Chapter 3 Kashem

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Chapter-3

Behavior in Organizations

Goal Congruence
Good MCS influence behavior in a goal congruent manner.
Goal Congruence means that the goals of an organization’s individual members should be
consistent with the goals of the organization itself

Informal Factors That Influence Goal Congruence


Both formal systems and informal processes influence human behavior in organizations;
consequently, they affect the degree to which goal congruence can be achieved. This book is
primarily concerned with formal control systems—strategic plans, budgets, and reports. But it is
important for the designers of formal systems to take into account the informal processes, such
as work ethic, management style, and culture, because in order to implement organization
strategies effectively the formal mechanisms must be consistent with the informal ones.

Informal factors refer to the non-official or unofficial aspects within an organization that can
influence goal congruence. These factors may not be explicitly stated in formal policies or
procedures but can significantly impact the alignment of individual and organizational goals.
Informal factors can be categorized into two broad categories: external factors and internal
factors.

 External Factors:
External factors are influenced by the environment surrounding the organization. These factors
can include:
a. Market Competition: Intense competition in the market can influence employees to focus
more on individual or departmental goals rather than the overall organizational goals. This can
create conflicts and hinder goal congruence.

b. Economic Conditions: Economic factors such as economic downturns, recessions, or


industry-specific trends can affect the motivation and priorities of individuals within an
organization. Employees may shift their focus to short-term goals or personal financial stability
rather than long-term organizational goals.

c. Stakeholder Expectations: The expectations and demands of various stakeholders, including


customers, suppliers, investors, or community groups, can impact goal congruence. If there is a
significant discrepancy between stakeholder expectations and organizational goals, it may create
conflicts and hinder alignment.

Example. Silicon Valley—a stretch of northern California about 30 miles long and 10 miles
wide—is one of the major sources of new business creation and wealth in the American
economy. Silicon Valley attracts people with certain common characteristics: an entrepreneurial
spirit, a zest for hard work, high ambition, and a preference for informal work settings. Over the
last 50 years, Silicon Valley has created companies such as Hewlett-Packard, Microsoft, Apple
Computer, Sun Microsystems, Oracle, Cisco Systems, and Intel. Even after the most recent
boom-and-bust cycle, the old-line companies and the “dot com” survivors have kept up Silicon
Valley’s reputation as the center of technology innovation.
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 Internal factors that influence goal congruence within an organization include:

a. Culture: Organizational culture refers to the shared values, beliefs, and norms that shape
the behavior and attitudes of employees. If the organizational culture does not emphasize
goal alignment, collaboration, and a sense of shared purpose, it can hinder goal
congruence. A culture that promotes teamwork, open communication, and a focus on
organizational goals can enhance alignment.

b. Management Style: The management style employed within an organization can have a
significant impact on goal congruence. Autocratic or directive management styles that do
not involve employees in goal-setting or decision-making processes can create a lack of
ownership and alignment. In contrast, participative and inclusive management styles that
encourage employee involvement and empowerment can foster goal congruence.

c. The Informal Organization: The informal organization refers to the unofficial


relationships, networks, and social structures that exist within an organization. These
informal networks can influence goal congruence by shaping communication patterns,
influencing decision-making processes, and creating informal norms and expectations. If
the informal organization is not aligned with the formal organizational goals, it can lead
to conflicting priorities and hinder goal congruence.

d. Perception and Communication: Individual perceptions and communication play a


crucial role in goal congruence. If there is a lack of clarity or miscommunication
regarding organizational goals, individuals may interpret them differently or prioritize
their own understanding. Effective communication that provides clear goals,
expectations, and feedback can enhance alignment. Additionally, employees' perception
of fairness and transparency in goal-setting processes and performance evaluation can
impact their motivation and alignment with organizational goals.

Addressing these internal factors requires a proactive approach from organizational leaders and
managers. This can involve fostering a culture of goal alignment, promoting participative
management practices, recognizing and leveraging the informal organization, and establishing
effective communication channels and feedback mechanisms. By actively managing these
internal factors, organizations can enhance goal congruence and improve overall performance.

The Formal Control System

1. Rules
Rules are an important component of the formal control system. Rules are established to provide
clear guidelines and standards for behavior within the organization. They define the acceptable
and unacceptable actions and help ensure that employees act in accordance with organizational
goals and values. Rules can cover various areas such as ethical conduct, workplace safety,
financial practices, quality standards, and compliance with legal and regulatory requirements.
By establishing and enforcing rules, organizations can promote consistency, fairness, and
accountability. Rules help create a level playing field and prevent individuals from pursuing their

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own objectives at the expense of organizational goals. They provide a framework for decision-
making and help ensure that actions and behaviors are aligned with the desired outcomes.
Enforcement of rules is a crucial aspect of the formal control system. Organizations may have
mechanisms in place to monitor compliance with rules, such as audits, performance evaluations,
and disciplinary procedures. Violations of rules can lead to consequences such as warnings,
reprimands, and even termination of employment, depending on the severity of the infraction.

Some specific types of rules are listed below:


a. Physical Controls: Physical controls involve establishing rules and procedures to regulate
access to physical assets and resources. These rules can include measures such as locks, security
systems, key card access, and surveillance cameras. Physical controls help prevent unauthorized
access, protect valuable assets, and ensure their proper use in line with organizational goals.

b. Manuals: Manuals provide written guidelines and instructions for various aspects of
organizational operations. They can include employee handbooks, policy manuals, procedural
guides, and operational manuals. Manuals outline the rules, procedures, and best practices to be
followed by employees in performing their tasks. They provide a standardized approach and
promote consistency in actions and behaviors.

c. System Safeguards: System safeguards refer to rules and measures put in place to protect
information systems and data within an organization. These rules can include password policies,
access controls, data encryption, firewalls, and antivirus software. System safeguards help
prevent unauthorized access, data breaches, and ensure the integrity, availability, and
confidentiality of information systems.

d. Task Control Systems: Task control systems involve establishing rules and procedures to
monitor and regulate specific tasks or processes within the organization. These rules can include
quality control measures, checklists, standard operating procedures (SOPs), and workflow
management systems. Task control systems ensure that tasks are performed consistently,
efficiently, and in alignment with organizational goals and quality standards.

These specific types of rules contribute to the formal control system by providing clear
guidelines and procedures for employees to follow. They help create structure, accountability,
and consistency within the organization, promoting goal congruence and efficient operations.

2. Formal Control Process:


a. A strategic plan implements the organization’s goals and strategies
b. The strategic plan is converted to an annual budget that focuses on the planned
revenues and expenses for individual responsibility centers.
c. Responsibility centers are also guided by rules and other formal information.
d. Actual results are compared with budget to determine whether performance was
satisfactory.
e. If it was, the responsibility center receive feedback (praise or reward).

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f. If it was not, do corrective action in the responsibility center and possible plan
revision.

Types of Organizations
A firm’s strategy has a major influence on its structure. The type of structure, in turn, influences
the design of the organization’s management control systems. Although organizations
come in all sizes and shapes, their structures can be grouped into three general categories:
1. A functional structure, in which each manager is responsible for a specified function such as
production or marketing.
2. A business unit structure, in which business unit managers are responsible for most of the
activities of their particular unit, and the business unit functions as a semi-independent
part of the company.
3. A matrix structure, in which functional units have dual responsibilities.

1. Functional Structure: In a functional structure, an organization is divided into various


functional departments based on the specific functions or activities they perform, such as
marketing, finance, operations, human resources, and so on. Each department is
responsible for its own area of expertise and has its own hierarchical structure.
Communication and decision-making flow vertically within each department, and
employees report to functional managers. This structure promotes specialization and
efficiency within each function but can sometimes lead to silos and coordination
challenges across departments.
Example. In 2005, Deere & Co. was organized into four business units: Agricultural Equipment (tractors,
combines, harvesters, etc., targeted at farmers), Construction Equipment (bulldozers, backhoes,

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excavators, etc., targeted at building contractors), Consumer Equipment (lawnmowers, snowblowers,
etc., targeted at individual homes), and Credit (a unit that provided financing for equipment purchase).
Given the diversity of products and customer segments that the company served, Deere & Co. could not
adopt a functional structure

 An important advantage of a functional structure is efficiency.


 Disadvantages of a functional structure :
a. No unambigous way of determining the effectiveness of the separate functional
managers.
b. If the organization consists of managers in one function who report to higher-level
managers in the same function, then a dispute between managers of different functions
can be resolved only at the top.
c. Functional structures are inadequate for a firm with diversified products and markets.
d. Functional organizations tend to create soil for each functions.

2. Business Unit (BU) Structure: In a business unit structure, an organization is divided


into self-contained units, often based on product lines, geographic regions, customer
segments, or specific business functions. Each business unit operates as a separate entity
with its own resources, goals, and management structure. Business units have more
autonomy and decision-making authority, allowing for greater focus and responsiveness
to market conditions. This structure promotes entrepreneurship and innovation within
each unit, but coordination and integration across units can be more complex.
Example. Nabisco’s business units used different distribution systems for different products. For
example, its biscuit unit used its own trucks and salespeople to deliver directly to retailers’
shelves—a costly approach, but one that management believed was justified in terms of
improved customer relations and closer control over store inventory and sales.

 BU is designed to solve problems inherent in the functional structure.


 BU is responsible for all the functions involved in producing and marketing a specified
product line.
 The performance of BU is measured by the profitability of BU.
 Advantages of BU:
 It provides training ground in general management.
 Because BU is closer to the market for its products than HO, BU can react to new threats
& opportunities more quickly.

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3. Matrix Structure: A matrix structure combines elements of both functional and project-
based structures. In a matrix structure, employees report to both a functional manager
(based on their area of expertise) and a project or product manager (based on the project
or product they are working on). This dual reporting allows for the utilization of
specialized skills and resources across different projects or initiatives. Matrix structures
are often used in complex and dynamic environments where cross-functional
collaboration and coordination are critical. However, the matrix structure can lead to
ambiguity in roles and authority, and effective communication and conflict resolution are
crucial for its success.

These different organizational structures offer various advantages and challenges, and the choice
of structure depends on factors such as the organization's size, industry, goals, and the nature of
its operations. Organizations may also adopt hybrid or customized structures that combine
elements from multiple structures to best suit their specific needs.

Functions of the Controller


We shall refer to the person who is responsible for designing and operating the management
control system as the controller. Actually, in many organizations, the title of this person is chief
financial officer (CFO).12
The controller usually performs the following functions:
• Designing and operating information and control systems.
• Preparing financial statements and financial reports (including tax returns) for shareholders and
other external parties.
• Preparing and analyzing performance reports, interpreting these reports for managers, and
analyzing program and budget proposals from various segments of the company and
consolidating them into an overall annual budget.
• Supervising internal audit and accounting control procedures to ensure the validity of
information, establishing adequate safeguards against theft and fraud, and performing
operational audits.
• Developing personnel in the controller organization and participating in the education of
management personnel in matters relating to the controller function.

Relation to Line Organization


The controllership function is a staff function. Although the controller is usually responsible for
the design and operation of the systems which collect and report information, the use of this
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information is the responsibility of line management. The controller may be responsible for
developing and analyzing control measurements and for recommending actions to management.
Other possible charges may include monitoring adherence to the spending limitations laid down
by the chief executive, controlling the integrity of the accounting system, and safeguarding
company assets from theft and fraud.
The controller does make some decisions, however—primarily those that implement policies
decided on by line management. For example, a member of the controller organization often
decides on the propriety of expenses listed on a travel voucher since most line managers prefer
not to get involved in discussions about the cost of meals or why the traveler felt it necessary to
fly first class rather than economy class.
Controllers also play an important role in the preparation of strategic plans and budgets. And
they are often asked to scrutinize performance reports to ensure accuracy, and to call line
managers’ attention to items deserving further inquiry. In this capacity, controllers are acting
somewhat like line managers themselves. The difference is that their decisions can be overruled
by the line manager to whom the subordinate manager is responsible

The Business Unit Controller


Business unit controllers inevitably have divided loyalty. On the one hand, they owe some
allegiance to the corporate controller, who is presumably responsible for the overall operation of
the control system.
In some companies, the business unit controller reports to the business unit manager, and has
what is called a dotted line relationship with the corporate controller. Here, the business unit
general manager is the controller’s immediate boss, and has ultimate authority in the hiring,
training, transferal, compensation, promotion, and firing of controllers within that business unit.
These decisions are rarely made, however, without input from the corporate controller.
In other companies, business unit controllers report directly to the corporate controller— that is,
the corporate controller is their boss, as indicated by a solid line on the organization chart. ITT
used this approach.
There are problems with each of these relationships. If the business unit controller works
primarily for the business unit manager, there is the possibility that he or she will not provide
completely objective reports on business unit budgets and business unit performance to senior
management. On the other hand, if the business unit controller works primarily for the corporate
controller, the business unit manager may treat him or her as a “spy from the front office,” rather
than as a trusted aide.

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