UNIT 5: EVALUATING CONTROL SYSTEMS FOR THE MANAGEMENT OF
OPERATIONS AND RESOURCES
Control means ensuring that objectives planned and undertaken lead to desired
outcomes. (CIMA)
Control System is a framework of policies, procedures, and mechanisms used to
monitor and ensure that activities align with strategic goals and objectives, promoting
efficiency, accountability, and risk management.
Components / Elements of control systems
Control Environment: This sets the tone of an organization regarding
internal control, influencing how people view and approach control. It includes
elements like management philosophy and operating style, integrity and
ethical values, and the structure and assignment of authority and
responsibility.
Risk Assessment: This involves identifying and analysing risks that could
prevent the organisation from achieving its objectives. It’s a dynamic process
that should be integrated into the organisation’s strategic planning.
Control Activities: These are the policies and procedures that help ensure
that management’s directives are carried out. Example include segregation of
duties, system access controls, and financial authorizations.
Information and Communication: This component focuses on ensuring that
relevant information is identified, captured, and communicated in a timely
manner to enable people to carry out their responsibilities.
Monitoring activities: These are ongoing evaluations of the effectiveness of
the internal control system. They help identify problems and corrective action.
1
Loop system
A loop system refers to a system where the output is fed back to the
input, allowing for continuous monitoring and adjustment to maintain a
desired state or setpoint, a concept also known as a closed-loop system.
Single loop control to a system
Under this example, there is one loop of control. The actual output is compared to
the standard or plan (a comparison known as primary feedback), and the effector
controls the input to the system. Notice that the control loop is a single loop control
system; control is exercised once and there is no control over the plan.
Standard
Effector Comparator Sensor
Input Process Output
Double loop control to a system
The double-loop involves questioning the underlying assumptions, policies, and
structures that lead to those problems, aiming for more fundamental and sustainable
changes.
Environmental Influence
High level Controller
Standards
Effector Comparator Sensor
2
Input Process Output
Feedback
Feedback control is the measurement of differences between planned outputs and
actual outputs achieved, and the modification of subsequent action and/or plans to
achieve future required results.
Examples of most common types of control systems in businesses are budgetary
control systems, inventory control systems, production control systems are all based
on negative circles.
Negative feedback
Is information which indicates that system is deviating from its planned or prescribed
course (the performance gap between outputs and targets), and that corrective
action is necessary to bring it back on course. It is called “negative” because control
action would seek to reverse the direction or movement of the system back towards
its planned course e.g. sales.
Positive feedback
Positive feedback results in control action which causes actual results to maintain (or
increase) their path of deviation from planned results.
Feedforward control and planning
Feedforward control is the forecasting of differences between actual and planned
outcomes, and the implementation of action, before the event, to avoid such
differences. Deviations in the system are anticipated, so that ‘corrective action’ can
be taken in advance of them actually happening.
STRUCTURE OF ORGANISATIONS
An organizational structure is the framework that defines how tasks are delegated,
roles are assigned, and responsibilities are distributed within an organization to
achieve its goals, influencing how it operates and performs.
Strategic apex
Technostructure Support staff
3
Middle line
Operating core
Components of organisational structure
1. Strategic apex – (e.g. board of directors) directs strategy
2. Middle line – Converts the wishes of the strategic apex into the work of
the operating core
3. Operating core - Contains those people directly involved in the process
of adding value
4. Techno structure – Standardizes the work of others, e.g. Human
Resource Management specialists, work study analysts
5. Support staff – Provide ancillary services such as public relations or
legal counsel
Hierarchy
Within the organization’s hierarchy there are lines of authority or chain of command,
running from senior management vertically downwards through the organization
connecting the various levels of managers.
The chain of command represents not only the decisions-making hierarchy, it also
provides a defined channel for formal communication up and down the organisation.
Tall and flat organisations
1. Tall organisation
A tall organization is one which, in relation to its size, has a large no. of management
levels.
It is inefficient, despite the advantages of a narrow span of control and the possibility
of graduated promotions. Tall structures can impose rigid supervision and control
and therefore block initiative and ruin the motivation of subordinates.
2. Flat organisation
A flat organization is one which, in relation to its size, has a smaller of management
levels. Flat organizations have become more common as a result of the current
fashion for delayering and empowerment.
4
MD Chief
executive
Division
al
directors
Departmental
heads
Senior management
Section heads
Assistants Middle
management
Foremen
Charge hands Supervisory
management
Workers
Tall organisation
5
MD
Department Heads
Supervisors
workers
Flat organisation
Empowerment
Empowerment is the term for making workers (and particularly work teams)
responsible for achieving and even setting, work targets, with the freedom to make
decisions about how they are to be achieved.
Empowerment goes hand in hand with the following developments:
(a) Delayering or cut in the number of levels in the chain of command.
(b) Flexibility, since giving responsibility to the people closest to the products and
customer encourages responsiveness.
(c) New technology, since there are more “knowledge workers”. Such people
need less supervision.
Establishing control in an empowered culture can be achieved perhaps through;
(i) Standardization of processes, with clear guidelines.
(ii) Cultural control, so that everyone accepts the responsibilities that come with
empowerment.
(iii) Team working
Purposes of Organizational Structure
Organizational design or structure implies a framework or mechanism intended to do
the following:
6
(i) Link individuals so that authority, responsibility and communications can be
controlled, using the concept of hierarchy.
(ii) Group together the tasks required to fulfil the objectives of the organization,
and allocate them to suitable individuals or groups.
(iii) Give each individual or group the authority required to perform the allocated
functions, while controlling behaviour and resources in the interests of the
organization as a whole.
(iv) Co-ordinate the objectives and activities of separate units, so that overall aims
are achieved without gaps or overlaps in the flow of work required.
(v) Facilitate the flow of work, information and other resources required, through
planning, control and other systems.
Influences on Organizational Structure
(i) The older the Organization, the more formalized its behaviour.
(ii) Organizational Structure reflects the age of the industry’s foundation.
(iii) The larger the organization, the more elaborate its structure.
(iv) The larger the organization, the more formalized its behaviour.
(v) The larger the organization, the larger the average size of the units within it.
(vi) The more sophisticated the technology, the more elaborate and professional
the administrative structure.
(vii) The automation of the work transforms a controlled bureaucratic
administrative structure into an organic one. An organ organization is characterized
by fluid hierarchies and communications, and is the opposite of the rigid rule-bound
bureaucracy.
(viii) The more dynamic the environment, the more organic the structure.
(ix) The more complex the environment, the more decentralized the structure.
(x) The more diversified the markets, the greater the propensity to split into
market based departments.
(xi) Extreme environmental hostility is a force for centralization, since central
control permits rapid action.
(xii) The more an organization is subject to external control, the more centralized
and formalized its structure.
Centralization and Decentralization
Centralization and decentralization refer to the degree to which authority is delegated
in an organization and therefore the level at which decisions are taken in the
management hierarchy.
7
There are several issues;
(a) In some businesses, authority is centralized and decisions are taken at the
top. In a small business, the owner manager may take all the decisions. However, in
a hospital environmental, ‘Life or death’ decisions are taken at ‘operational level’.
(b) Some businesses have regional offices with decision autonomy. In other
businesses, decisions of any significance have to be referred back to Head office.
(c) Operations might be decentralized, but standards might be set centrally and
distributed throughout the organization.
Advantages of centralization and decentralization
Centralization
(i) Easier to co-ordinate.
(ii) Senior managers in an organization can take a wider view of problems and
consequences.
(iii) Senior management can keep a proper balance between different
departments or functions.
(iv) Quality of decisions is higher due to senior managers’ skills and experience.
(v) Possibly cheaper
(vi) Crisis decisions are taken more quickly
(vii) Policies, procedures and documentation can be standardized organization.
Decentralization
(i) Avoid overburdening to managers, in terms of workload and stress.
(ii) Improves motivation of more junior managers
(iii) Greater awareness of local problems by decision makers.
(iv) Greater speed of decision making and response to changing events.
(v) Help junior managers to develop.
(vi) Separate spheres of responsibility can be identified; controls, performance
measurement and accountability are better.
(vii) Communication technology allows decisions to be made locally, with
information and input from head office.
8
Centralisation and strategic management
Goold and Campbell conducted a study of a study large number of high-profile
diversified companies to examine how different companies cope with the problem of
managing diversity. They discovered three main philosophies and three
corresponding styles of strategic management. Goold and Campbell describe the
features of the different styles of central management in terms of the management
structure that we have already seen under contingency theory.
Styles of central management
Features
Strategic planning - Entails the centre participating and influencing the
strategies of the core businesses.
Strategic control - Is concerned with the plans of its business units but
believes in autonomy for business unit managers.
Financial control - As the name suggests, focuses on annual profit targets.
There are no longer long-term planning documents and no strategy
documents. The role of the centre is united to approving budgets and
monitoring performance.
Functional structure
In a functional organisation structure, departments are defined by their functions, that
is the work that they do. It is a traditional and many organisations are structured like
this.
A functional structure is based on work specialism and is therefore logical.
However, a functional structure does not reflect the actual business processes by
which value is created. Staff may not have an understanding of how the whole
business works. There are problems of co-ordinating the work of different
specialisms.
Matrix organisation
Matrix organisation is a structure which provides for the formalisation of
management control between different functions, whilst at the same time maintaining
functional departmentation. It can be a mixture of functional, product, and territorial
organisation. Matrix organisation means that subordinates have two (or more)
supervisors, in the sense that they must report to both a functional manager and a
project manager. However, a subordinate cannot easily take orders from two or more
bosses. The authority of each would have to be carefully defined.
Advantages
1. It is flexible: develop an attitude of staff which is geared to accepting change.
2. It should improve communication within the organisation.
3. Dual authority gives the organisation multiple orientation
4. It provides a structure for allocating responsibility to managers for end –
results, rather than just fulfilling processes
9
5. It provides for inter – disciplinary co – operation and a mixing of skills and
expertise.
Disadvantages
1. Daul or triple authority threatens a conflict between functional managers,
product/ project managers and nation/ country managers.
2. One individual with two or more bosses is more likely to suffer role stress at
work.
3. It is complex and thus more-costly – e.g. product managers are additional
jobs which would not be required in a simple structure of functional
departmentation.
ORGANIZATIONAL CULTURE
This section will deal with the role of organizational culture in determining how the
organization operates.
What is culture?
Culture is the sum total of the beliefs, knowledge, attitudes of mind and customs to
which people are exposed. It is “the pattern of basic assumptions that a given group
has inverted, discovered, or developed, in learning to cope with its problems, and
that have worked well enough to be considered valid and therefore to be taught to
new members.
Organization culture are the principles and beliefs of any organization. Organization
culture decides the way employees interact amongst themselves as well as external
parties. No two organizations can have the same culture and it is essential for the
employees to adjust well in their organization’s culture to enjoy their work and stay
stress-free.
Charles Handy’s Model of Organizational Culture and its four types of
organizational culture: Power, Role, Task, and Person Cultures
Handy recognizes that while an organization might reflect a single culture, it may
also have elements of different culture. According to Charles Handy’s model, there
are four types of culture which the organizations follow.
Type of culture Description
Power Found mainly in smaller organizations, this is where power
and influence stem from a central source. The organization is
capable of adapting quickly to meet change. The organization
is capable of adapting quickly to meet change.
Role/ Formal structure, operating well-established rules and
bureaucracy procedures. Job descriptions established definite tasks for
each person’s job. Procedures are established for many work
10
routines, for communication between individuals and
departments, and for the settlement of disputes and appeals
Task Reflected in a matrix organization, in project teams and task
forces. The principal concern is to get the job done. Therefore
the important individuals are the expert with the ability to
accomplish a particular aspect of the task.
Person Purpose is to serve the interests of individuals within it. Some
individual may use any organization to suit their own purposes.
– to gain experience, further their careers or express
themselves
Culture and the environment
Daniel Denison maps the strategic orientation of organization culture on a grid, to
assess the relationship of culture with the environment. This model asserts that
mission, adaptability, involvement and consistency can be used to describe
organizational culture. These four traits measure behaviors driven by these beliefs
and assumptions that create an organization culture. There are two dimensions to
this:
(a) How oriented (aligned) is the firm to the environment rather than to its internal
workings?
(b) To what external does the environment offer stability or change?
Orientation
Internal External
Stability Consistency Mission
(Do we have the (Do we know where we
values, systems and are going?)
processes in place to
create leverage)
responses required
Environmental
Change/Flexibility Involvement Adaptability
(Are we responding to
(Are our people
the
aligned and
marketplace/external
engaged?)
environment)
Type of culture Description
Consistency culture This exists in a stable environment, and its structure is well
integrated. Management is preoccupied with efficiency. Such
11
cultures are characterized by formal ways of behavior.
Predictability and reliability are valued.
Mission culture The environment is relatively stable, but the organization is
oriented towards its key elements (such as ‘customers’). A
mission culture, where members’ work activities are given
meaning and value, is appropriate. (For example schools).
Involvement culture The satisfaction of employees’ needs is necessary for them
to provide optimum performance. An example might be an
orchestra, whose performance depends on each individual.
Involvement and participation create a greater sense of
commitment and hence performance.
Adaptability culture The company’s strategic focus is on the external
environment, which is in a state of change. Corporate values
encourage inquisitiveness and interest in the external
environment. Fashion companies are an example. There
ideas come from a variety of sources and customer needs
are fickle and change rapidly.
Cultural control
This means applying control (through firm central direction, shared values and
beliefs) but also allowing maximum individual autonomy and even competition
between individuals or groups within the organization. Culture, peer pressure, a
focus on action, customer-oriented and so on are ways of exercising control over
employees. Individuals should be given at least the illusion of (personal) control’ over
their destinies, while still being given a sense of belonging and a secure, perceived
meaningful framework in which to act.
HUMAN RESOURCE MANAGEMENT
This section deals with examining how organizations exercise control over the
managers and staff they employ, in order to ensure that their work contributes to
achievement of the organization’s goals.
Human Resource Management is defined by Armstrong as, “a strategic and
coherent approach to the management of an organization’s most valued assets: the
people working there who individually and collectively contribute to the achievement
of its objectives for sustainable competitive advantage.”
Influences on Human Resource Management
The overall emphasis of Human Resources Management will be dependent on how
tightly the organization wishes to control its employees, and also whether it wishes to
focus on controlling behavior or output.
12
Compliance and commitment
The distinction between tight and loose HRM may be characterized as the difference
between a system based on compliance and a system based on commitment.
Compliance – means performing according to set rules and standards, according to
what you are expected and asked to do. Competence-based systems of control
reflect a low level of trust and challenge: performance is expected to be no less than
the set standard – but also no more, since there is little room for creative or
exceptional input or effort, which may militate against tight managerial control.
Commitment – has been defined as “the relative strength of an individual’s
identification with, and involvement in, a particular organization”.
Commitment depends on:
A strong belief in and acceptance of an organization’s goals and values
A willingness to exert considerable effort on behalf of the organization
A strong desire to maintain membership of the organization
Commitment based systems of control reflect a high level of trust, based on
assumptions that the work relationship can offer employees opportunities to meet
their needs and aspirations, as well as the organization’s needs.
Behavior or output
Behavior control deals with how the work is performed, the precise sequencing of
tasks and procedures. Behavior control is exercised when outcomes cannot be
assessed easily, or where procedure is everything. This can link with a bureaucracy
culture.
Output control is based on specifying key outputs that individuals must achieve. This
can be applied at various levels in the organization.
A specified level of sales or profitability for a division: managers might be left
to meet the actual targets
Specified targets for service delivery (for example waiting lists for hospital
appointments)
Operational matters such as quantity of products made, for example the
number of cars per hour made in a factory (which may differ from
manufacturing to manufacturer, showing major differences in efficiency)
Performance targets for individuals, for example deadlines, productivity,
accuracy
13
Control techniques over human resources
Job evaluation
Job evaluation is a systematic method of arriving at a wage or salary structure, so
that the rate of pay for a job is felt to be fair in comparison with other jobs in the
organization.
Recruitment and selection
Recruitment and selection have several roles in organizational control.
(a) In the cybernetic model, recruitment is one of the ways of obtaining resource
inputs.
(b) Recruitment can be a way by which the system adapts to the environment or
maintains itself in a steady state.
(c) Recruitment and selection can be feedforward control actions, in terms of
obtaining more resources so that capacity can match demand.
(d) The ability to recruit can, in fact, be a measure of performance. For academic
institutions, the ability to recruit good staff is a statement that people want to
study there.
(e) Recruitment and selection can be a way of bringing a greater possibility for
agency into the system, if a different type of person is recruited.
(f) Recruitment and selection may be necessary to ensure the quality of the
output.
(g) Recruitment and selection are important in maintaining cultural control if
people with the “right” attitudes and outlook are recruited.
The important control objectives over recruitment and selection are as follows:
The right candidates are recruited
Good candidates are not passed over
The organization taps the right labour markets, or those most appropriate for
its needs
The selection process is timely
Contracts of employment
Employment contracts are a tool used to achieve control within an organization. An
actual written contract stating clearly what is expected of employer and employee
(including a job description) provides a visible control tool.
Definition of Roles
Lack of definition of roles can lead to confusion over responsibilities and a lack of
segregation of duties (different key tasks being performed by different members of
staff). It also can lead to problems in performance management, with a lack of
accountability for errors, or failing to give credit when jobs have been done well.
14
The following controls should help ensure that jobs are allocated properly
(a) Detailed role and task analysis
(b) Allocation of more significant responsibilities to full-time or more experienced
staff
(c) Confining some roles or tasks to staff who have had appropriate training in,
for example, health and safety risks
Training and learning
Training and learning are one aspect of performance management, and hence the
control system. The roles of training and development are as follows:
(a) Improve the performance of individuals in carrying out their roles
(b) Provide the skills and competences that the organization needs
(c) Maintain existing performance levels
(d) Develop people for new roles in future
(e) A form of reward, if the training is useful and valued
(f) A form of cultural indoctrination and team building.
Performance management
Performance management is that aspect of Human Resource Management that
appears to reflect control systems thinking.
There are four key performance management activities.
(a) Preparation of performance agreements
(b) Preparation of performance and development plans
(c) Management of performance throughout the year.
(d) Provision of performance reviews and appraisals.
Managerial performance and responsibility accounting
Management performance measures should perhaps only include those items that
are directly controllable by the manager in question not the ones that do not relate
specifically to a manager.
Possible management performance measures
The following management performance measures can be suggested:
(a) Subjective measures may be used, for example ranking performance on a
scale of 1 to 5
(b) The judgement of outsiders can be regarded as a measure of managerial
performance.
(c) Upward appraisal is used by some businesses. This involves staff giving their
opinions on the performance of their managers.
(d) Accounting measures can be used, but must be tailored according to what or
who is being judged.
15
(e) Non-financial measures may include market share measures or a variety of
other qualitative criteria.
Performance related rewards
Rewarding managers for their performance is a method of control in the sense that it
is assumed that attempts will be made to achieve the organization’s objectives in
return for rewards. This, in turn, derives from motivation theory, which suggests that
people have wants or desired outcomes and modify their behavior accordingly.
CONTROL ENVIRONMENT
This section will briefly look at the control environment and consider the elements of
a strong control environment as set out in the UK’s Turnbull report on Internal
Control.
Nature of control environment
The control environment is the overall attitude, awareness and actions of directors
and management regarding internal controls and their importance in the entity. The
control environment encompasses the management style, and corporate culture and
values shared by all employees. It provides the background against which the
various other controls are operated.
The following factors are reflected in the control environment.
The philosophy and operating style of the directors and management.
The organization’s culture, whether control is seen as an integral part of the
organizational framework, or something that is imposed on the rest of the
system.
The entity’s organizational structure and methods of assigning authority and
responsibility (including segregation of duties and supervisory controls)
The directors’ methods of imposing control, including the internal audit
function, the functions of the board of directors and personnel policies and
procedures
The integrity, ethical values and competence of directors and staff
The Turnbull report highlighted a number of elements of a strong control
environment
Clear strategies for dealing with the significant risks that have been identified
The company’s culture, code of conduct, human resource policies and
performance reward systems supporting the business objectives, risk
management and internal control systems
Senior management demonstrating through its actions and policies
commitment to competence, integrity and fostering a climate of trust with the
company
16
Clear definition of authority, responsibility and accountability so that decisions
are made and actions taken by the appropriate people
Communication to employees what is expected of them and the scope of their
freedom to act
People in the company having the knowledge, skills and tools to support the
achievements of the organization’s objectives and to manage effectively its
risks
However, a strong control environment does not, by itself, ensure the effectiveness
of the of the overall internal control system, although it will have major influence
upon it.
The control environment will have a major impact on the establishment of business
objectives, the structuring of business activities, and dealing with risks.
The control environment is influenced by management’s attitudes towards control,
organizational structure and the values and abilities of employees.
17