CH 3 Behavior in Organizations

Management Control Systems
Chapter 2
Behavior in Organizations
Goal Congruence
 The central purpose of a management control system, then, is to ensure (insofar

as is feasible) a high level of what is called “goal congruence.”
 In a goal congruent process, the actions people are led to take in accordance with
their perceived self-interest are also in the best interest of the organization.
 An adequate control system will at least not encourage individuals to act against
the best interests of the organization.
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.
 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.
External Factors
 External factors are norms of desirable behavior that exist in the society of which
the organization is a part. These norms include a set of attitudes, often
collectively referred to as the work ethic, which is manifested in employees’
loyalty to the organization, their diligence, their spirit, and their pride in doing a
good job (rather than just putting in time).
 Some of these attitudes are local—that is, specific to the city or region in which
the organization does its work.
 Other attitudes and norms are industry-specific.
Internal Factors
 Culture: The most important internal factor is the organization’s own culture—the common
beliefs, shared values, norms of behavior, and assumptions that are implicitly accepted and
explicitly manifested throughout the organization.
 Management Style: The internal factor that probably has the strongest impact on
management control is management style.
 The Informal Organization: The lines on an organization chart depict the formal
relationships—that is, the official authority and responsibilities—of each manager.
 Perception and Communication: In working toward the goals of the organization, operating
managers must know what these goals are and what actions they are supposed to take to
achieve them.
The Formal Control System
 Rules: all types of formal instructions and controls, including standing instructions, job
descriptions, standard operating procedures, manuals, and ethical guidelines.
 Rules range from the most trivial (e.g., paper clips will be issued only on the basis of a
signed requisition) to the most important (e.g., capital expenditures of over $5 million must
be approved by the board of directors).
 Some rules are guides, some rules are positive requirements that certain actions be taken.
Others are prohibitions against unethical, illegal, or other undesirable actions. Finally,
there are rules that should never be broken under any circumstances.
Specific types of rules
 Physical Controls: Security guards, locked storerooms, vaults, computer passwords,

television surveillance, and other physical controls may be part of the control structure.
 Manuals: Much judgment is involved in deciding which rules should be written into a
manual, which should be considered to be guidelines rather than fiats, how much discretion
should be allowed, and a host of other considerations.
 System Safeguards: Various safeguards are built into the information processing system to
ensure that the information flowing through the system is accurate, and to prevent (or at
least minimize) fraud of every sort.
 Task Control Systems: the process of ensuring that specific tasks are carried out efficiently
and effectively.
The Formal Control Process
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.
Functional Organizations
The rationale for the functional form of organization involves the notion of a manager who
brings specialized knowledge to bear on decisions related to a specific function, as contrasted
with the general-purpose manager who lacks that specialized knowledge.
There are several disadvantages to a functional structure:
1. In a functional organization there is no unambiguous way of determining the effectiveness
of the separate functional managers.
2. 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.
3. Functional structures are inadequate for a firm with diversified products and markets.
4. Functional organizations tend to create “silos” for each function, thereby preventing cross-
functional coordination in areas such as new product development.
Business Units
 The business unit form of organization is designed to solve problems inherent in

the functional structure.
 A business unit, also called a division, is responsible for all the functions involved
in producing and marketing a specified product line. Business unit managers act
almost as if their units were separate companies.
 Although business unit managers exercise broad authority over their units,
headquarters reserves certain key prerogatives.
Business Units
Advantage of the business unit form of organization:
1. provides a training ground in general management.
2. business unit is closer to the market for its products than headquarters is, its manager may
make sounder production and marketing decisions than headquarters might, and the unit as
a whole can react to new threats or opportunities more quickly.
Disadvantage of the business unit form:
3. the possibility that each business unit staff may duplicate some work that in a functional
organization is done at headquarters.
4. the disputes between functional specialists in a functional organization may be replaced by
disputes between business units in a business unit organization.
Implications for System Design
 A functional organization may be more efficient because larger functional units

provide the benefits of economies of scale.
 Also, a business unit organization requires a somewhat broader type of manager
than the specialist who manages a specific function, and competent general
managers of this type may be difficult to find.
 Once management has decided that a given structure is best, all things considered,
then the system designer must take that structure as given.
Functions of the Controller
Controller: the person who is responsible for designing and operating the management control
system.
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 information is the responsibility of line management. The
controller may be responsible for developing and analyzing control measurements and for
recommending actions to management.
 The controller does not make or enforce management decisions.
 The controller does make some decisions, however—primarily those that implement
policies decided on by line management.
 Controllers also play an important role in the preparation of strategic plans and budgets.
The Business Unit Controller
Business unit controllers inevitably have divided loyalty.

 they owe some allegiance to the corporate controller, who is presumably responsible for
the overall operation of the control system.
 they also owe allegiance to the managers of their own units, for whom they provide staff
assistance.
 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.
 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.
Alternative Controller Relationships
Problems with each of the 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.
 Regardless of the reporting relationships, it is expected that the controller will not condone
or participate in the transmission of misleading information or in the concealment of
unfavorable information. The overall ethical responsibilities inherent in the position do not
countenance such practices.
Case 3-1
Southwest Airlines Corporation

(page 114 - 116)
Question:
1. What is Southwest’s strategy? What is the basis on which Southwest builds its competitive
advantage?
2. How do Southwest’s control systems help execute the firm’s strategy?

CH 3 Behavior in Organizations

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Management Control Systems

 The central purpose of a management control system, then, is to ensure (insofar

 Physical Controls: Security guards, locked storerooms, vaults, computer passwords,

 The business unit form of organization is designed to solve problems inherent in

 A functional organization may be more efficient because larger functional units

 The controllership function is a staff function. Although the controller is usually

Business unit controllers inevitably have divided loyalty.

Southwest Airlines Corporation

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