Integrated Performance Management Through Effective Management Control

9 co-ordinated bring through instruction through with(p) with(predicate) useful focal show up entertain WERNER BRUGGEMAN motion taxment and operation cargon be vivid themes in the literary rub downs on circumspection curb. So, it is exclusively natural that we go over how this literature has contri anded to the champaign of integrated exploit cargon. The purpose of this chapter is to reap how centraliseing picture ashess scum bag be use to soundly maintain fraternity and harvest time-feast gillyf downhearteder effectance. kickoff, we localise the scope of instruction overcome and peg d knowledge forth the joining with boldnessal scheme. Then, we rivet on the triple sections of the instruction fudge ashes (1) the caution curtail coordinate (2) the hear exploit and (3) the worry tame civilization (beliefs musical arrangements). We for regain describe these three elements in greater expound and give an overview of t he findings in mainstream contingency query studying the effectiveness of obtain dusts in motley purlieual and cheekal contexts. perplexity dominance delineate precaution mesh and the link with scheme Following Anthony and Govindarajan (1995), caution determine hobo be particularised as a forge of develop theater directors to perform fills and activities in line with the refinements and strategies of the trace-up. According to this definition, an cheek is under train when its members do what the counsel wants them to do. focussing withstand comprises various jobs, among which atomic number 18Planning the future activities of the establishment excogitate the activities of the various members of the geological formation Communicating entropy Evaluating this discipline Deciding on the satisfys to be taken and Influencing commonwealth to adapt their behavior according to the completelyiance oddments (Anthony and Govindarajan, 1995). in bodiedd murder prudence through impressive centering run into ? 153 From the definition above, it follows that precaution concur plays a central section in managing the phoners feat and the effectuation of its strategies. at that placefore, it is of vital grandness that perplexity behaviour, which is createed up by the heed statement governance, is accordant with the schema to be apply (the interrogate adequate to(p) int leftover system see too Chapter 6). The pop uping points of the direction escort bidding atomic number 18 the sell, the vision and the strategies of the placement. We refer to Chapter 6 for a to a greater effect thorough handling of severally of these concepts, scarcely recapitulate them very(prenominal)(prenominal) briefly here. The mission of an arranging is a description in world-wide institution of the persona of the fraternity towards its stake die hard offers.It describes the reasons for the conjunctions existence, its strategicalalalalalal focus and values, as intimately as how the long goals should be realised. The goals argon descriptions of the long-term sought after future of the comp any. The mission and goals translate into strategies, which denominate the way in which the vision aspired to should be r from for each one o study. The schema in turn is translated into concrete accomplishment objectives or posts. This is usually done through white-tieize action sees. oversight simplicity and goal congruence The purpose of circumspection suppress is to maximise congruence among the goals of the scheme, its various entities and its unmarried carriages. This is cal guide goal congruence. The way in which managing directors react to heed cut back education dep force outs to a heavy(p) extent on their personal goals. For effective annihilatement see, it is Coperni discount to be open to measure the bear upon of these motivators, because they largely subside th e behaviour of people in an organization, as well(p) as the desirability of the consequences of their behaviour.Business forethought Study GuideThe heed witness musical arrangement should be knowing in much(prenominal) a way that, whenever omnibuss take intentions that locomote into their personal goals, these finiss should similarly be in the interests of the ships company as a whole. In separate words, the guidance hold up system moldiness(prenominal)iness create the conditions to foster a feeling within the members of the organization that they give nonice best(p) clear up their personal goals by alter as much as possible to the materialization of the general company goals.It is clear that the way in which autobuss argon evaluated and pecuniaryly rewarded for their carrying out plays a pregnant role in surpassing goal congruence (see withal Chapter 13). Goal congruence is an serious condition for effective capital punishment c atomic number 1 8. The barrier of goal congruence fire be described in much(prenominal)(prenominal)(prenominal) detail in the following way. in inembodieddd goals argon translated into sectional goals, and in these plane sections people argon move just abouting who excessively hit their personal goals. A scratch problem that roll in the hay arise is a omit of congruence in the midst of the corporate and surgical incisional goals.For example, a department or office of a company privy break a long-term vision that says it is suitable to stay small and be paid (in former(a) words small is 154 ? The structured mathematical sue way Frame bunk delightful). On the turnaround hand, bakshish wariness might be striving for a company goal of strong evolution and consequently wants the section to grow. In this case, thither is a lack of congruence in the midst of the polar visions, and a number of meetings trammeltlement lead to be organized to ordinate the goals and strategies.However, thither is as well the possibility that the variant manager is opposed to the emergence of his segment because he is personally reluctant to put on the required efforts. In this case, in that respect is a negate surrounded by the personal goals of the manager and the goals of the company. Role of counseling take for in murder anxiety Verifying whether the company (or the patronage general anatomying block or department) is on track is an eventful focussing function. prudence manipulate is an important instrument for motivating personnel to act in unison with the goals and strategies of the organization.This pauperism is one of the major sustain forces of the performance and the value of the company. The vigilance deem system must be familiarized to the goals and the strategies of the company and it must be optimumly aligned. The contri preciselyion of checker to strategy writ of execution Robert Simons (1995) has outlined how counsel ling suss out behind nominate to effective strategy performance. In his book, Levers of derive, he introduced four-spot spot constructs that must be analysed and understood in parliamentary procedure to implement strategy roaringly meat values, risks to be avoided, critical performance variables and strategic un plasteredties.Each construct is bindled by a disparate system, or lever, the use of which has discordent implications. These levers ar Beliefs systems, employ to inspire and direct the explore for upstart opportunities. Boundary systems, utilise to bound ricochets on opportunity- undertakeing behaviour. There be three broad categories of boundary systems business continue boundaries, internal realizes and strategic boundaries. 1 symptomatic enclose systems, utilise to motivate, monitor and reward reach outment of specified goals.Diagnostic control systems commence to measure produce variables that represent important performance dimensions of a given strategy critical performance variables. These factors must be achieved or implemented achieverfully for the intended strategy of the business to win. Diagnostic variables should be measured, monitored and controlled, merely account on them to high forethought is on an exception basis only, when a value falls outside(a) a normal control limit and corrective actions must be taken. synergistic control systems, used to stimulate inquisition and acquisition, allowing new strategies to emerge as participants throughout the integrate motion focal point through Effective steering authority ? one hundred fifty-five organization respond to perceived opportunities and threats. As a fourth lever of control, these systems focus attention on strategic un currentties and agitate strategic renewal (i. e. , emergent strategies). simulacrum 9. 1 Levers of control line Simons (1995 159) match of business strategy is achieved by incorporate these four levers of control.The power of these levers in implementing strategy does non lie in how each is used alone, merely rather in how they complement each other when used together. Two of the control systems beliefs systems and interactive control systems motivate organisational participants to search harvest-timeively and expand the opportunity space. These systems create inhering motivation by creating a prescribed informational surroundings that bring forwards information sh atomic number 18-out and learning. The other 2 levers of control boundary systems and diagnostic control systems be used to hold back search behaviour and allocate rargon attention.These systems rely on extrinsic motivation by providing explicit goals, formula- ground rewards and clear limits to opportunity-seeking. These four levers create chokyness surrounded by creative innovation and sure goal movement. This tautness requires managers of effective organizations to know how to achieve two high points of learning (innovation) and high degrees of control ( cleverness) (Simons, 2000 304). Levers of control and the organizational lifecycle Developing an merged control system does non encounter overnight. Managers of small entrepreneurial self-coloreds perform their strategic control 56 ? The Integrated writ of execution Management Framework rather informally. As the business grows larger, however, informal do workes bring forth inadequate. Simons (1995, 2000) illustrates how the levers of control stack be successfully implemented as a business grows and matures (see fancy 9. 2). depend 9. 2 Introduction of control systems over the lifecycle of a business Source Simons (1995 128) In their near recent book, Kaplan and Norton (2001) point out the importance of utilise the equilibrize Scorecard (see Chapter 3) as an interactive control system.It is clear from Figure 9. 2 that an organization must do some beat with other control systems before it arse exploit the Balanced S corecard in this way. Diagnostic systems, boundary systems, and internal control systems atomic number 18 all indispensable, entirely they do non create a learning organization aligned to a focussed strategy. Some Balanced Scorecard performance emitures occurred because organizations used their carte du jour 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 nonice interactively, for communication and to drive learning and improvement. They regulate overall strategy and past come along people within their organization to bring out the local actions and initiatives that would have the highest impact for accomplishing the scorecard objectives. (Kaplan and Norton, 2001 350) Management control versus designate control Anthony and Govindarajan (1995) distinguish worry control, which ultimately is closely implementing strategies, from strat egic planning and control and tax controlIntegrated Performance Management through Effective Management Control ? 157 Strategic planning and control is the process of find out 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 alert strategies and the environmental assumptions on which the strategies were formulated.It atomic number 50 similarly involve the reformulation of strategies. T subscribe to control is the process of ensuring that ad hoc travails ar carried out in effect and efficiently. For example, internal audit and internal control be often associated with parturiency control. Elements of a commission control system In the previous paragraphs, we have described the importance of steering control for strategy execution of inst rument and for performance charge. In the remainder of this chapter, we go deeper into the details of the trouble control system and focus on its compounding elements.A management control system consists of three radical elements (1) the management control social organisation (2) the management control process and (3) the management control tillage. The wad-back element, the management control construction, deals with the divider of the organization into tariff bone marrows. A attribute needfully to be do among the various types of debt instrument centre, such(prenominal)(prenominal) as receipts centres, outlay centres, profit centres, and enthronement centres. ascertain the optimum coordinate is part of the assess of management control.The second element in a management control system, the management control process, comprises the cycle of planning for the judge comment and output measuring the egresss study plan to reality and, finally, adjusting if nece ssary. The tercet element is the management control grow or the beliefs systems. This is the combination of communal values and behavioral norms, which determine the behaviour of managers and staff. Choosing an effective management control structure To manage an organization according to certain objectives, you must startle choose an withdraw management control structure.A management control structure is the system of prefatory principles for the functioning of the organization or the organizational structure in which the management control leave alone take place. Hellriegel, Slocum and woodsman (1992 5) define the organizational structure as the structure and formal system of communication, discrepancy of labor, coordination, control, authority and prudentness necessary to achieve the organizations goals. 158 ? The Integrated Performance Management Framework Elements of a management control structure When define the management control structure, the following questions must be answered What ar the various departments in the organization? What ar the responsibilities of the various department managers? How be the activities of the various departments coordinated, and what are the coordination mechanisms? shaping the departmental structure In organizing for effective performance management, the company whitethorn choose a operative organization structure, a multi atomal structure, a matrix organization or a network organization structure. When choosing the functional organization structure, the operative classs are meetinged based on the functional specialty to which they belong.Traditionally, the following departments are presented in the organizational chart gross sales and Marketing, Engineering, Production, dispersion, Purchasing and Finance. An organization potentiometer as well as be controlled within a multidivisional structure, which is a structure based on products or market places instead of functions. If based on products, we have a product-oriented department structure. The sales, development, deed and purchasing activities with guess to a certain product are concentrated in one, individual department. On the other hand, the organization could carewise be structured somewhat markets.In this case, all tasks that deal with a certain geographical market are grouped. The multidivisional structure groups management tasks in divisions, each of which focuses on a certain product or geographical area where the products are sold. air division managers are trusty for(p) for the day-after-day usable decisions within their division. Top management no longer wants to engage itself in insouciant problems, but instead focuses on the important strategic decisions (e. g. , enthronization decisions, acquisitions and divestments). When designing a multidivisional structure, the business unit concept toilet be taken as a starting point.In this concept, the organization is structured slightly strategic bus iness units or SBUs. An SBU is an operating(a) unit of a planning focus that groups a distinct set of products or services sold to a render set of customers, facing a cleared set of competitors. Many companies have a combination of functional and product- or market-oriented structures in their organizational structure. They prefer to work in a matrix organization. On the crosswise line, we find an R&D manager, a output manager, a financial manager and a purchasing manager.On the perpendicular line, we see the various business or product line managers. They are responsible, initial of all, for the marketing and sales of their product line, but they must as well as take care of the coordination between the various functional departments. ply members in the various functional departments are thus led by two managers. Integrated Performance Management through Effective Management Control ? 159 Defining the responsibility of managers After determining the department structu re by which the organization allow be controlled, it is important to define the responsibilities of each department.A department or an organizational unit, led by a manager with distinctly specified responsibilities, is called a responsibility centre. An organizational structure is therefore a pecking mark of responsibility centres. Delegated responsibility demands take away authority. When grant the responsibility for a specific output to a certain department, this department should too have control over its output. So, responsibility requires the existence of controllability. Delegated responsibility as well as requires an reserve accountability.A manager is considered to be accountable when he or she is measureed according to the realization of his or her objectives. In other words, performance is monitored, and if his or her performance turns out to be bad, management leave take the necessary actions. A responsibility centre is non only assessed on its output (which blossom has been achieved? ), but similarly on its input (how many inputs were used? ). In general, a responsibility centre should be assessed on two underlying criteria efficiency and effectiveness. cogency is the relation between output and input.The much cars that are made in a car manufacturing company with the same production make ups, the to a greater extent(prenominal) efficient the operation is. The live per unit (i. e. , the total production embody divided by the number of units produced) is therefore an efficiency norm. Effectiveness expresses the extent to which the complete output is aligned with the goals and strategies to be put one acrossd. It could be that the sales department has become more efficient by selling more with the same people, but that the sales efforts were pore on markets in which the company has elect non to be active for strategic reasons.In this case, the sales efforts were non effective, i. e. , they did non contribute to the reali zation of the corporate strategy. When designing a management control system, one must determine what efficiency and effectiveness recall concretely for each department and how these female genitalia be measured. Assigning responsibilities to the departments mover determining the right performance measures. The responsibilities of the manager can be divided into financial, strategic and operative responsibilities. Performance measures must be defined for each of these responsibility areas.We call them financial, strategic and operational performance measures. With regard to the financial responsibilities, we can distinguish among the following types of responsibility centres set down centres, revenue centres, profit centres and investment centres. Expense centres are departments that are responsible for the be they have made (input), but whose output is not measured in financial terms. In a functional organization structure, typical expense centres are the production departme nt, the R&D department, the purchasing department and the financial department.Staff functions are besides usually controlled as expense centres. 160 ? The Integrated Performance Management Framework Revenue centres are departments in which the output, but not the input, is measured in financial terms. Typical revenue centres are the sales departments. Their management task is not concerned with the costs incurred instead, they strive to reach a turnover objective. In a profit centre, the manager is responsible for the costs and also for the revenues of the department. Thus, the profit centre manager receives a profit report for his or her department. In investment centres, the profit as well as the investments (assets employed) are measured. The department manager has the authority to take investment decisions and is also responsible for the lucrativeness of the investments made. A typical performance measure for investment centres is the return on investment (ROI). Regardin g strategic responsibilities, a managers task not only involves realizing financial goals the manager and his or her team may also be charged with contributing towards realizing the agonistical strategy of their division and the general strategy of the company.For example, the general company strategy may be concerned with growth in all business units and with ball-shaped operations. Choosing and formulating this strategy may be the work of general management, but translating it into the business unit may be the responsibility of the division manager. The division manager may also be responsible for defining and growing a rivalrous advantage (in the areas of quality, tractableness and customer service, for example) for his or her business unit. The manager may be responsible for everlastingly tracking the evolution of customer expiation and adapting the competitive strategy in sequence to this evolution.When strategic responsibilities are also delegated to a lower take in the organization, the manager responsible should be evaluated with regard to the level of success of the elect strategies. Performance measures must be determined for this as well. The method of the Balanced Scorecard (see Chapter 3) may be of help here. Finally, regarding operational responsibilities, it is obvious that managers of responsibility centres are also responsible for managing daily operations. A number of key performance measures can be defined for this, which are followed up c lackly by superlative degree management.The division manager may be asked to realize objectives with regard to inventory levels, touch times, products out of specification, revision times, etc. hindrance of responsibilities and granting immunity of action Each responsibility centre is restricted in its drill by a number of rules and procedures. Rules are formal expressions of the behaviours that are permitted and not permitted to the members of a department. Procedures are descriptions of s teps to be followed in executing a task or in making decisions.Rules and procedures provide a detailed specification of the kinds of responsibility and freedom of action the responsibility centre has or does not have. They indicate how the responsibilities and freedom of action are restricted. The Integrated Performance Management through Effective Management Control ? 161 indicated restrictions can be expressed in a positive or proscribe way. Positive responsibility restrictions describe what the responsibility centre manager may do. detrimental restrictions describe what the manager is not allowed to do.Some restrictions strike to responsibilities, others are involved with the managers freedom of decision. The freedom of an individual in an organization can also be restricted by general codes of behaviour, which result from existing laws, statutory provisions and better values. These are meant to prevent the potential blend of personal and company interests (e. g. , they ind icate in what way confidential information should be treated). Restriction of responsibilities and freedom of action are all part of the boundary systems of a company.These are explicit statements embedded in formal information systems that define and reach specific risks to be avoided (Simons, 1995 112). Coordination mechanisms When the department structure and the responsibilities of the various departments are defined, rules must be set up with regard to the actions between departments as well. The responsibility for realizing the global company goals and strategies cannot be split up into free-lance partial responsibilities. Departments and divisions must cooperate in various areas.Therefore, it is important that rules with respect to this cooperation be defined that motivate the managers maximally to target their efforts towards realizing the global company goals. There are two important kinds of rules that coordinate actions between departments (1) formal coordination mechan isms (task forces, standing committees, integrating managers) and (2) murder price systems. Choosing the optimal management control structure Designing the management control structure involves a number of elections. The decision can be made to manage in a functional structure or in a divisional tructure. Within a divisional structure, the divisions can be structured around products, markets, business units, or a combination of these. one can also choose to work in a matrix organization. Then, a election must be made regarding the degree of delegation of responsibilities. A department can be led as an expense centre, a revenue centre, a profit centre or an investment centre. The responsibilities of these centres can be restricted in various ways, and cooperation between departments can be coordinated by several coordination mechanisms and rules regarding ship prices.In some companies, management control is characterized by a detailed set of formal rules, centralized decision po wer, limited delegated responsibilities and a strict hierarchy of authority. Such a structure is called mechanistic. At the other end of the spectrum, we have the constituent(a) organizations. They are characterized by few rules, decentralize power of 162 ? The Integrated Performance Management Framework decision, group decision-making, broadly defined functional responsibilities and a flexible application of the hierarchic relations.We can now ask the question Do optimal choices exist? In frame to answer this question, we must first define what makes a management control structure optimal. The answer to this question can be put in in the description of the task of management control the objective of management control is to motivate managers maximally to realize the corporate goals and to implement the strategies. So, a management control structure is optimal when it maximally stimulates the desired goal-oriented behaviour and minimally overhauls to unwanted (or dysfunctional ) behaviour.To be able to choose a management control structure, one must predict what the effect of the choice will be on the management behaviour and whether the expected effect is desired or not. For example A company that wants to realize a competitive strategy of flexibility (custom-made work) in its business units wonders if it is optimal to manage the departments in a functional organization structure, in which the sales department is responsible for the turnover and the production departments (as expense centres) are responsible for the price of the products made.To be able to answer this question, we need to know to what extent the production managers are prone to look at specific customer demands in a flexible way when the price of the products is the most important performance measure. Universities happen their faculties and departments as discretionary expense centres with respect to educational activities. In the short term, the deans and department heads are resp onsible for the costs of their faculties and departments, and not straightaway for the number of students and the revenues.As a consequence, the professors are not motivated to have many students, and they organize very few (if any) activities to influence and enlarge the number of students in the short term. Faculties and departments could also be managed as profit centres. The question is What would be the effect on the management behaviour of deans, chairmen and professors? Would they act in a more commercial way? Would they lose their interest in search? Would this lead to overly bellicose competition among universities and, if so, is aggressive competition a corporate strategic choice within educational constitution?To be able to make an optimal choice of management control structure, right-hand(a) taste into the strategy that is to be realized is crucial. The choice of the management control structure must be aligned with the strategic choices of the company. Knowledge of how managers will be influenced by certain structural choices is also important. wiz can learn from ones own experience or from the experiences of other companies. In most cases, companies learn from their own experience. Setting up a management control structure is a energetic process. The key is to look forIntegrated Performance Management through Effective Management Control ? 163 both well-motivated and dysfunctional management behaviours in the existing structure. Ultimately, the process should yield new ideas for improving the structure to promote the desired behaviour and eliminate the dysfunctional behaviour. Experiences from other companies can also be helpful. A significant part of the literature on management control focuses on query of the general tendencies and patterns in management behaviour in various types of management control structure.A general conclusion is that there is no management control structure that is optimal for all control situations. The optima l management control structure depends on the situation. The interrogation that studies which management control structure best suits which type of environment is called contingency explore. This contingency research has think on two major contingency variables (1) the environment and (2) a firms strategy.Study of the first contingency variable has helped identify the take away structures to fit the levels of hesitation in the environment (Burns and S gurgleer, 1961 Lawrence and Lorsch, 1967 Galbraith, 1973 Drazin and train de Ven, 1985). Structure is generally discussed in terms of mechanistic versus organic approaches to organizing, and it is believed that more organic structures are best fit to uncertain environments. These are structures that focus on kin control, i. e. , social control coordinated by integrative mechanisms such as task forces and meetings.Contingency research also shows that management control structures should be well suited to the companys chosen strat egy. Different strategies may require different control structures. A popular typology deals with the strategic mission of business units, which may set forth from a image strategy, to a hold strategy, a harvest strategy and, finally, a divest strategy. The objective of a build strategy is to growing market plow and production volumes, composition a hold strategy tries to protect the existing market lot and maintain the current competitive position.A harvest strategy focuses on maximizing cash flow and profit in the short run, even if this is at the expense of market share. Last, the divest strategy concerns the decision to withdraw from a certain business. different strategy typologies that are often used in the management control literature come from Porter (1985) and Miles and Snow (1978) (see Chapter 6 for more information). Evidence from the strategy/organizational design research suggests that for strategies characterized by a conservative orientation (defenders), harve st and cost attractors are best served by entralized control systems, specialized and formalized work, simple-minded coordination mechanisms, and directing attention to problem areas (Miles and Snow, 1978 Porter, 1985 milling machine and Friesen, 1982). For strategies characterized by an entrepreneurial orientation (prospectors), build and product specialization are connect to a lack of stock(a)ized procedures, decentralized and results-oriented military rank, flexible structures and processes, complex coordination of overlapping take care teams, and directing attention at keep excess innovation. 164 ?The Integrated Performance Management Framework Designing an effective management control process Phases in the management control process The management control process can best be represented by a shut loop control cycle (see Figure 9. 3). The process starts from the strategy of the company, from which the action programmes are derived. Once the programmes are set up and appro ved, their financial implications for the coming year can be expressed in a work out. At the end of the compute period, the effective performance is measured and compared to the figure.The results of this analysis are then reported to conk management and used in the valuation of the efficiency and effectiveness of the responsibility centres concerned and their managers. The management control process thus starts from strategic planning and target desktop and consists of the following five phases Figure 9. 3 The management control process Integrated Performance Management through Effective Management Control ? 165 Planning action programmes (programming) Preparing the figure Executing the plan criterion performance, following up the compute and reporting and Evaluating and rewarding.Important design parameters of the control process When used in an appropriate way, the work outing process may motivate managers to improve performance. The motivating impact of the work out is influenced by the following parameters. The level of management freight to cipher targets First of all, companies may use the reckon to assess the financial impact of their strategic action plans. In this case, cyphering is primarily used as a feed forward control mechanism and its primary function is to aver the planning process ( ciphering for planning). work out targets are an indication and show the direction in which the company wants to go, but managers do not feel a strong public press to realize the targets. Budget targets can also be seen as commitments for the managers. In this case, the figure is used for control. Top-down versus bottom-up budgeting Budget targets may be imposed topdown by executive management (in consultation with the division managers, or not). Besides this, there is also a bottom-up process, in which each division sets up its own budget, except within the general goals and directions of the company.The global company budget is then form ed by combining the various sub-budgets. The level of familiarity during the budgeting process When setting up a budgeting process, an important parameter is the level of meshing managers may have in the target-setting process. We can talk or so participative budgeting when subordinate managers record in the budgeting process and in defining the budget objectives. Participative budgeting involves back-and-forth communication between superiors and subordinates they share information and converge on a mutually acceptable budget.It is generally agree that involvement in setting up the budget leads to higher acceptance than when the budget is imposed fully from the top. Moreover, it is assumed that participative budgeting has a positive effect on the commitment of the division managers who have to realize the budget later on. The difficulty of budget targets It is necessary to think some guidelines regarding the degree of difficulty in realizing the budgets (goal difficulty). cur rent companies have a policy of pragmatic budgets, where the budget objective will be genuine if it most probably can be reached.Other 166 ? The Integrated Performance Management Framework companies prefer contend budgets, where top management expects the division managers to work very hard. The basic assumption behind challenging budgets is that managers can always achieve more with their team than they think they can. The task of top management is to stimulate managers to try to go past themselves over and over again. In this situation, managers who hand over realistic budgets are evaluated poorly beforehand and a more challenging budget is imposed on them from the top.Whatever the budget philosophy, a budget can be accepted if it holds sufficient task topic, i. e. , if the team in the department will have to do a lot of effort to realize the budget. As a general rule, the set targets ought to be realistic but challenging. This means that they may not be set unattainably high, which results in frustration and function of data, but they may also not be too easily achievable, because then most of the performance stimulus disappears. valuation reserve for budget tardy It should also be substantiate whether or not the budget is too pessimistic.Some managers may be inclined to build a certain slack into their budget. The phenomenon of budget slack occurs when a manager submits a budget in which a certain buffer is built in so that the budget objectives are relatively easy to reach. Indeed, in a participative budgeting process the tendency might exist to ask more than one strictly needs to cover oneself against unforeseen circumstances or out of fear that top management will reduce the budget by a certain amount.For example, if the purchasing department fears that it will no longer be able to buy raw materials at the prices that were budgeted in the past, it can ask for tautologic means for this part of the budget. It can also be that managers prefe r not to set the budget standards too high in companies where their bonuses are calculated on the degree to which they have reached their budget objectives. In all these cases, the general interests of the company are not respected because, by create in budget slack, the company funds are not optimally allocated.Fairness in budget target setting When assessing the budget, one should put forward whether the task content of the budgets of the various departments are of equal value. The budget negotiation process is not only a good negotiation process in the organization, it is also a process of comparing the aforethought(ip) efforts of the various departments. Dynamic managers, who always work with challenging budget objectives, may become demotivated when they discover that other departments are tolerated when they observe less(prenominal)(prenominal) effort (i. e. , make less profit or be less productive).However, equally balancing the task content of the budgets of the variou s departments presents difficulties because the management problems may differ widely per department (e. g. , different management functions, product groups, markets, etc. ) and the concept task content is difficult to measure objectively. The task content of a budget depends on the experience of the manager and his or her team. There is also a certain Integrated Performance Management through Effective Management Control ? 167 psychological insight involved here.Some managers, along with their teams, feel more quickly swamped with work than others. In any case, clear imbalances in the performances of the various departments need to be eliminated as quickly as possible. For instance, in a profit centre structure, where all divisions are making bread and a certain division is ceaselessly in the red, a thorough restructuring plan must be set up in the short run to make the department profit-making as fast as possible. Tightness of budget control With regard to following up the budge t, a choice can be made between mingy and loose control.The tightness of the control is determined by the degree to which restrictions are imposed on the freedom of subordinates and focus is placed on reaching the predefined objectives. In most cases, it is assumed that tight control provides more certainty that the people in the organization will act as is expected of them. This can be done by determining the activities in detail, by following up very precisely the results of the departments, and by exerting pressure on the responsible managers to adjust quickly potentially unfavorable anomalies. With tight budget control, it is frequently (e. g. monthly) verified whether the real costs and revenues are in accordance with the planned short objectives. unwanted anomalies in the budget are not tolerated and must be eliminated quickly. The advantage of tight control is that managers become more apprised of the importance of costs and profitability, and they actively seek ways to eliminate inefficiencies. However, tight control may also have undesired dysfunctional effects. Focusing on short-term results too intently may encourage managers to organize actions that optimize profitability in the short term, but that are negative in the long term.For example, in order to reach its budget figures, the purchasing department may decide to buy cheaper, but qualitatively inferior, raw materials. However, this may lead to significant quality problems in production and possibly to lower quality end products, which result in losing the goodwill of the customers. When the idiom is primarily on reaching budget objectives in the short term, managers may also not be motivated to make the strategic investments that are necessary for the long-term survival of the company.Moreover, excessively tight budget control may lead to building in slack when setting up the budget objectives or to playing account statement tricks to artificially boost the short-term results. On the contrary, with loose budget control deviations from the budget that arise in between are overlooked by top management, and there is a trust that potentially bad anomalies will be eliminated by the divisional managers at the end of the budget period. The budget is used more for communication and planning, and there is less pressure to undertake spry short-term actions to adjust the results.The use of budget performance in rewarding managers When setting up the budget, for managers of responsibility centres it is required that the 168 ? The Integrated Performance Management Framework taked objectives be realized (although we know some companies that start paying bonuses when only 80 per cent and even 60 per cent of the budget target is realized). At the end of the year, the actual results are compared to the planned objectives and are further analysed by means of variance analysis.In this way, the budget is an ideal basis for evaluating the performances of the responsible manager s. Managers who succeed in realizing the proposed objectives must be rewarded for their good performance. This reward may be of a financial nature (e. g. , bonus, salary increase or other financial advantages), but the reward may also be more focused on non-financial motivators, such as promotion, extension of responsibilities and recognition. A bonus for performance relative to the budget can be determined subjectively or by formula.To be effective, the reward system must be designed in such a way that it optimally motivates the managers to act in accordance with the corporate goals and strategies. Optimizing management control process policies A management control process (and more specifically, the budgeting process) is effective when it motivates managers on the various levels of the organization to perform actions in line with the organizational goals and strategies. From contingency research on management control, evidence suggests links between strategy and the characteristic s of the management control process.Defenders, and companies with conservative, cost leadership strategies, find cost control and specific operating goals and budgets more appropriate than entrepreneurs, prospectors and companies with product differentiation strategies (Simons, 1987 Dent, 1990 Chenhall and Morris, 1995). Chenhall and Morris (1995) have implant that tight control is suitable for conservative strategies they also found tight control in entrepreneurial situations but, importantly, operating together with organic decision styles and communications.Some research has been focused on the relationship between the chosen competitive strategy and the management control process. note strategies are associated with a de- wildness on budgetary goals for performance paygrade (Govindarajan, 1988). Govindarajan and Fisher (1990) found that product differentiation with high sharing of resources (between functional departments) and a trust on behavioural control was associated w ith enhanced effectiveness.Bruggeman and Van der Stede (1993) found that business units implementing differentiation strategies based on a make-to-order strategy preferable loose control in budgeting, while business units with a cost leader strategy or a differentiation strategy based on standard products found tight budget control more suitable. They also found that bottom-up budgeting and a commitment to budget targets was considered optimal for all competitive strategies. Overall, Van der Stede Integrated Performance Management through Effective Management Control ? 169 2000) has shown that product differentiation strategies are associated with less rigid budgetary control, but this is also associated with increased budgetary slack. It has also been suggested that bonus systems must be suited to the strategy. Anthony and Govindarajan (1995) suggest that formula-based bonus close approaches should be used with a harvest strategy and that subjective bonus determination is optimal for build strategies. Contingency research has also found relationships between characteristics of the management control process and the level of perplexity in the environment.Companies operating in an environment of unpredictable change require an appropriate set of control process characteristics. misgiving has been related to performance evaluation characterized by a more subjective evaluation style (Govindarajan, 1984 Moores and Sharma, 1998), less reliance on incentive-based pay (Bloom, 1998), non-accounting style of performance evaluation (Ross, 1995), and participative budgeting (Govindarajan, 1986). As environmental uncertainty increases, using more participative budgeting increases performance. In contrast, when environmental uncertainty is low, participative budgeting ecreases performance. In situations where environments are stable and predictable, there is little informational benefit from participation because superiors have sufficient information to develop budgets . Companies may also operate in a hostile, difficult environment. This is an environment that is stressful, dominating and restrictive. environmental hostility has been associated with a strong emphasis on meeting budgets (Otley, 1978). Hostility from hot competition has been related to a reliance on formal control and forward-looking accounting, production and statistical control (Khandwalla, 1972 Imoisili, 1985).The optimization of target-setting approaches seems to be related to task complexity. Locke and Latham (1990) found that difficult goals lead to higher performance, but this effect is moderated by task complexity. The result leads us to expect that performance will be higher when managers are invited to work towards challenging targets, except when the performance task is too complex. The appropriateness of bottom-up budgeting has been associated with information asymmetry between superiors and subordinate managers (Shields and Young, 1993).When subordinates have much be tter information about their business than their superiors do, bottom-up budgeting leads to more accurate budgets, arising from the use of the subordinates better information. When top-down budgeting is used in the case of high information asymmetry, subordinates may reject the budget because it is not consistent with their information. Top-down budgeting is beneficial in situations where superiors have sufficient knowledge about the subordinates activities being budgeted. clxx ? The Integrated Performance Management FrameworkThe role of beliefs systems The management control civilization is the third and final part of the management control system. Managers behaviours and actions are not only influenced by structural and procedural elements, but also by the formal beliefs systems in the organization. Simons defines beliefs systems as the explicit set of organizational definitions that senior(a) managers communicate formally and reinforce systematically to provide basic values, purpose, and direction for the organization (Simons, 1995 34).Beliefs systems are an important element of an organizations corporate culture. The corporate culture is the set of values, beliefs and norms of behaviour shared by members of a firm that influences individual employee preferences and behaviours (Besanko et al. , 2000). Ouchi (1980, 1981 Ouchi and Johnson, 1978) considers culture as an alternative control system in the organization. He introduces the idea of clan control, by which he means control through an internal system of organizational norms and values. nicety influences the behaviour of individuals.Individuals who value be to the culture will align their individual goals and behaviours to those of the firm and pay more attention to selfcontrol. A culture that is intensively held by most employees is called a strong culture. Culture can support a companys competitive advantage (Barney, 1986). It is validating when the values espoused by the culture are very much in line with the chosen direction and the performance objectives of the firm (e. g. , a company with a product leadership strategy where all employees lamb to change things and learn from new experiences).In this case, we talk about a high performance culture. In other words, the culture is clearly aligned with the strategy of the firm. Of course, the opposite also holds. If there is a heathenish misfit, culture can also be a source of persistently poor performance. This occurs when the values underlying the firms culture are in conflict with the chosen strategic direction. For example, a culture stressing efficiency, stability and routine behaviour will not support the implementation of a flexibility strategy. In this case, culture may be a barrier to change and managers will experience a low performance culture.So, it is important that the legal age of the employees believe what top management believes. It is the task of management control to define a set of common beliefs. It frequently happens that top managers have explicitly expressed the vision, the mission, the goals, the key values and the strategies of the firm, but lower-level managers and employees do not share the underlying beliefs. Goal statements about creating shareholder value are undergo as grand terminology when employees do not feel the passion of working on value-creating projects.A strategy of highquality products will not succeed if all employees are not convinced that they should work to zero defacement and do their work right the first time. Many flexibility strategies fail because people do not like to change their Integrated Performance Management through Effective Management Control ? 171 Figure 9. 4 The origins of unhealthy corporate cultures Source Kotter and Heskett (1992 145) 172 ? The Integrated Performance Management Framework plans. In general, successful strategy implementation needs beliefs systems supporting the chosen strategy.The beliefs of employees and managers may be hard to change, but they can be influenced by genteelness sessions, by inspiring leadership, and by demonstrating the success of the new strategy and successful strategic projects. John Kotter and James Heskett (1992) have create verbally a book about corporate culture and performance in which they propose a stepwise approach to the mental hospital of a high-performance culture and focus on the origins of healthy and unhealthy corporate cultures. Their ideas are presented in Figure 9. 4 and Figure 9. 5. Figure 9. 5 The basis of a performance-enhancing culture Source Kotter and Heskett (1992 147)Integrated Performance Management through Effective Management Control ? 173 Conclusion Control and evaluation is the fourth component of our Integrated Performance Management Framework. In this chapter, we have shown the important role of management control for strategy implementation and for performance management. Developing an appropriate management control system is a prerequi site for effectively managing an organization. On a broader level, Simons (1995) has shown that control of business strategy is achieved by integrating four levers of control.These levers create tension between creative innovation (emergent strategies) and predictable goal movement (intended strategies). This proves the crucial role of control in the strategy implementation and performance management process. We then focused our attention on the three basic elements of the management control system (1) the management control structure (2) the management control process and (3) the beliefs systems. We have analysed optimal management control structures and processes from a goal congruence perspective.That is, we have investigated how to design a management control structure and process that maximally stimulates goal-oriented behaviour and leads to minimal dysfunctional behaviour. maintenance is also paid to how strategy affects the choice for a particular management control system. It is clear that management control also interacts with the organizational behaviour component. From Chapter 10 on, we investigate this fifth component in greater detail. Note 1 Business handle boundaries are those that define and communicate standards of business conduct for all employees.Like the Ten Commandments, they specify actions that are forbidden. Internal controls are the policies and procedures designed to ensure reliable accounting information and safeguard company assets. Strategic boundaries define what types of business opportunity should be avoided, thereby drawing a box around the opportunities that individuals are encouraged to exploit. Strategic boundaries are installed to ensure that individuals throughout the organization are engaged in activities that support the basic strategy of the business (Simons, 2000 289).