Management Control and Performance Management

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Introduction

In the contemporary business world, the survival of organizations depends primarily on the decisions made by their management. Leaders on various levels are responsible for ensuring that companies achieve their strategic objectives, gain or sustain market share, and attract new customers with their products and services. Whether or not an organization is capable of reaching its goals largely defines its long-term success and profitability. For this reason, management control and performance management are critical aspects of administration in modern organizations. By employing these concepts and implementing various techniques or systems related to them, companies can enhance performance and decision-making, thus coping with the increasingly competitive business environment. The present paper will seek to provide a comprehensive overview of management control and performance management concepts while also describing how they can be applied in practice to support companies in various industries.

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Management Control

The concept of management control is essential in today’s businesses since organizations have become more complex over the past decades. With more levels in the corporate hierarchy, decision-making has become decentralized, meaning that employees and leaders on various organizational levels influence company performance and achievements. As explained by Garrison, Noreen, and Brewer (2017), top managers of most organizations today have to delegate decision-making to their subordinates. In doing so, they employ management control, which serves to align the actions of company employees with the goals and interests of the organization.

According to scholars, management control is best defined as a process that managers apply to ensure that organizational strategies are implemented appropriately. According to Merchant and Van der Stede (2017), management control is one of “the management functions along a process involving objective setting, strategy formulation, and management control” (p. 9). In other words, management control is a process that is used by managers to guide organizations to succeed in their current business environment.

The importance of management control to businesses should not be underestimated. Scholars note that failure to apply this concept successfully can lead to critical business failures that might damage profitability, operations, and even the image of the company, causing it to lose its place in the market (Merchant & Van der Stede, 2017). On the contrary, if management control is utilized successfully, companies can enhance their strategic performance and fulfill their objectives, thus becoming more competitive and sustaining business achievements in the long term.

Management Control Systems

To support leaders in the process of management control, various systems can be designed and applied in organizations. Management control systems are defined as the systems that are used by managers “to ensure the behaviors and decisions of their employees are consistent with the organization’s objectives and strategies” (Merchant & Van der Stede, 2017, p. 8). The primary purpose of these systems is to provide information and decision-making support to managers in executing organizational strategies. For this reason, management control systems are primarily concerned with the evaluation of the performance of different aspects of the company, such as its human or financial resources. By enabling managers to assess the performance of these organizational aspects, management control systems help to ensure congruence between employees’ activities and the organization’s short- and long-term goals (Garrison et al., 2017). This makes management control systems critical to the execution of management control in general.

The nature of management control systems is highly flexible, and they are typically designed by organizations based on their goals and strategic objectives. As shown by Merchant and Van der Stede (2017), management control systems are developed through specific, organization-related questions: “What is desired? and What is likely to happen? […] What controls should be used? and How tightly should each be applied?” (p. 221). Consequently, the process of designing a management control system involves assessing the organization’s current internal environment to determine its core needs that have to be addressed to achieve strategic objectives.

A system of management control typically includes a variety of evaluation mechanisms that enable reviewing the functioning of different aspects of an organization. Merchant and Van der Stede (2017) distinguish between three types of controls: results, action, and personnel or cultural controls. The techniques vary significantly depending on the kind of controls employed. For instance, results are typically controlled through accountability, wherein managers or employees are held accountable for the organization’s outcomes (Merchant & Van der Stede, 2017). Action controls, in turn, might include behavioral constraints, preaction reviews, or action accountability, as all of these techniques can prevent undesirable decisions and promote beneficial activities on different company levels (Merchant & Van der Stede, 2017). Finally, personnel controls can include various human resource management practices, such as selection and placement, training, and culture creation, since these techniques support employees’ engagement, morale, and commitment to their employers (Merchant & Van der Stede, 2017). At the same time, personnel controls can be tied to rewards and recognitions, thus promoting individual or group achievements that contribute to the company’s performance (Merchant & Van der Stede, 2017). Accordingly, management control systems are highly flexible and can be tailored to the needs and environment of a particular organization. By assessing the current state of the company and comparing it to the desired outcomes, managers can highlight the areas that require control the most and determine ways in which control can be executed.

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Performance Management

Performance management is a concept that relates to management control since it focuses on enhancing corporate performance through proven instruments. Scholars consider performance management to be a necessity for the modern organization since it helps to ensure that companies achieve their financial and operational goals. The definitions of performance management vary slightly in the literature. However, the term is most commonly used to describe “an applied, systematic and structured approach of the successful management of enterprises, systems, processes, employees, departments and organizations to ensure that goals and objectives are being reached efficiently and effectively” (Hemold & Samara, 2019, p. vii). Consequently, three characteristics define the activities related to performance management.

Firstly, they are systematic, meaning that they are applied consistently throughout the organization. This ensures that all units and departments that are part of the business contribute positively to the achievement of its key goals. Secondly, performance management activities are structured in a way that promotes alignment with organizational objectives. Thus, the measures used to evaluate the progress, as well as the overall goals of performance improvements, are relevant to the company’s strategy (Hemold & Samara, 2019). Thirdly, performance management activities and techniques are aimed at ensuring effectiveness and efficiency. This means that, in applying performance management, a company’s leaders aim not only to implement the organization’s strategy successfully, but to do so without excessive activities, costs, or efforts (Hemold & Samara, 2019). In this way, the application of performance management aids organizations in controlling their costs and resource utilization while also achieving financial and market success. In competitive business environments, these benefits are highly relevant since they enable companies to earn more profits that can be distributed among shareholders or reinvested into product or service improvements.

Performance Management Techniques

Responsibility Accounting

One of the most critical techniques tied to performance management in modern companies is responsibility accounting. As explained by Garrison et al. (2017), “organizations need responsibility accounting systems that link lower-level managers’ decision-making authority with accountability for the outcomes of those decisions” (p. 508). Responsibility accounting is particularly relevant in decentralized organizations, where decisions are made on various levels of the corporate hierarchy. In applying this technique in practice, managers have to define responsibility centers that represent parts of the company where managers have control over costs, profits, or investments (Garrison et al., 2017). Then, responsibility centers are evaluated using financial outcome measures, such as return on investment (Garrison et al., 2017). By ensuring that managers are held accountable for the decisions that they make, responsibility accounting can help to improve and sustain performance in various organizational functions.

Operating Performance Evaluation

While responsibility accounting focuses on financial measures of performance, many organizations also require operating performance assessments to ensure that the production or processing of products and services is efficient. Achieving efficiency in operations is a critical goal for companies since it helps to reduce waste and losses associated with functional processes, including financial or time losses (Garrison et al., 2017). The primary method that supports operating performance evaluations is the analysis of critical performance indicators. Depending on the nature of the business and its operational processes or goals, this can include throughput time, delivery cycle time, and manufacturing cycle efficiency (Garrison et al., 2017). Once a method for assessing these factors has been instituted, managers can use these indicators to determine the efficiency of the company’s operations, determine goals for improvement, and implement operational performance initiatives to stimulate progress.

Balanced Scorecard

A balanced scorecard is a useful technique of performance management that is applied in various companies regardless of their industry or type of business. A balanced scorecard is a combined tool, meaning that it can incorporate measures from operating or financial performance evaluations (Garrison et al., 2017). At the most basic level, a balanced scorecard “consists of an integrated set of performance measures that are derived from and support a company’s strategy” (Garrison et al., 2017, p. 519). In other words, the application of a balanced scorecard involves determining key performance indicators for various business areas that relate to the company’s overall strategy and collecting data on them to track progress and determine the need for improvements. The main benefit of a balanced scorecard is that it allows operationalizing the company’s strategy in a way that can be easily applied to manage and assess performance (Garrison et al., 2017). For example, the measures included in the balanced scorecard can target financial results, customer outcomes, internal business processes, and even characteristics of the organizational environment (Garrison et al., 2017). Consequently, the technique can be applied by all types of businesses and holds significant benefits for the management.

Quality Management Systems

Another technique that can contribute to performance management in organizations is quality management systems. As defined by Hemold and Samara (2019), a quality management system involves business processes that are aimed at enhancing customer satisfaction. For most companies in today’s world, customer satisfaction is essential to competitiveness since it affects profitability, market share, and future growth prospects. Consequently, a quality management system involves a set of process guidelines that define how the company will achieve superior customer satisfaction and how progress will be evaluated (Hemold & Samara, 2019). Although quality management systems can be customized to fit any organizational environment, some standardized systems are frequently applied by businesses, including ISO 9001 (Hemold & Samara, 2019). Quality management systems provide numerous benefits to organizations, beginning from higher customer satisfaction levels and ending with enhanced internal processes. Hence, they represent an excellent technique for performance management that delivers results and can be combined with other tools.

Conclusion

On the whole, modern businesses face many challenges that necessitate them to enhance performance continuously to survive and grow. Changes in the external environment, as well as highly competitive markets, require the application of well-defined, straightforward strategies. At the same time, businesses must also aim to achieve their goals efficiently, thus minimizing the costs and non-financial inputs that allow creating products or services. In this context, management control and performance management are critical notions that must be applied by businesses striving for long-term success. On the one hand, management control helps companies to implement their strategies, ensuring that the decisions made by employees on various organizational levels contribute to the achievement of strategic objectives. On the other hand, performance management tools and techniques assist in evaluating and improving corporate functions, thus attaining better financial outcomes, customer satisfaction, or operational performance. By applying a combination of proven performance management techniques and appropriate management controls, leaders can reach their strategic objectives and aims, thus preparing their companies for long-term success.

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References

Garrison, R. H., Noreen, E. W., & Brewer. P. C. (2017). Managerial accounting (16th ed.). New York, NY: McGraw-Hill Education.

Hemold, M., & Samara, W. (2019). Progress in performance management: Industry insights and case studies on principles, application tools, and practice. Cham, Switzerland: Springer.

Merchant, K. A., & Van der Stede W. A. (2017). Management control systems: Performance measurement, evaluation, and incentives (4th ed.). Harlow, England: Pearson.

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BusinessEssay. 2021. "Management Control and Performance Management." December 30, 2021. https://business-essay.com/management-control-and-performance-management/.

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