MANAGING ORGANIZATIONS

Session 10: Control Systems in Organizations

PGP 2010-12 Section B Term 1:June-September 2010

Sourav Mukherji Associate Professor of Organization & Strategy Indian Institute of Management Bangalore, India

POST MID TERM REVIEW: RECAPITULATING WHAT WE SET OUT TO DO

STRATEGY DEPENDENCY ON ENVIRONMENT IMPACT OF TECHNOLOGY

STRUCTURE & PROCESSES

1. 2. 3. 4. 5. 6. 7. 8.

CULTURE POWER POLITICS

Centralization Formalization Specialization Coordination Control systems Learning Decision Making Change management

SIZE AND GROWTH

Remaining sessions will be focused on some critical organizational processes and their relationships with structure

S Mukherji

CONTROLS ARE FUNDAMENTAL TO ORGANIZATION DESIGN

Organizations are means to achieve principals (one or a few individuals) goal through the efforts of many agents . For agents, the organizational objective might be means to other objectives, not all of which would be aligned to the organizational objective.

PRINCIPAL AGENT

Organizational control systems try to achieve organizational objectives despite partial convergence between the goals of the principal and the agents

S Mukherji

CONTROL SYSTEMS OPERATE AT ALL LEVELS IN THE SOCIETY

What are the control systems deployed within the class at IIM Bangalore ? What are the control systems deployed at the hostel? How are they different ? Why ? What are the control systems that are deployed over faculty members at IIMB? What are the control systems a mother would deploy if she employs a driver to take her young children to school everyday? Will the systems change over a period of time ? Why? What are the control systems that society imposes on individuals? Why are they necessary?

S Mukherji

THERE ARE TWO WAYS TO DEAL WITH THE P-A PROBLEM

1. Live with the goal divergence and try to achieve objectives despite goal-incongruence 2. Increase goal-congruence

PRINCIPAL

AGENT

PRINCIPAL

AGENT

Direct supervision Rules and regulations Financial incentives and penalties related to rule adherence or performance targets

Recruitment, socialization Inspiration, motivation Peer pressure, mentoring

S Mukherji

DEVISING CONTROL SYSTEMS FOR A GROWING ORGANIZATION

VFM pharmaceuticals is an entrepreneurial organization that has seen high growth in the first two years since inception. It has now decided to get more process oriented and abandon its earlier generalist structure. The senior management has divided the organization into three divisions sales, product development and support services (comprising finance and accounting, human resource management and administration). What are the control systems that they should deploy for the three different divisions? Should these systems be uniform or should they be different? What are the characteristics on which these would depend?

S Mukherji

TASK CHARACTERISTICS DETERMINE APPROPRIATENESS OF CONTROL SYSTEMS

High

Behaviour
Process Hierarchy

Behaviour / Output

Output control is close to market based control Needs little or no goal congruence Risky for agents under conditions of uncertainty or absence of information

TASK PROGRAMMABILITY

Clan
Low
Recruitment Socialization

Output

Clan or cultural control is most difficult to implement but can be the most effective High

Low OUTPUT MEASURABILITY

S Mukherji

ORGANIZATIONS SEEK BALANCE BETWEEN EMPOWERMENT AND CONTROL

Belief System Core values
Culture control

Risks to be avoided Organizational objective

Boundary Systems

Strategic uncertainties

Critical performance variable

Interactive Control Systems

Output & Process control Direct supervision Increasing uncertainty

Diagnostic Control Systems

Source: Control in an Age of Empowerment, R Simons, Harvard Business Review, 1995

S Mukherji

EVALUATING ORGANIZATIONS: THE BALANCED SCORECARD

No single measure can provide a clear performance target
How do we look to shareholders ?

Financial Perspective
What must we excel at ?

Cash flow Sales growth Market share ROE / ROCE

Internal Business
Efficiency Target vs. actual New product launch Exploiting opportunity

Innovation & Learning

Patents / copyrights Improvement on existing products New product sales

Customer Perspective
Service levels Customer satisfaction Repeat customers Reference customers
Can we continue to improve & create value?

How do customers see us ?

Source: The Balanced Scorecard: Measures that Drive Performance, R S Kaplan & D P Norton Harvard Business Review, 1992 S Mukherji