generate
revenue; goal = increase it by 5%); so goal is the incremental statistic
aimed for to achieve the overall objective
 vi. Goals based on management judgement, expectations and historical data
vii. Used to establish desired performance levels, motivate performance and
benchmark for assessment of actuals
1. E.g. standard costs to motivate employees to control costs and
evaluate performance
viii. Objectives/goals used to facilitate ex ante and ex post control
1. Ex-ante: motivation of performance before
operational/behavioural system executed; standard intended to
influence performance levels
2. Ex-post: Use of goals to evaluate basis of rewards to reinforce and
modify future performance
b. The Operational System
i. On-going system for performing functions for day-to-day org. activities
ii. Any level of organizational analysis
iii. Core control system = for any component of organizational; individual to
entire enterprise
c. Measurement System
i. Process of assigning numbers to rep. behaviour and performance
ii. Includes accounting system –fin. And managerial performance
iii. Non-financial measures too: (e.g. production indices, scrap rates,
rejection ratios, social accountability, etc.)
iv. Measurement = dual function
1. numbers generated to measure extent achieved to then aim for
corrective feedback: “Output Function” of measurement
2. Measurement Operations caused by act/process of measurement;
being measured influences people, and Is stimulus: “Process
Function”
v. For example: accounting system (measurement system), budgeting
system (planning and measurement); not the full control system
1. Accounting misses planning and evaluation reward
2. Budgeting lacks evaluation-reward
3. Needs each of the 4 subsystems to put together the full control
system
vi. Effective control system: all needs to be measured; if one is dysfunctional
or unmeasured = then it will tend to be ignored
vii. Folly of rewarding A but wanting B – B will be ignored
d. Feedback System:
i. Information about operations and results
ii. 2 types of feedback:
1. Corrective: information about performance of operational
system, designed to adjust operations to improve performance
2. Evaluative: Information about how well the operational system is
doing; basis for performance eval. & awards
 3. Basically, one is applicable, the other is just a judgement/fact
sheet
e. Evaluation & Reward Subsystem – final component
i. Mechanisms for performance assessment and giving rewards
ii. Ex ante and ex post control
iii. Evaluation: assessing performance of one or groups on basis of meeting
goals
1. Based on system of measurement & measures of performance
often uses accounting measures like budgets & std costs
2. Determines how rewards will be administered
iv. Rewards: outcomes of desirable behaviour
1. Either from performing task: extrinsic or intrinsic
2. Do something b/c interesting = intrinsic; more deep work
3. Do because expect to receive something = extrinsic
4. Need a combo of extrinsic and intrinsic rewards
5. Purpose: motivate ppl to behave in ways to attain goals, aim for
positive performance and change negative performance
6. Effective if rewards linked to org goals/behaviour produced leads
to goal attainment for org and individuals
7. Must see tasks as a method of gaining their own goals (goal
alignment; end rewards are for the self too)
v. Failures of rewarding:
1. No rewards for motivating desired behaviour
2. Rewarding the wrong thing when aiming for another (Kerr 1975:
“folly of rewarding A while hoping for B”
3. E.g. rewarded for not exceeding budget, but need to pay attention
to personnel development
4. Power of rewarding = to motivate/reinforce behaviour
a. Ex-ante: initial motivation when expecting rewards
b. How to keep consistent once achieved? Reinforcing
behaviour = evoke, then reward means greater chance to
repeat
5. Reinforcing behaviour: recognition, praise, money, promotion,
performance evals
a. Primary: intrinsically rewarding; satisfies needs directly
b. Secondary: are rewarding b/c of association with primary
reinforcers and how it leads to primary
i. Extrinisically
6. Principle of reinforcing behaviour: you get desired behaviour if
doing it increases chance of reward; no reward = less likely to
occur = “extinction” / extinguished
 vi. Effects of rewards: not just what, but also when;
1. Immediate rewards
vs. delayed
2. Longer it takes = less
effect on future behaviour
3. Immediate
reinforcement often not
feasible (e.g. compensation
going up is hard); need like
accumulating points or
progress bar
a. Need to see return on
putting work into it
vii. Last issue: what to reward
for; all of it or some of it?
1. Sustained only when
some of it is rewarded
2. Slot machines =
infrequent payoffs but
people want it so bad that
they’ll keep playing; addictive
because they look for the
next time they get returns

f. The Whole Core System

i. Cybernetic model: between machines and living things & is closed-
loop/feedback system –results affect the beginning of planning = repeat
ii. Operational (behavioural) system is the focus; all goes back to this
1. Includes planning, measurement, feedback, reward/eval (basically
everything else)
iii. Initial process of goal/objective setting > effort > performance standards
> ex ante and ex post control
1. Ex ante: motivates behaviour in operational system
2. Ex post: Inputs to eval/reward system
iv. Measurement > measured dimension of goals; compare it to the
standards
1. Corrective & evaluative feedback
v. Rewards: also towards ex ante and ex post control functions
1. Ex ante: source of arousing motivation
2. Ex post: reinforce/extinguish behaviour
g. Illustrating Core Control System:
i. Example with manufacturing plant
ii. Noted Steps:
 1. Identify Key Result Areas relevant to Operational/behavioural
system
a. All should be different in nature
2. Identify Measurement method for objectives and goals for the
year compared to historical data (but is this introducing
bureaucracy?)
3. Record this year’s goals, link to actual performance, then interim
results with consistency: evaluative feedback and then corrective
feedback
4. Illustrate and announce to members to remind them of
performance: Key result areas, current performance goals, prior
years, historical best, performance to date
a. Serves as a reminder
5. Link to rewards

h. Different Configurations of Core Control Systems Elements

i. 4 elements must be present to function fully: goals/objectives (planning),
operational/behavioural system (measurement), feedback,
evaluation/rewards
ii. Can have different systems; if some are missing, cannot fully evaluate all
sides of the organization
iii. Each control system may have different degrees of control and show
different forms of results
iv. Control is a variable; amount of control is a function of how the control
system elements are configured
v. Control Levels
vi. First Degree Level: Operations > Results; measurement is by-product of
supervision
vii. Second Degree Level: Operations plus any additional element that leads
to the results or loops back to operations
1. E.g. Planning > Ops > Results or Ops > Results > measurement
 viii. Third Degree Level:
Planning > Operations >
Results > Measurement
ix. Fourth Degree: Adds
in Feedback, evaluation
and rewards
x. Illustrates effects and
defects of control
systems; and how to
design/evaluate it

B. Organizational
Structure – 2nd
Component of Overall
Macro-Control System
a. Structure functions as
form of control:
developed as response to
problem of control; can
be a form of control (Yes)
b. A control mechanism
that specifies behaviours
and expectations of
people in roles, extent of
authority and report relationships within roles of organization
c. Relatively static
d. Contributes to process of control
e. Specifies degree of centralization/decentralization, functional specialization
(specializing), vertical/horizontal integration, span of control (direct reports)
f. Strategic response to environment and requirements of market
C. Organizational Culture – 3rd Component of Overall Macro-Control System
a. Different definitions/denotations
b. Set of values, beliefs, and social norms which tend to be shared by its members
and, in turn, tend to influence their thoughts and actions
c. Starting point in designing control system; changes slowly and hard to change
d. Can be designed or a product of management design; can change based on
personnel appointment and changing the direction of goals
e. Vision and overarching value system changes culture
f. E.g. RCA Corp. changing intense politicking to rewards performance (effective)

3 Major Managerial Uses of Control Systems Model

1. Describe/understand structure of control systems
2. Evaluate the functioning and effectiveness of such systems
 3. Design/re-design control systems as tools

Describing Control Systems

1. Can’t just use organization chart, far more complex (roles of people and reporting
relationships); only approximation
2. Specify elements of control system further and interrelationships; E.g. The control
systems chart which indicate how planning, ops, measurement, results, feedback,
eval/rewards are intertwined and what roles are involved (degree of control involved as
well)

Evaluating the System

1. Function and effectivenesss
2. Control systems chart, whether: (1/3 = development; 2/4 = articulation as integrated
system)
a. 3 major elements have been developed (Culture, structure, core control system)
b. if elements are fluent/coherent/communicate with each other
c. Components of core control system are developed (plan, measure, etc.)
d. If core control system components are adhesive
3. Organizations don’t always have all components, although they can
a. If gap in organizational/individual performance – likely design (or lack of) in
organization’s control system
b. Either in regards to development or articulation/integration

Design and Re-design of Control Systems

1. Model can be used as lens to understand current flaws in control system that lead to
suboptimal functioning
2. Can use as template for new system/redesign the one in place

From the example:

- Too focused on sales: the culture and structure of the firm focused purely on sales,
meaning controls, variances, budgets, planning and measurement, feedback all were
irrelevant
- Personnel compensated, promoted, and recognized based on sales level = roles were
not defined, culture focused on sales; promoted based on sales, evaluated unit based on
how much good salespeople there were => thus, sales is king
- All other things were irrelevant and scorned; no impact except as forced on the branch
managers
- Forced to accept their dictates; profits not paid attention to
- Folly of rewarding A while hoping for B: branch managers were given bonus based on
sales and not branch profits; they were rewarded on sales—reorient to profits

Usefulness of the System

- Control system not merely control techniques
 - It has to include how well they’re integrated and if they motivate and control the
behaviour of the firm’s managers
- Real control system: combo of culture, structure, budgetary planning & accounting
measurement system

The gap from the example

real estate firm:
- Objective is profitability
- System focuses its goals on
sales, and rewards based off
of sales
- Thus, gap is apparent;
little/no attention to
budget/variances

Revise control system to focus

on profits rather than sales
- Structure/managerial role
needs to be revised
- Core system needs to be
revised

Criteria for Design and

Evaluation for Effective
Control Systems
- Ultimate objective/criterion
of effective control system:
the extent to which it increases profitability that people behave in ways that leads to
attaining org objectives
- - Goal congruence: if not consistently congruent and has goal conflicts = ineffective/less
effective

3 Questions posed for criteria for effective control systems: RELEVANCE, VALIDITY,
RELIABILITY
1. Extent that control system controls all relevant goals and performance (penultimate
goal of control systems; ultimate goal)
2. If it leads to behaviour which is intended to or claims to be intended to lead
(instrumental)
3. How consistently it leads to that lead behaviour (Instrumental)

Behavioural Relevance:
- Identify all relevant behaviours/goals required
- If not all identified, people will either ignore it or channel to desired but uncontrolled
behaviour
 - If not controlled = only hope
Behavioural Validity
- Extent to which control system leads to behaviour that it claims to
- If it does what it claims to desire to do = behaviourally valid
- Conflicted = behaviorally invalid
- Impossible to make completely valid/always consistent; aim for satisfactory degree

Behavioural Reliability
- Extent of producing the same behaviour repeatedly, intended or not
- Can be reliable but unintended behaviour (invalid), or valid but irregular

Ineffective Control Systems

- Ineffective = dysfunctional behavioural consequences
- 2 types of dysfunctional behaviour:
o Goal displacement
o Measurementship

Goal Displacement: lack of congruence created by motivation to achieve some goals at the
expense of other intended goals
- Caused by 3 main things:
o (1) Suboptimization: when performance of organizational subunit is optimized at
the expense of another unit or the organization’s whole goals
 E.g. If rewarded based on variance measurement: unit focuses on
measured performance, ignores all else not responsible for
 Not wanting to modify production schedules for special requests b/c
additional manufacturing costs
 Buying cheaper materials which affect production b/c they’re measured
by cost reduction
 Profit is then not their goal
 Suboptimization occurs b/c factored overall org goals into subgoals
 Difficult to avoid in larger/complex organizations b/c impossible to align
all subunits’ behavioural relevance (not all required behaviours are
controlled)
o (2) Selective attention to organizational goals:
 Similar to suboptimization: occurs when e
 If they want both profitability and employee development (PWC/Arthur
Anderson), but only monitor the former = they want to maximize profit at
expense of developing personnel;
 Possible solution: measure both in performance eval
 Problem recognized: lead to “human resource accounting”
 Measurement of the value and cost of people as organizational
resources
 Change in hr value = assessing the attention to aspect of
performance: “Human Capital Management” control system
 o (3) Inversion of means and ends: when control system tries to motivate
attention to certain instrumental goals, which are then ends because of rewards
 if they only reward the instrumental goals, and thus neglect the overall
unmeasured goal
 E.g. major goal = connect workers seeking employment and employees
seeking workers
 Control = # of interviews conducted (controlled prior instrumental goals
to be complete, but effective? No)
 Effect: People just wanted interviews; goal of control was to motivate
interviewers, but what about actually getting the job

Measurementship:
- Conflict caused because people are motivated to make their measures look good; no
real benefit derived
o All a numbers game/manipulating measures by control system
- 2 primary types of measurementship:
o (1) Smoothing: timing activities to make measures look better since they’re in
different periods
 Measures are related specified time periods (e.g. 1 year increase in xx%)
 To make numbers consistently better, may move expenses up or down in
adjacent time periods to make it look better;
 E.g. incurring expenditures in first period with unexpectedly high sales to
make second and first period look better/smoothed
o (2) Falsification: reporting false data of what is occurring in organization
 Makes person/activity look good in terms of measurement system
 E.g. Mattel – manipulated sales/showing transactions incorrectly for good
earnings; falsifying performance measure
 Barings: fell when huge losses in derivatives trading; poor judgement and
manipulated accounts

Rewards are powerful incentive, but if there’s no effective control system = dysfunctional
behaviour
- Operated without control = bad
- Need formal core control systems

Other Uses & Implications

- For corporate
- HRM

Framework is: Lens for understanding, designing, evaluating control systems > Overall model of
org control with 3 components – core control system, structure, culture > cybernetic close-
looped model with 5 processes – planning, operations, measurement, feedback, eval/reward
Implications for Corporate Management
- Purpose: Make system visible to manage
 - In practice (real estate) can have contradictions and can cause problems
- Organizational control system = part of overall management = can be long-term
competitive advantage
o B/c products/services can be copied/reverse-engineered, culture/systems are
harder to copy
o Mngt needs control systems – need to understand
o High opp costs if no sophisticated understanding of control systems

Implications for Human Resource Management:

- HRM = major role in designing and administering control systems
- 3 components (core control, structure, control): all related to HRM
- HRM in core control system really plays role in eval/reward
o Senior hr manager = advisor to general mngt related to control systems =
familiar with frameworks

Implications for Scholars

- More hypotheses raised
- Do well-developed control systems have competitive advantages in face of level
competition? Need paired comparisons
- Relative importance of 3 components in different natural environments (e.g. Japan with
focus on cultural control than normal control mechanisms vs. European community with
different components)
- Differences in overall economic performance of enterprises in terms of extent of
control models used?

Conclusion
- Org control to help influence behaviour of people in org
- 3 major components:
o Core control system
o Structure
o Culture
o Environment
- Core Control System:
o Planning System
o Operations
o Measurements
o Feedback
o Evaluation/Rewards
- Necessary to motivate ppl to org goals, coordinating diverse efforts, feedback to
problems
- Ultimate Criterion: Goal congruence; identity between members and organization
- Control system must satisfy penultimate and instrumental criteria:
o Behavioural relevance
o Validity
 o Reliability
- Does not satisfy = dysfunctional unintended results
o Goal displacement: Suboptimization, selective attention to org goals, inversion of
means and ends
o Measurementship: Smoothing, Falsification
-