MGT2Case1

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Introduction

Merchant’s Management Control System framework focuses on eliminating

three barriers that prevent employees from successfully executing their

organizations’ strategies. The three barriers include (1) employees lack direction in

the sense they don’t know what is expected of them; (2) employees know what is expected of them but aren’t motivated to complete the activities; and (3) employees

know what’s expected of them and are motivated, but personal limitations prevent

them from successfully completing the activities. In order to address these barriers,

Merchant proposes to use one or more management controls namely results, action,

and personnel and culture controls.

Results controls clearly communicate to employees what they must

accomplish to effectively execute the organization’s strategy and allow employees to

determine how to best to reach their goals. Action controls are intended to constrain

employee actions by clearly directing employees on what they should and should not do. Personnel controls rely on employees’ desire to self-police their actions, while

cultural controls rely on peer pressure to influence individual employees’ actions. In

order to effectively remove barriers, Merchant recommends that managers first apply

personnel and cultural controls. If inadequate, action controls should be introduce,

and eventually the results control.

Robert Simon’s Levers of Control framework consists of four controls that

work together to help managers implement their organization’s strategy. Diagnostic

controls involve developing performance measures based on the organization’s

strategy, setting targets, outlining initiatives to reach targets, and then paying bonuses when successful. A downside of this is that it’s difficult to perfectly align the

measures and budgets with the strategy and the pressure to deliver the results. For

this, boundary controls should be employed. Boundary controls outline those

activities that aren’t allowed. While these outline what employees should not do, they

don’t encourage employees to do the right things for the organization. For this, firms

need belief controls. Belief controls serve to inspire employees to create value for

their organizations because they believe in what the organization is trying to

accomplish. Lastly, interactive controls monitor the environment for changes that

may harm the firm, and then update the organization’s strategy to address these threats.

Role of Management Control Systems in Organizations

Management control system plays a vital role in various organizations. It is an

integral part of management that provides information which are primarily used by

management to formulate strategies, plan, coordinate and control activities, make

decisions, optimize the use of resources and safeguard assets. In terms of control,

this helps decision makers determine whether organizational, business, and operational level strategies and objectives are being met.

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Elements of a Management Control System

There are different elements that constitute a management control system. First is condition or characteristic being controlled. Because of size and complexities associated with organizational systems, it is not practically possible to control every aspect of their operations with rigid control mechanisms. However, controllers can

determine the key conditions or characteristics of output and monitor them. Another element is sensor. After identifying the conditions, managers must

integrate the various communications and data collecting sensors that procure and pass information from the system to management. This can be done using various logistics tools to provide the controller a source of accurate and timely information relevant to the overall performance of the process. It is important that the communication is carefully worded, as mis-communication and misinterpretation of data can lead to costly mistakes.

Also, one element to consider is comparison with standards. Information should be collected and interpreted in a timely and accurate way by management

and then benchmarked against previously stated organizational or competitive standards. At this point, deviations from the expected outcomes and desired results can be noted and discussed.

The last element is implementor. After collecting data and comparing it with desired standards, an implementation strategy for alterations can be integrated into the existing process. This is often referred to as a series of corrective actions that address and test issues with the process in the next control cycle.

Reason(s) Why Different Types of Firms Require Different Management Control

Systems The contingency theory of management accounting suggests that there is no

universally appropriate accounting system for all organizations in all

circumstances.This theory, however, is not only limited to management accounting

systems. This theory can also be applied to organizations’ management control

systems. This essentially means that efficient and effective management control

system in type of firm may not be applicable to another type of firm. This basically

explains why different types of firms require different management control systems.

There are different factors that contribute in the design of MCS. These include

external factors such as technological, political, cultural, natural, economic, and demographic factors. Internal factors typically includes the company itself, its

suppliers, marketing intermediaries, customers, and competitors. In various types of

firms, management control systems are substantially based on processes or

operations being observed, which means that, control systems vary from one type of

firm to another.

Background of the Case

Good city, a large metropolis, is a city where crime is prevalent and criminals have taken over it. The people in the city are helpless, and the crime is not helping

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the city’s business, tourism and citizen’s morale, but the mayor and the police are

powerless against it.

In the city, there was a top secret laboratory where scientists experiment with

shape-shifting DNA. While doing an experiment, something went very wrong. Their

experiment blew up but as a result, the scientists became mutants and inherited superpowers. They are Catrix (fast, mean, strong, and smart), Lasereye (can see

through stuff and can shoot lasers), Guffaw (strong, can grow as big as he wants,

and feels no pain), and 2 by 4 (can fly, and can use his body like a javelin).

The four mutants wondered what their future holds since no one will hire them

as scientists. They worried about how they will support themselves and their family.

After brainstorming, Catrix came up with an idea. He proposed that they should

incorporate a limited liability partnership (LLP) called SuperHeroes LLP and sell their

superpower services to clean up Good City’s crime. So, they went to the mayor and

pitched their idea to help fight crime in the city for a flat fee of $40,000 per month, in which the mayor was excited about so he agreed.

After their agreement, the four mutants planned on how the business is going

to work. The first thing they talked about was how they will fight crime and how they

will split the $40,000 revenue among themselves, They decided that will work

separately and split the $40,000 equally (i.e. $10,000 each).

So, SuperHeroes LLP starts to clean up the city. They did a great job in

stopping crimes but they also incur damages in the city. A month after starting their

business, the citizens in Good city were happy in the decline of crime rate but the

damages from the superheroes are also affecting the citizens so they complained to the mayor. So, the mayor called a meeting with the superheroes and told them they

had to minimize the damage that they incur. “Mayor, I hope you know that this may

tie our hands and make us less effective.”, one of the superheroes said but the

mayor still wanted them to lessen the damages in the city.

As a result, the superheroes went back to the laboratory and started to plan

their next course of action in which Catrix acted as the CEO. They all agreed that

SuperHeroes LLP’s strategy is to clean up and keep good city safe from criminals

while minimizing damaging and casualties. They also decided to recruit other

superheroes in their LLP: Domatrix, Envirogirl, 10x, Jarm, Skater, 3-Side, Kewl and H*bot. In addition, they hired Controller, a professional accountant with super

management control powers to help them formulate a plan to execute their strategy.

Before Controller can start giving advice to the LLP, he asked the superheroes some

questions first: (1) Who are SuperHeroes LLP accountable to, and what is it

accountable for?; (2) What keeps you, Catrix, awake at night and what can get in the

way of SuperHeroes LLP successfully executing its strategy?; (3) What are your

firm’s values, what compass guides your decisions, and how will you get the group to

live by those values?; (4) What is the best way for SuperHeroes LLP to get paid by

the city? To answer that you need to measure your benefit to Good city. You know SuperHeroes LLP contributes more to Good city than just turning bad guys over to

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the police to be prosecuted.; and (5) What is the best way to compensate each of the

12 super heroes? Guffaw is catching twice the criminals, but gets the same pay. Is

that fair to him?

1.a. Who is SuperHeroes LLP accountable to, and what is it accountable for? SuperHeroes LLP is accountable to the mayor of Good City since he is the

one who hired them. By being accountable to the mayor, the company is also

accountable to the citizens of Good City who are the ones that benefit from its

services. The company is also accountable to its employees in terms of

compensation as a return for their services. In addition, SuperHeroes LLP is

accountable to the environment because of the damages it causes in operating ts

services. Currently, the company is compromising its environmental responsibility for

its operations.

The company is accountable for lowering the crime rate in Good City which keeps the citizens safe from any harm or danger, while minimizing the costs it incurs,

especially the damage cost which is an external failure cost.

1.b. What can get in the way of SuperHeroes LLP successfully executing its

strategy of cleaning up Good City and keeping it safe from criminals?

SWOT Analysis

STRENGTHS Competent employees Differentiation strategy First-mover advantage

WEAKNESSES Three barriers of Merchant’s

Management Control System Sudden increase in the number

of employees Occupational hazard Constraints Conflict among employees Corrupt employees Loss of superpower (return to

human form)

OPPORTUNITIES

High crime rates in other cities(Market expansion)

No market competition Expansion/Replication of

mutation process

THREATS

Going concern issues Environmental issues Possible lawsuits Corrupt government Anonymous or hidden crimes

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As identified in the Merchant’s Management Control System, there are three

barriers that may prevent the superheroes from successfully executing their

organization’s strategies. The first barrier is the lack of direction of the employees

(they don’t know what is expected of them). The second is the lack of motivation of

the employees despite of having direction. The last barrier is personal limitation (e.g. lack of training and skills) which prevent them from successfully completing the

activities even without the first two barriers.

Another concern for the LLP is that they expanded rapidly by increasing the

number of superheroes from 4 to 12 members. These new members may not agree

with the plans and strategy of the LLP. In addition, the mayor of Good City is already

complaining about the $40,000 flat rate so there may be a conflict on the amount of

compensation since they have to distribute it among the 12 members. These

concerns may cause the barriers mentioned earlier to develop. These may also

cause the company to lose employees which may negatively affect the company and create competition.

Another thing to consider is that the superheroes may be injured which is an

occupational hazard. This may cause problems for the LLP if the number of available

healthy superheroes cannot control the crime level to an acceptable level. This will

decrease the effectivity of the company in which the mayor and the citizens may

complain about.

In addition to employee issues, the LLP may be subject to constraints when

performing its job. In minimizing the damage to the city, the superheroes may not be

able to do their jobs effectively. They need to weigh the benefits from the loss before carrying out their duties which can limit the effectivity of crime fighting.

Of course there is also the possibility of the mutants to return to their human

forms which will cause them to lose their powers. This will keep the company from

doing their job as the powers of superheroes are the most important asset of the

company.

Corrupt government may also cause a problem for the company. It is hard to

control crime in a city where the leader is part of the wrongdoings. The mayor may

take advantage of his position and use the information he has on the company to

successfully commit crime. But, a corrupt employee may be worse than a corrupt mayor. This is because the superheroes (employees) are the ones who reduces the

crime in the city. If one or more of the superheroes are part of the problem, then the

objective of the LLP, which is to minimize crime rate, will be very difficult to meet, if

not impossible.

There is also a possibility that the LLP will be very effective in solving crimes

that it totally eliminates it from the city. This poses a problem because there will be

no more crime to fight for, which leads to no demand for the services of the

company. This will cause the company to shut down.

On the other hand, there is also a possibility that the company will not be able to see all the crimes happening around the city. This may give access to criminals to

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continue breaking the law. By realizing that certain way(s) of doing a crime is not

visible to the superheroes, criminals may follow that way to succeed in their goal.

At present, employees cause a lot of damages to the citizens. If these

damages cause to the community is not minimized, citizens may opt to file cases

against SuperHeroes due to property damages. Damages to the community is not only limited to the damages to the properties. This also involves environmental

damages - employees may cause fire to a nuclear plant (if the city has), for example,

or the fire on properties may result to air pollution. Moreover, the chemicals involved

in the company’s laboratory processes may be harmful to the environment.

1.c. What are SuperHeroes LLP’s values? What compass guides its decisions?

And more importantly, how should the CEO get the other superheroes to live

by these values?Establishing values for the company is very important because these are

considered as guiding principles in decision making, specifically in the formulation,

implementation and monitoring of organizational strategy. The following are the

values that should be considered for SuperHeroes LLP:

Client Focus. Understanding customers’ needs and consistently delivering

quality services is important. Safety of the citizens in Good City is the main priority of

the company.

Integrity. Superheroes should act with integrity through honesty, fairness and

accountability basing on doing the right thing at the right time for the right reason.Quality . By doing more than the expectations of the city, by providing

services efficiently and effectively, it is guaranteed that the company will be

hired/invited back by Good City and possibly other cities.

Continuous Improvement. Having the first-mover advantage in the industry,

the company should have long-term commitment with Research and Development in

order to discover more laboratory procedures that could create other kinds of

mutations. This value is also important because the company is currently integrating

differentiation in its strategy.

Environmental Stewardship. Given the fact that the company is engaged to a long-term commitment with Research and Development, the company should find

substitute chemicals for the hazardous materials that are necessary for the

company’s laboratory processes. In addition, the company should be engaged on

corporate social responsibility such as in restoring what has been damaged in the

community during their operations.

1.d. What is the best way for SuperHeroes LLP to get paid by the city? Develop

a performance measurement for SuperHeroes LLP. What is the best way tocompensate each of the 12 superheroes?

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Payment to SuperHeroes LLP

The best and fairest way for the SuperHeroes LLP to get paid is based on the

crime rate of the city. Monthly flat rate was $40,000 regardless of the performance

and effectivity of the company. By basing monthly payment to SuperHeroes LLP on

the monthly crime rate, the company will receive the compensation that they deserve. This will encourage the company to do its best to reduce crime in the city. If

the crime rate for a certain month is relatively low, then payment to the LLP will be

higher for that month than in other months with higher crime rates. For instance, the

mayor may setup $100,000 as basis which will be multiplied to 1 minus crime rate to

compute for the compensation. If crime rate for the month is 70%, then the company

will receive $30,000 ($100,000 x [1 - 70%]).

The mayor may also opt to give a bonus to SuperHeroes LLP if crime rate has

significantly decreased compare to the previous month. Of course the bonus will be

based on how much the crime rate decreased. This will also encourage the company to keep on striving to decrease the crime rate. For instance, the mayor may stipulate

that crime rate has to decrease by at least 2% to receive the bonus and for every

0.01% decrease in excess of 2%, SuperHeroes LLP will receive $100. That means a

3% decrease in crime rate from the previous month will entitle the LLP to a $10,000

($100 x [3% - 2%]/0.01%) bonus. Instead of a $100, which is fixed, the bonus can

also be based on the main payment that they will receive. This will be computed by

multiplying the main payment to the decrease in crime rate. For example, crime went

down from 73% to 70%. The main payment will be $30,000. Bonus will be $900

($30,000 x 3%). Although adding a bonus to the compensation may seem like a good idea, there are long-term issues that the mayor should consider first. If crime

rate is already too low that it cannot reduce it any more, the LLP may consider letting

the crime rate increase quickly in order for them to have a way to decrease it again,

which earns them a bonus.

The damage costs caused by solving crimes will have to be deducted from

the total compensation to encourage the superheroes to minimize the damage they

create. These damages include property and infrastructure damages, and

environmental damages. This will also encourage the LLP to strengthen its

ecoefficiency.

Distribution of Profit

The net payment that SuperHeroes LLP receives will be distributed among

the 12 superheroes. But first, a portion of that should be set aside for the company to

fund its day-to-day operations and other costs that it might incur. The LLP should

review its historical costs to see if its operational costs are constant for each month

or if it varies according to crime solving activities. If costs are steady, the company

should set aside a fixed portion (e.g. $5,000), but if it is variable, the company should

set aside a percentage of the net payment (e.g.. 5%). If costs are both fixed and variable, then the company can set aside a fixed portion plus a percentage of the net

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payment (e.g. $5,000 + [net payment x 0.05]). The company may also have a policy

of setting aside more portion of the compensation if there is a need to upgrade

facilities (e.g. new gadgets, new equipments, upgrade laboratory, research and

development, etc.).

The remainder of the compensation should be divided among the 12 employees based on their performance. The factors that should be considered in

measuring their performances are (1) number of criminal arrests, (2) the degree of

crime of the criminal arrested, and (3) damages incurred. To measure the degree of

crime, the LLP should establish a criteria and rate the crime from 1 to 10 (10 being

the highest level of crime). Performance should be computed by adding the product

of criminal arrested and degree of crime (i.e. summation of [criminal arrested x

degree of crime]). The gross compensation, which is the main payment and the

bonus, should be allocated based on that as the salary of the superheroes. Then,

damages by each superhero should be deducted to their respective salary. If the arrest of a criminal is by a group of superheroes, then the credit to that arrest should

be shared among the group on the basis of their contribution. Accordingly, the

allocation of damages should also be based on their contribution.

The company can also set a minimum number of criminals to be caught per

superhero in a month. It can also set a maximum damage cost per crime fighting

activity. This maximum may vary if the superhero is successful or not, or according to

the degree of crime. In order to urge the superheroes, bonuses may be given based

on the number of criminals caught in excess of the minimum. Also, superheroes who

exceed the maximum damage cost should be penalized.

Management Control System

A significant part of a management’s job is to control the processes involved

in the successful operation of a business.

Merchant’s Management Control System

1. Results controls . Objectives should be properly communicated to the

superheroes for them to have direction and to effectively execute organization’s strategy. This will be achieved by performance evaluation.

2. Action controls. Employees should be directed of what should and should

not be done. There should be codes of conduct that clearly delineate activities

that employees aren’t allowed to engage in. Action accountability is very

important for LLP because of the nature of its business. In addition,

supervision should be imposed on the employees to ensure that their actions

are not against any rules and laws.

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3. Personnel & Cultural controls . SuperHeroes LLP must have a criteria in

hiring applicants. For instance, the company should only hire employees with

superpower and has a sense of heroism. In addition, the company should

provide training for its employees to do their job more efficiently. Lastly and

more importantly, Catrix should serve as an example to the other superheroes.

Simons’ Levers of Control Framework

1. Diagnostic controls. Compensation to employees is divided among

employees based on three measures (1) number of criminals arrested; (2)

degree of crime committed; and (3) damages incurred. Gross compensation

can be calculated based on performance and costs damages incurred will be

deducted correspondingly. (Refer to 1d for a more detailed explanation)

2. Boundary controls. SuperHeroes LLP should establish a code of conduct

that is specific to the LLP to guide the superheroes on what are the

acceptable and unacceptable practices. This code of conduct should include:

i. No innocent citizen should be harmed by a superhero.

ii. No superhero should refuse to help an innocent citizen in

danger.

iii. Under no circumstances should a superhero break a law.

iv. No superhero shall compete against another or steal another

superhero’s target criminal in order to gain more pay.v. Real identity of the superhero should be confidential to outside

parties.

3. Belief controls. SuperHeroes LLP should set up a belief system that clearly

communicates the importance of crime solving in Good City. In addition to

that, the five values of the company (client focus, integrity, quality, continuous

improvement and environmental stewardship) should also be part of the belief

system. To do that, the company should have group activities that will show

them their importance as superheroes in the city. The company should also recognize and reward superheroes show strong beliefs in the company

values.

4. Interactive controls. To monitor the performance of the company and how it

is fitting in with changes in the environment, it should have monthly

performance evaluation either from the mayor or from a qualified third party.

The company’s compliance to its agreement with the mayor and the quality of

the superheroes’ work should be evaluated. In addition to that, the company

mays decide to implement a training program to keep the superheroes fit updates with current events.

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2. Do you feel that the control system you have just developed meets the

objective of cleaning up Good City and keeping it safe from criminals while

minimizing property damage and casualties to its citizens?With the developed management control system for SuperHeroes LLP, it can

be seen that it is in accordance to meeting the objective of the company which is to

cleanup Good City and keep it safe from criminals while minimizing property damage

and casualties to its citizens. As seen on the discussion above, using both

Merchant’s management control system and Simon’s levers of control framework,

three barriers that prevent employees from successfully executing strategies were

addressed. Moreover, there is an increase in the alignment between the activities

planned and the activities performed by its employees. With these, employees are

now empowered to provide services to their clients in line with the company’s strategies, objectives and values.

References:

https://www.boundless.com/management/textbooks/boundless-management-textboo

k/control-8/managing-control-66/elements-of-managing-control-333-1876/

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