Introduction to Control Systems

Session 5 February 1, 2012

Department of Accountancy University of Illinois at Urbana-Champaign

Control


The problem of organization is the problem of obtaining cooperation among a collection of individuals or units who share only partially congruent objectives What are the mechanisms through which an organization can be managed so that it moves towards its objectives?

Department of Accountancy University of Illinois at Urbana-Champaign

Ouchis Framework


Ouchi proposes three mechanisms through which organizations can seek to cope with the problem of control
  

Market Control Bureaucratic Control Culture / Clan Control

The mechanisms themselves overlap in organizations

Department of Accountancy University of Illinois at Urbana-Champaign

Market Control


Markets deal with the control problem through their ability to precisely measure and reward individual contributions
Employees are rewarded in proportion to their contribution

Permits each to pursue non-organizational goals, but at a personal loss of reward

Department of Accountancy University of Illinois at Urbana-Champaign

Market Control


Disadvantage:
Market control can be very efficient but only if strict conditions apply
 

Contributions need to be measurable Norm of reciprocity

Department of Accountancy University of Illinois at Urbana-Champaign

Bureaucratic Control


Bureaucracies rely upon a mixture of close evaluation with a socialized acceptance of common objectives
Explicit routines of monitoring Rules Compliance


Supervisors have the right to direct the effort of subordinates on an ad hoc basis

Department of Accountancy University of Illinois at Urbana-Champaign

Bureaucratic Control


Drawbacks:
High administrative costs Heavy reliance on monitoring and correcting is likely to offend peoples sense of autonomy which will have an negative effect on their motivation

Department of Accountancy University of Illinois at Urbana-Champaign

Cultural/Clan Control


Attains cooperation by selecting and socializing individuals such that their individual objectives substantially overlap with the organizations objectives
Internalization of objectives
 

Ceremonies, stories and rituals Socialization process

Social agreement on values and beliefs

Department of Accountancy University of Illinois at Urbana-Champaign

Cultural/Clan Control


Drawbacks:
Cannot cope with heterogeneity Cannot deal with high turnover

Department of Accountancy University of Illinois at Urbana-Champaign

Efficiency


Which form of control is more efficient?

Clarity with which performance can be assessed
 

Knowledge of required inputs? Knowledge of required outputs?

Degree of goal incongruence

 

How hard is it to recruit the right employees? How hard is it to train / socialize ?

Department of Accountancy University of Illinois at Urbana-Champaign

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Control in Organizations


You will never observe a pure market, a pure bureaucracy, or a pure clan
Organizations will contain some features of each of the modes of control Some controls are subtle and ordinary not visible to the inexperienced eye but that does not mean they are not affective


Formal and Informal controls

Department of Accountancy University of Illinois at Urbana-Champaign

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Lincoln Electric
In Lincoln Electric Company, you learn:


How to evaluate overall control from the COCOs 4 groups of control criteria How to infer strategy

Department of Accountancy University of Illinois at Urbana-Champaign

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Lincoln Electric: COCO

Purpose STRONG Commitment VERY STRONG Objectives well-established Plans? Measures? Open doors, Advisory Board Employee stock ownership Piecework pay and bonus plan

Capability Improvement, flat org., flexibility STRONG/MIXED Weak in R&D (Strategy?) Monitoring and learning WEAK Monitoring of environments? Challenge assumptions?

Department of Accountancy University of Illinois at Urbana-Champaign

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Assessment


Focus is on identification of what is in place and what may be missing

Established, communicated, identified, assessed,

Remember: evaluation of control is not evaluation of strategy

Control supports the reliable achievement of objectives: it does not tell people what objectives to set

Remember: controls may relate to multiple criteria

Department of Accountancy University of Illinois at Urbana-Champaign

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What is Lincoln Electrics strategy?



To build a better and better product at a lower and lower price

Department of Accountancy University of Illinois at Urbana-Champaign

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What is Lincoln Electrics strategy?



To build a better and better product ??? Lower and lower failure rate Welding machines and electrodes


No technology innovation

at a lower and lower price

Department of Accountancy University of Illinois at Urbana-Champaign

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What is Lincoln Electrics strategy?

1936 Buick Century 60 series

Department of Accountancy University of Illinois at Urbana-Champaign

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What is Lincoln Electrics strategy?

2003 Buick Century

Department of Accountancy University of Illinois at Urbana-Champaign

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What is Lincoln Electrics strategy?

The Early 1980s Computer

Department of Accountancy University of Illinois at Urbana-Champaign

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What is Lincoln Electrics strategy?

Todays Computer

Department of Accountancy University of Illinois at Urbana-Champaign

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What is Lincoln Electrics strategy?

Lincoln Electric Engine Driven Welder

1950

Department of Accountancy University of Illinois at Urbana-Champaign

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What is Lincoln Electrics strategy?

Lincoln Electric Engine Driven Welder

1980

Department of Accountancy University of Illinois at Urbana-Champaign

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What is Lincoln Electrics strategy?

Lincoln Electric Engine Driven Welder

Today

Department of Accountancy University of Illinois at Urbana-Champaign

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What is Lincoln Electrics strategy?



To build a better and better product??? Lower and lower failure rate Welding machines and electrodes
 

No technology innovation Narrow product line

at a lower and lower price

Motivate each worker by incentive

Department of Accountancy University of Illinois at Urbana-Champaign

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Inferring Objectives


Refer to organizational statements (e.g., mission statement, annual report, interviews) Judge using your experience (e.g., customers perspective, working experience, business press) Deduce from control system

Department of Accountancy University of Illinois at Urbana-Champaign

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