Performance Management. Ch. 2 The Evolution of the Concept of Management Control

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1 UNIVERSITY OF PAVIA Performance Management Ch. 2 The Evolution of the Concept of Management Control Chiara Demartini mariachiara.demartini@unipv.it Master in International Business and Economics

Structure of the course and materials First part: Principles of Financial Accounting Principles of Financial Statement Analysis Teaching notes Second part: Performance Management Teaching notes

2 Structure of the course and materials First part: Principles of Financial Accounting Principles of Financial Statement Analysis Teaching notes Second part: Performance Management Teaching notes & Demartini C. (2013), Performance Management Systems. Design, Diagnosis and Use, Springer, Berlin. C. Demartini Performance Management 2

& Demartini C. (2013), Performance Management Systems.

3 Part Two: Performance Management Master in International Business and Economics C. Demartini Performance Management

assisting the strategic process and ongoing management through analysis, planning, measurement, control, rewarding, and

4 A definition of Performance Management System A PMS is the set of evolving formal and informal mechanisms, processes, systems, and networks used by organizations for conveying the key objectives and goals elicited by management, for assisting the strategic process and ongoing management through analysis, planning, measurement, control, rewarding, and broadly managing performance, and for supporting and facilitating organizational learning and change (Ferreira and Otley 2009: 264). 4

5 Key features 1. Types of mechanisms (formal and informal) 2. Effectiveness in strategy accomplishment 3. Enabling role in goal achievement, through learning and change A PMS is the set of evolving formal and informal mechanisms, processes, systems, and networks used by organizations for conveying the key objectives and goals elicited by management, for assisting the strategic process and ongoing management through analysis, planning, measurement, control, rewarding, and broadly managing performance, and for supporting and facilitating organizational learning and change (Ferreira and Otley 2009: 264). MAIN EVOLUTIONARY PATHS IN ORGANISATIONAL CONTROL 5

organizations for conveying the key objectives and goals elicited by management, for assisting the strategic process and ongoing management through analysis,

6 Evolutionary Paths in Organisational Control From formal to informal control From control to strategy formulation and implementation Change in Performance Management meaning C. Demartini Performance Management 6

formulation and implementation Change in Performance

7 Organisational theories of control Coalition of agents that implements a set of coordinated and cooperative actions in order to perform individual objectives by means of the organizational objectives Operating rules Enforcement rules C. Demartini Performance Management 7

perform individual objectives by means of the organizational

8 Economic theories of organisational control Economic theories (Theory of the firm): Principal-agent theory Ownership Control Transaction cost theory Organisational contracts Market transactions C. Demartini Performance Management 8

Ownership Control Transaction cost theory Organisational

Sociological theories of organisational control Sociological approaches to organizational control try to explain and prescribe organizational behaviour by

9 Sociological theories of organisational control Sociological approaches to organizational control try to explain and prescribe organizational behaviour by emphasizing the central tendencies of groups Organizational control exerted by SOCIAL STRUCTURES RULES, POLICIES, HIERARCHIES C. Demartini Performance Management 9

emphasizing the central tendencies of groups Organizational control exerted by

Sociological theories of organisational control FUNCTIONALISM GENERAL SYSTEMS THEORY CONTINGENCY THEORY THEORY OF BUREAUCREACY Three main organisational levels (technical, managerial, institutional)

10 Sociological theories of organisational control FUNCTIONALISM GENERAL SYSTEMS THEORY CONTINGENCY THEORY THEORY OF BUREAUCREACY Three main organisational levels (technical, managerial, institutional) Delegation and specialisation Environment causes deviations from equilibrium Control should adjust deviations Fit between environmental and organisational variables (culture, size, strategy, environmental uncertainty, etc.) Rational economic action Principles: Jurisdiction areas Hierarchy Written documents Training Full working capacity General rules C. Demartini Performance Management 10

should adjust deviations Fit between environmental and organisational variables (culture, size, strategy, environmental uncertainty, etc.

Psychological theories of organisational control Individualorganisational conflict Minimise dysfunctional effects of contracts Interorganisational tensions Recruitment, Selection, Training,

11 Psychological theories of organisational control Individualorganisational conflict Minimise dysfunctional effects of contracts Interorganisational tensions Recruitment, Selection, Training, Allocation Authority, Influence, Psychological contact Job specialisation, Individual identification Organisational survival Flexibility, Adaptability C. Demartini Performance Management 11

Training, Allocation Authority, Influence, Psychological contact Job specialisation,

12 Behavioural theories of organisational control Behavioural theories focus on: 1. firm as its basic unit, 2. firm behavior with respect to such decisions as price, output, and resource allocation as its objective, 3. Emphasis on decision making Process of choice which leads to action BOUNDED RATIONALITY C. Demartini Performance Management 12

firm behavior with respect to such decisions as price, output, and resource

13 From Control Theories to Management Control Approaches Assumption of one best way 1911 Control is the central idea of scientific management Relationship between control and planning different meanings of control C. Demartini Performance Management

management Relationship between control and planning 1914 1920 57

14 Anthony s Proposed Framework STRATEGIC PLANNING MANAGEMENT CONTROL OPERATIONAL CONTROL 14

Strategic Planning Strategic planning is the process of deciding on Objectives of the organization, on changes in these objectives Resources used

15 Strategic Planning Strategic planning is the process of deciding on Objectives of the organization, on changes in these objectives Resources used to attain these objectives Policies that are to govern the acquisition, use, and disposition of these resources C. Demartini Performance Management 15

used to attain these objectives Policies that are to govern the

16 Management Control Management control is the process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of the organization s objectives C. Demartini Performance Management 16

effectively and efficiently in the accomplishment of the

17 Purposes of Management Control Efficiency Effectiveness Economy Extent to which an organisation maintains a particular level of production with fewer resources or increases the level of goods or services it produces with a less than proportionate increase in the resources used Extent to which an organisation or programme produces particular outputs (which are concrete and measurable) or outcomes (which may not be measurable). Economy is an input measure and is normally based around the expenditure of the organisation. 17

the resources used Extent to which an organisation or programme produces particular outputs (which are concrete and measurable) or

18 Operational Control Operational control is the process of assuring that specific tasks are carried out effectively and efficiently C. Demartini Performance Management 18

19 Anthony s Proposed Framework STRATEGIC PLANNING MANAGEMENT CONTROL OPERATIONAL CONTROL 19

20 Psychology and Management Control Control is exerted by and on people (Argyris, 1950; Hoefstede, 1968; Schiff & Lewin, 1970) Social psychology is the source discipline of MC (Anthony, 1965) 20

21 Hopwood Social Approach Types of control (Hopwood, 1974): administrative, social and self-control having one basic function: to help ensure the proper behaviours of people in the organization [ by] influencing people s behaviour 21

certain conditions specified within the contract Bureaucratic mechanisms solve to some extent the market failures, in

22 Clan Control Ouchi addressed three mechanisms of control: 1. the market, 2. the bureaucratic and Contract relationships that enable different agents to exchange different goods or services at certain conditions specified within the contract Bureaucratic mechanisms solve to some extent the market failures, in that they simplify the contract. 3. the clan mechanism (Ouchi, 1979, 1980). Organic association which resembles a kin network but may not include blood relations 22

23 Contingency Approach MCS should effectively match environmental variables: 1. technology, 2. environment, 3. size, 4. organizational structure and 5. strategy 23

24 Strategic MCS A strategic MCS is A system to support managers in assessing the relevance of the organization s strategy to its progress in the accomplishment of its goals and, where discrepancies exist, to support areas needing attention (Lorange et al., 1986: 19). 24

25 From MCS to performance management systems Starting in the '70s a stark change in management philosophy affected the management control discipline Internationalisation New MC techniques (extended boundaries) Relevance Lost 25

26 Cost of Poor Quality COPQ is the cost or price a company pays when all of its products are not perfect. In other words, COPQ would go away completely if the products are made perfectly and without any need to rework them whatsoever. Costs of non-conformities Cost of inefficient processes Cost of lost opportunities for sales 26

27 Cost of Poor Quality Categories Internal Failure Cost External Failure Cost Prevention Cost These costs are due to deficiencies discovered before delivery of the product, with the product not being able to meet stated and perceived needs of the customer These costs are associated with deficiencies found after product is delivered to the customer. These are costs associated/incurred to meet the degree of conformance or determine the degree of conformance to customer requirements. Appraisal Cost Prevention costs are incurred to keep the Appraisal and Failure Costs to a bare minimum. 27

28 Economic Order Quantity The economic order quantity (EOQ) is the order quantity that minimizes total holding and ordering costs for the year. Assumptions: Relatively uniform & known demand rate Fixed item cost Fixed ordering and holding cost Constant lead time 29

29 Holding and Ordering Costs A = Demand for the year Cp = Cost to place a single order Ch = Cost to hold one unit inventory for a year Total Relevant Costs = Yearly Holding Costs + Yearly Ordering Costs 30

30 Economic Order Quantity 31

31 The focus on Performance [t]he choice of the term performance measurement reflects an attempt to avoid more traditional accounting terms like control or performance evaluation. If management accounting and the environment in which it operates are currently facing a paradigm shift [Shank 1989; Porter 1990], it is best to use a term without strong connections to the old paradigm (Nanni et al., 1992: 9). BUT what is a performance? [p]erformance is a social construct since it is defined by the organization and its environment (Lebas and Euske, 1992: 71). 32

32 Typologies of Performance Subjective v objective performance Local v global performance Causal v isolated performance Strategic v operational performance Integrated v stand-alone performance Measurement v management of performance 33

Chiara Demartini. Performance Management. Systems. Design, Diagnosis and Use. Physica -Verlag. A Springer Company

Chiara Demartini. Performance Management. Systems. Design, Diagnosis and Use. Physica -Verlag. A Springer Company Chiara Demartini Performance Management Systems Design, Diagnosis and Use Physica -Verlag A Springer Company Contents 1 Introduction 1 1.1 The Performance Management Revolution 1 1.2 The Performance Management