Assume you are the CEO of the Integrated Technology Company (ITC) which currentl

Question

Assume you are the CEO of the Integrated Technology Company (ITC) which currently employs 175 employees and provides accounting software, as well as information systems software and consulting services for small-to-medium sized companies in the construction industry across the country. Based on your reading of the assigned chapters (Chapter 16, Managerial Control" in Management: Leading & Collaborating in a Competitive World) in Bateman, Snell, & Konopaske, as well as in the assigned articles (Simons and Control theory brief), what would you regard as the three most important principles (express each as a single complete sentence) in developing a control system for your organization. Give a rationale for each principle. Next, briefly state how you would use these principles to design a control system for ITC. Assume that ITC was a very small company for many years, but it has grown significantly during the last three years as the business has been successful. As CEO, you now believe more attention needs to be given to organizational control.

Article

One of the key lessons from the 2008-2009 recession is that rms that take on risk without being adequately reimbursed suffer from poor performance, and in the worst case become insolvent. If rms are to survive, and even thrive, in a post-recession world, they need to adopt risk-based strategies. This three-part article series integrates strategy mapping, risk management and management control into a risk-based approach to strategy execution.1 Part one used strategy mapping as a tool to visually depict the rm’s strategy. Part two discussed how to assess a rm’s risks. Now, in part three we will explore designing a rm’s management control system to manage those risks that have the greatest probability to negatively impact rm protability.
Assessing Risks Part two of this series assessed and ranked a rm’s risk events according to their nancial impact and probability of occurring, and then placed each within the Risk Heat Map. Now, we will discuss how to develop a comprehensive management control system, and then explain how managers can use these controls to manage the risks in the red and yellow zones. The
aim of the management control system is to reduce risk to the point where it meets the rm’s risk exposure target.2
Designing a Risk-Based Management Control System Robert Simons’ Levers of Control3 is a comprehensive framework which managers can employ to enhance the execution of their rm’s strategies. There are ve controls in Simons’ framework that managers can employ to manage its risks:4 diagnostic, boundary, belief, internal and interactive.

Diagnostic Controls Diagnostic controls communicate to employees which activities they need to engage in to meet organizational strategy. Employees then report on whether these diagnostic controls were successfully completed. This is “managing by the numbers;” management communicates its expectations to employees by setting targets for each activity, provides resources and outlines initiatives to achieve strategies, regularly monitors progress and rewards employees for successes. Examples of diagnostic controls include budgets, cash forecasts and balanced scorecards.
JetBlue is an airline that manages its operations using two key metrics: Breakeven Load Factor (BELF), which measures how many passengers they need to break even for each ight; and Cost per Available Seat Mile (CASM), which measures how much it costs to y per seat mile. JetBlue’s target is to have the lowest CASM in the industry. In the second quarter of 2009, JetBlue’s CASM was 8.9 cents, Southwest’s was 9.8 cents, while the remainder of the large airlines were over 10 cents. Effectively using metrics to manage its operations allows JetBlue to successfully compete in the low cost segment of the airline market against Southwest and other rivals.
Boundary Controls Boundary controls, such as employee codes of conduct and standard operating procedures, are intended to constrain employee activities. They make it clear to employees which actions are unacceptable. Examples of boundary controls include rules regarding the use of company property, sharing of proprietary information, conicts of interest and payments to government ofcials. Fluor Corporation competes in the global construction industry where bribery is a major issue for all construction rms. Fluor’s CEO, Alan Boeckmann, implemented an award-winning program, including online and face-to-face training, to reduce incidents of bribery and corruption. To drive the training home, Fluor appointed a Head of Compliance. In addition,
Fluor has an open-door culture for reporting potential violations of its corruption policies and has a zero tolerance for violators of the policy. In recognition of its efforts to reduce incidences of bribery, Fluor has been named the “World’s Most Admired Engineering Company.”
Belief Controls While performance measures and boundaries seek to align organizational activities with the rm’s strategy by appealing to staff’s rational side, belief controls seek to align behavior by appealing to staff emotions surrounding the company. Belief controls outline what the rm stands for and serve to inspire and motivate employees to make a difference. Employees who have bought into the rm’s beliefs are excited to come to work and nd new ways to enhance the rm’s value proposition. While the company’s beliefs are manifested in its corporate culture, examples of formal belief controls include company value statements and corporate credos.
Zappos is an online seller of shoes. Its CEO, Tony Hsieh, consciously invested in belief controls in order to gain an advantage over its many Internet rivals. Zappos competes on customer service, so its belief controls reinforce the importance of delivering the best service. Zappos formalized its values into a value statement and communicates employee interpretations of these values in an annual publication, which is distributed to all employees. The rm works hard to attract and keep the right individuals and reinforces the importance of beliefs by basing half of each employee’s merit pay on how well they are judged to be living Zappos’ beliefs. Hsieh’s superior customer service strategy has paid off. Zappos was bought by Amazon in November 2009 for $1.2 billion.
Internal Controls Internal controls ensure accurate record keeping, safeguard the rm’s assets and enhance compliance with all applicable laws and regulations. To do these things effectively, rms employ a number of control methods, including, but not limited to:
• hiring qualied accounting staff; • abiding by Department of Labor laws and following human resources best practices; • creating authorization hierarchies; • setting up physical safeguards; • enforcing IT security policies; and • segregating duties.
Establishing and conforming to strong internal controls helps rms avoid fraud (both internal and external) as well as fraudulent nancial reporting.
Interactive Controls Management needs to monitor identied risks on a regular basis to ensure that its controls are working. Management needs to consider many risk-related issues:
• Are the management controls reducing the risks to the extent anticipated? • Is the risk exposure in line with the rm’s risk appetite? • If things are not going as planned, do we need to revisit the way we use controls to manage risk or do we need to change our strategy?
Managers need to monitor the appropriateness of their rm’s strategy in light of environmental changes. A starting point is to pay close attention to those risks that pose the greatest threat to the organization’s strategy. These risks become the focus of the organization’s interactive control system. The interactive control system monitors the validity of the rm’s strategy as the external environment changes, to ensure it is still being adequately compensated for the risks the rm is assuming. Mattel is an example of a rm that appeared to be lacking a well-functioning interactive control system after losing a signicant amount of market share in the early 2000’s. Barbie’s sales dropped 28 percent since 2002 and its market share has been reduced from 80 percent to 50 percent in the period from 2000 to 2009. Mattel’s Barbie doll brand lost its edge to newer, hipper dolls such as Spin Master’s line of Liv dolls, and to electronic games, such as Nintendo’s Wii and 3DS systems.
As part of its interactive controls system, senior managers need to continually gather information about and debate how environmental changes may impact the rm’s ability to achieve its strategy, and then make any necessary adjustments to the strategy. A successful interactive system generates dialog and debate about the key risks throughout the organization and one that allows the discussion to reach the ears of the senior management team. Senior managers need to ensure that if a salesperson in the eld hears of a rival’s impending product introduction, the information gets communicated back to senior management. If the rm’s management team wants to be informed of relevant signals from the market, it needs to ensure all employees:
• have a common understanding of the rm’s strategy map; • understand how they can contribute their thoughts and ndings; and • feel that the rm’s value system emphasizes (and rewards) information sharing.
Using “Levers of Control” to Manage Risk Managers need to customize their use of Simons’ Levers of Control to ensure they are adequately managing the risks they have identied. For example, managers can reduce risk using diagnostic controls to communicate expectations, monitor progress and then reward employees for providing good service, decreasing waste and keeping the premises clean.
Managers can use boundary controls to decrease risk by clearly delineating which behaviours are to be avoided. Standard operating procedures, such as those describing the best ways to consistently produce quality offerings, also reduce the risk of a bad service event. Some rms have increased the effectiveness of their boundary controls systems by offering compliance training, introducing compliance managers, condential employee compliance surveys, independent compliance audits, compliance hotline and implementing exit interviews, which reveal any incidences of non-compliance the exiting employee may have witnessed. Belief controls mitigate risk as they help to recruit and retain the best employees, which in turn, are
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less likely to commit service errors. Hiring only employees who exemplify the rm values, ensures they are less likely to harm the rm5. Once rms have formalized their beliefs, there are a several tactics managers can use to enhance their efcacy:
• Hire only employees who t with the rm’s belief system. • Lead by example; managers must embody the rm’s beliefs themselves. • Reward behaviours which are in line with beliefs (and work to correct those that aren’t). • Communicate the desired values during orientation and subsequent training. • Tell and re-tell stories about employees who exemplify the rm’s values.
It is not feasible to mitigate all risks. Some risks must be accepted and monitored, as we discuss in the next section.
Conclusion A rm’s future protability depends on its ability to identify and manage risk. Given that rms only prot when they successfully manage risk, the design and application of its management control system must ow from an assessment of the risks assumed in its strategy. Managers need to improve their strategic execution capabilities by fully integrating strategy mapping with control, compliance and risk management activities. The primary advantage of a risk-based strategy is that it allows managers, in real time, to steer the rm towards the good things that were described in its strategy and away from any bad things.

Explanation / Answer

Three most important principles for organizational control for ITC can be given as below :-

1. Giving a set of goals and guidelines to be followed for achieving them.

2. Empowering workers to take decisions and report business performance to stakeholders.

3. By defining process checks and constraints to be followed in financial, legal, ethical and operational decision making for functioning as per plan.

The above three principles will help in implementing organizational control so that the organization and its memebers can function without hierarchical control. The principles aim at empowering workers through learning and experience so that they can meet with changes in business environment. Empowerment and accountability builds responsibility in organization. There needs to be checks like budgets and plans for working as per plans and follow organizational principles to maintain the business identity and making the control process successful and ingrained in the culture.

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