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Published: Tue, 13 Mar 2018

1 Introduction

This chapter introduces the background of the selected research topic, Management Control System of MCB Bank of Pakistan and providing information about the knowledge gape by discussing the existing literature & researches already done on the specific field but mostly not focusing on Pakistan Environment. It elaborated the problem discussion associated within Management Control System, explaining the research purpose to conduct investigation about Mechanisms of MCS as a package, integration within types of MCS at different levels and shifting traditional approach to online business. The chapter further described the research questions designed to study the research problem, position of the study in the specific field, delimitations and structure of the thesis.

1.1 Background

The thesis is written as a part of the MBA degree at the School of Management Blekinge Institute of Technology, Karlskrona, Sweden. The researchers have some management experience in the Banking Industry and want to be specialized in this particular direction. Hence to study management control system in a MCB Bank will be a most interesting area for our research work.

The Management control systems used both diagnostically and interactively have been emphasized comprehensively (Magne & Stine, 2006) in the specialization courses we have studied in our academic career. This leads our interest to research the selected field in depth. By keeping in mind, the thesis on this area requires a great deal of information of strategic art and demand of particular attention; we chose to contact an organization MCB Bank of Pakistan. We collected all the essential information by using both primary and secondary art and making it an easy task to dive into the Management control system of MCB Bank.

The new technology and the increased competition by entrance of foreign banks into local markets have been putting great pressure on the need to reduce costs. Resultantly the banks are focussing to search alternative solutions that lead them to a consolidation in the business market through alliances, mergers, & acquisition (Magne & Stine, 2006). To cope up with the market and attract the new customers, MCB Bank always try to introduce some unique business solutions through offering competitive services such as online banking facilities, ATM services, interest margins on saving and current accounts, Dynamic and high value products including Rupee Travellers’ Cheques, Credits Cards & Debit Cards, and Consumer Durables (MCB, 2011) .

These new offerings desire great deal of changing management structure, adopting new techniques instead of focusing only on traditional banking, creating values for existing and new customers through differentiation. The innovative ways of changing traditional approaches to e-solutions desire great changes in the control system to facilitate and serve the consumers in the best way. To succeed in the business objectives in such a competitive environment banks have strong need to develop their knowledge of the changing market conditions, and the ways those affecting their performances.

1.2 Problem Discussion

The advancement in technologies has changed the way of doing business in the market. Now world becomes a globe and organizations have to think globally for playing their potential roles in the business world. The entry of global organizations in the local markets have been increased the competition. The customers’ behaviour and approach is not limited to national boundaries and they are playing their active roles globally through e-services. The appearance of large number of competitors in the market made the business more complicated especially in the banking sector. There is a great demand of business solutions that compete with the international standards.

Management Control defined by Merchant & Van der Stede, (2007:15) stated that managers have to implement one or more control mechanisms to avoid the control problems especially those related to decision making process. The author explained further, the collection of control mechanisms that are used in generally called as Management Control System (MCS).

Management Control System is a comprehensive process of controlling and managing the behaviours of employees including all actions, policies, resources, and strategies that mangers do to ensure that firm’s plans, objectives, and strategies carried out perfectly (Merchant & Van der Stede, 2007: Xiii).

MCS differs substantially between organizations and units or areas critical to every company. Managers’ control decisions are not unsystematic. They are based on any of numerous factors. Some controls are ineffective or not cost effective in certain circumstances. Certain types of controls are superior to deal with the types of awareness of the problems, and various organizations and different areas within each organization are often quite different combinations of control problems. Certain types of controls have several adverse effects that may primarily hazardous in certain environments. And some controls simply outfit particular managers’ styles better than others (Merchant & Van der Stede, 2007:15-16).

There are too many choices available in accounting and management control system, and they are not as fully studied as they demanded like older theories and tools (Malmi and Granlund, 2009). However, the new theories and tools have also challenging, due to firms and organizations seem to have too much faith in them and use them in an uncritical way. They considered them as the solution of all management challenges. For instance, the new theories and tools are, business process reengineering (BPR), balanced Score cards (BSC), activity- based-costing (ABC), and total quality management (TQM). The uses of above said systems have potential results with ideal situations but expensive to acquire and mostly organizations do not exactly evaluate the relationship between costs and advantages of the system in use. They should first analyze the compatibility of the system with their organization structure, demands, and requirements to achieve business goals (Siverbo and Akesson 2009, Maria and Gustav, 2010).

We investigated the management control systems administered by MCB Bank as a package. There are several reasons why management control systems as a single package is attractive to study for us. The one claim is that a large amount of research has been conducted with a focus on one issue or, indeed, sitting in the broader control system and perspective (Malmi and Brown, 2008, Maria and Gustav, 2010). If you do not take into account the relationship between different control systems, the way in which the mechanisms of control systems, representing various contingent variables will direct to flawed conclusions (Fisher, 1998, Maria and Gustav, 2010).

1.3 Problem formulation and purpose

The research is primarily investigating the Mechanisms of Management Control System as a package in MCB Bank. In addition to what types of management control system are used at different levels of organization and how they integrate with each other. The other focus of the research is to analyze and customize Management Control System when changing the business approaches from traditional to online.

MCB Bank has huge networks of branches extending gradually covering the whole country and launching some branches abroad as well. They are using same MCS in all their branches. Those things are very interesting for us to investigate it. In the year 2010, MCB Bank services (product & investment) menu was additionally strengthened as they introduced more customized facilities to their customers. MCB delivered a net profit of Rs. 17B, remained competitive in terms of the total asset base of Rs. 568B. Nonetheless such severe circumstances, how MCB Bank stands strong in terms of its management policies, net spreads, capital adequacy, overall profitability and equity base (MCB Annual Report, 2010).

This leading success in commercial sector attracts our interest to go in depth and analyze the MCS of MCB. In this case study we aim to describe the management control systems of a commercial bank MCB in Pakistan, since it is expanding and growing with good speed as compared to other banks due to its good approach of MCS system. Furthermore, how MCB was able to keep effectively control the assets quality through its management control package and who are the core resources in its success and how MCB manage them and what is its special focus to the successful implementations of its MCS, vision and benchmarks set?

In concluding, we want to investigate the management control system practically used in MCB Bank by analyzing comparison between theory and practice and to suggest what the most appropriate practice seems to us based on findings from literatures and empirics. We will present a model at the end of the study to show how better a management control could look like in the light of this research.

1.4 Research Question

The research is basically analyzing what, and how MCS contributing in the success of MCB Bank of Pakistan. To fulfil the desired objectives of the thesis, the research questions formulated as:

  • What are the Mechanisms of Management Control System package of MCB Bank of Pakistan?
  • What types of management control systems are used at different organization levels?
  • How do customize their Management Control System shifting from traditional to online environment?

1.5 De-limitations

The research is focussing on a single case study of a commercial bank MCB in Pakistan and investigating the MCS as a package. In addition to analyze the different MCS practised at different levels of the organization, integration of MCS within branch networks, and approaches to transfer from traditional to online environment. There is no any intention to generalize the research results. The results might be applicable for other banks in the same environment.

1.6 Thesis Structure

The research paper organized in six chapters as follow:

Chapter 1 It introduced the research topic with background, problem discussion, problem formulation and purpose, research question as well as highlighted limitation of the study.

Chapter 2 Second chapter examined the theories related to this study through the literature review as discussed by different scholars.

Chapter 3 This chapter explained most important methods in general and specific research strategy to fulfil the research purposes.

Chapter 4 It presented empirical findings of the research.

Chapter5 This chapter provided most important part of the thesis process, analysis of the study.

Chapter 6 This chapter discussed conclusions and implications of the research.

2 Theory

We will examine the major theories of management control in this section. Prior to specify definitions of management control systems (MCSs) and management control system packages (MCSPs), we will first give an explanation to management and management control. We also review the theories that describe the components of a package of MCS, and various control options. Once the appropriate definitions have been rested adding section turns to present the most relevant conceptualizations package of management accounting literature. At the end of the section, both the reasons of choice and de-selection of every theoretical and conceptual framework to analyze the data collected will be discussed.

2.1 Management, Management Control & Management Control Systems

Management literature written on this subject matter is described in many ways, but all have something to do with the process of allocating resources and direct activities to meet the organization’s overall goal. Management is a broader topic and can be separated into smaller rudiments such as product development, operations, marketing/sales and finance. The management processes can also be divided into smaller parts that are objectives setting, strategy formulation and management control. Developing goal-setting is a necessary process to formulate and sometimes it is important to review the direction and destination of the company. If goals are not established, it is impossible to determine whether the resources allocated in the right direction and if the right activities have been made. Strategy formulation is the process by which organizations learn to use their resources to achieve their goals. The management processes of objective setting, strategy formulation and management control is a continuous process (Merchant & Van der Stede, 2007).

What is an MCS is a question that has been answered in different ways in the literature of presented management accounting (Fisher, 1998; Malmi & Brown, 2008; Merchant and Otley, 2007; cited in Sorsanen, 2009). Due to the absence of a general and well-articulated definition, the interpretation of the results of research and design of the MCS is problematic (Fisher, 1998; Malmi & Brown, 2008; Sorsanen, 2009). This view is supported by Bisbe et al (2007) who argue that it is important to pay particular attention to the conceptual specification of the studied construct since a careful definition will promote both effective research into MCS and progress in understanding the results.

First definition of MCS was provided by Anthony (1965; cited in Sorsanen, 2009), in which management control is “the process by which managers ensure that resources are obtained and used effectively in achieving organizational goals.” Anthony’s (1965) definition is of a limited nature, which separates management control from strategic control and operational control. Flamholz (1983; cited in Sorsanen, 2009), by contrast, emphasizes the behavioural aspect of MCS with the argument that individuals and organizations that share only partially congruent objectives, it is necessary to channel human efforts against a set of institutional goals, which inevitably leads to a need for control.

The behavioural view is also supported by Merchant and Van der Stede (2007) suggests that “management control includes that the managers to take steps to ensure that employees do what is best for the organization. This is an important feature because it is the people in the organization who make things happen. If all employees could always be trusted to do the best for the organization there would be no need for MCS”.

In addition, MCS has been conceptualized as formal routines, based on information and procedures managers use to maintain or alter patterns in organizational activities (Simons, 2000). As shown above definitions, some concepts are wider than others. In the case of the broadest definitions, where, for example the implementation of the strategy and learning process fall within the scope, Merchant and Otley (2007) explain that “almost everything in the organization is part of the overalls control framework.”

Apply to this study, however, the definition of Malmi & Brown (2008), distinguishes between management control systems and decision support systems. Therefore, the only systems to support decision-making process of senior executives and managers have been omitted. The idea behind this distinction lies in the monitoring and control of subordinates in Malmi & Brown (2008) formulation: “If the support system is used by an individual (manager) to control over another person (subordinate) behaviour then it is a decision support system, whether used by senior executives or provided by senior managers to its managers,” In aggregate, Malmi & Brown (2008) defines MCS as follows:

Management controls include all the devices and systems managers ensure that the behaviours and decisions of their employees are consistent with the organization’s objectives and strategies, but leave out pure decision-support systems. Any system, such as budgeting or a strategy scorecard can be categorized as a management control system.

As Malmi & Brown (2008) point out, the definition is broader than the definitions given by Anthony (1965) and Simons (2000), since it controls the strategic and operational direction for employees and other routine information-based drop down ‘inside of the scope, respectively. However, the definition is narrower than those taking the decision support systems for consideration.

The above definition proposed by Malmi and Brown (2008) is, however, not exhaustive. In particular, it can be questioned what distinguishes management control from management control system? Authors believe that the systems, rules, values, and other activities that management puts in place to direct employee behaviour should be called management control. Moreover, if these are complete systems, so it should be called the management control systems (Malmi and Brown, 2008). What constitutes a complete system then? If a complete system needs elements as input, processing, output, and most importantly, feedback, what would this mean in the context of management control systems? For example, whether the culture of an organization is considered as an MCS only if an element where the feedback enables managers to monitor and perform actions based on feedback information there?

In spite of these open-ended questions and is believed here that the distinction between management controls and management control systems is rather theoretical – not empirical. Therefore, this study follows Malmi & Brown (2008) in determining management controls as an upper concept, which includes devices and systems that managers use to make sure that the actions and decisions of its employees in line with organizational goals and strategies. Thus, it is not of paramount importance to discuss whether the so-called specific means to control the behaviour of subordinates and decisions is called a device, practice, mechanism or a system as long as it can be recognized as independent means of management control, and ultimately serves the purpose inherent in management control – to achieve organization preferred objectives.

According to Merchant & Van der Stede (2007), managers implement various control mechanisms, or management controls, and the collection of such control mechanisms used are generally referred to as management control system. Malmi and Brown (2008), on the other hand, believe that organizations have plenty of MCS and the whole system can be called a management control system only if these systems were designed and harmonized intentionally. As is often provided by different systems of different interest groups at different times and should be, as they say, no controls could be considered as a single system. Instead, it should identify a set of these different controls and control systems that should be defined as a package or a range of systems (Malmi and Brown, 2008). This is exactly the problem that should be addressed in the next section

2.2 Management Control System Package

As mentioned above, the holistic perspective on management control systems is not new (Otley, 1980; cited in Sorsanen, 2009). It has been recognized by academics to an increasing extent that MCS should be considered as operating together for a better understanding of the design and use of MCS (Fisher, 1998: Langfield Smith, 2007; Otley, 1999; Malmi and Brown, 2008; cited in Sorsanen, 2009). Bedford (2006; cited in Sorsanen, 2009) emphasizes that the various MCS elements constitute a package if they operate together in order to achieve organizational results. After this argument, it state that if the linkages between elements of control system (such as budgeting and culture of the organization) are not sufficient, then the system (here MCSP) may not perform the intended functions (Fisher, 1998; Flamholz, 1983; cited in Sorsanen, 2009).

That is, MCSP may fail to affect behaviour in intended ways. The underlying rationale for the MCS package phenomenon can be crystallized as Malmi & Brown (2008) put it: ” MCS does not work in isolation,” In fact, it is logical to imagine that the company employs various MCS that may have reciprocal links (Abernethy & Brownell, 1997; cited in Sorsanen, 2009), and therefore, the operation of a single system is quite likely affected by its closest contingency factors, i.e. any other MCS. It is worth to mention that this thesis pays special attention to the interaction between these elements of control. Thus, this study acknowledges the fact that the company employs a range of interdependent MCS and those them to some extent serve the same purpose of reconciling the individual activities with the desired objectives of the organization (Abernethy & Chua, 1996; Alvesson & Kärreman, 2004; cited in Sorsanen, 2009). Consequently, this thesis relies on the idea that this combination can be visualized as a “package” of controls and the following Malmi and Brown (2008) in determining the MCSP as follows:

The general perception, management control systems package (MCSP) is a collection or set of controls and monitoring systems. The individual control systems may be more traditional accounting controls such as budgets and financial measures, or administrative controls, for example organizational structure and systems of governance, along with the more socially-based controls such as values and culture.

Earlier literature provides several conceptual frameworks to study MCS as a package (Sandelin, 2008; cited in Sorsanen, 2009). Thus, the existence of different views on whether a particular thought provides the best framework for the study of MCSP than other. The following sections provide brief introductions to the three well-known frameworks proposed by the Merchant and Van der Stede (2007), Simmons (2000) and Malmi and Brown (2008). With regard to the three frameworks, we will summarize each element of control and its key systems. Since this study primarily relies on Malmi and Brown (2008) classification and discussed constraints and problems of discarded frameworks as well as the advantages of the one selected.

2.2.1 Object-Of-Control Framework

Merchant & Van der Stede (2007) argued that the need for a management control exists due to three main reasons: lack of direction, motivational problems and personal restrictions. To address these issues, they propose the object of control framework, which divides control practices into four groups. Literally, the classification stems from the various control objects that can be focused on results achieved, and actions taken or the types of personnel employed and their norms and shared values. The next four sections will outline these groups of control practices, the results controls, action controls, personnel controls and cultural controls.

Results Controls

According to Merchant and Van der Stede (2007), results controls are an indirect form of control because it affects the actions of employees by linking rewards to the desired results. In addition to monetary compensation the rewards include, among other, job security, promotions, autonomy and recognition. The authors argue that the results control is a prerequisite for enabling the staff member because they provide a great deal of autonomy for the staff. Autonomy occurs due to the fact that staffs are accountable for producing results, not actions. In other words, the results controls do not identify the specific actions staff should take, but focus their attention to the results to be achieved, and therefore urged them to take appropriate action they believe will generate the desired results.

Merchant and Van der Stede (2007) propose four steps required to implement results controls. First, an organization should be measured to determine the correct dimensions of performance i.e. dimensions consistent with organizational goals and strategies. Second, it is required that the organization measures performance on these dimensions. Thirdly, the organization needs to develop specific goals for each aspect of the dimension of performance that is measured. Finally, the organization should provide rewards and punishments to encourage this kind of behaviour that are consistent with the desired results.

Action Controls

While results are not directly controlled in this form of management control, it does not specify the action staff should take, actions controls function or vice versa. In fact, the action controls aim to ensure that employees perform certain actions that are in the interest of the organization. Effectiveness and ease of use for this depends on the knowledge and required actions of managers as well as their ability to ensure that these actions occur. For the implementation of control measures managers need to know the actions that serve to achieve the desired objectives of the organization. (Merchant and Van der Stede, 2007) According to the authors, action controls comes in four different forms: behavioural constraints, pre-action reviews and accountability of action and redundancy.

Behavioural restrictions can be applied physically or administratively. Physical constraints include, for example, computer passwords and restrictions on access to classified and valuable areas. Administrative constraints, on the other hand, include elements such as restricting the authority of decision-making (such as reducing the amount of expenditures manager at a certain level may be approved) and the separation of duties (such as different people receive checks and make the entries of payment). Pre-action reviews refer to both formal and informal reviews of actions. A typical example of formal pre-action review is a condition of approval of the expenditure of the nature of the specific (such as capital expenditure). A coffee break conversation between a manager and a subordinate on progress of a particular project is a simple example of an informal pre-action review (Merchant and Van der Stede, 2007).

According to Merchant & Van der Stede (2007), accountability of actions, the third form of action controls, relate to the idea of holding staff accountable for their actions. Requirements for the implementation of action accountability controls work virtually identical to the requirements contained in the results controls. Therefore, for the implementation of these controls that the organization should first determine what actions are acceptable or unacceptable and communicate those definitions to staff, monitoring or follow-up to what would otherwise occur and, finally, rewarding appropriate actions and punish acts are unacceptable. The authors state that the communication of the actions for which staffs are held accountable can be done in two ways, either administratively or socially. Work rules, policies and procedures as well as codes of corporate conduct are typical examples of administrative modes of communication. If the actions are not communicated in written form they can be communicated orally, for example, in meetings or in private, face-to-face discussions. In some cases the actions required are not informed at all since in some occupations (such as doctor, lawyer and auditor) incorporate the premise of acting professionally (Merchant & Van der Stede, 2007).

Finally, the authors propose redundancy as the fourth form of action controls. Redundancy refers to the allocation of excessive amount of resources to the task. The idea is to increase the likelihood that the job is done in a satisfactory manner. However, as Merchant & Van der Stede (2007) point out, this is not a very common form of actions controls because of its nature expensive and inefficient.

Personnel Controls

Merchant & Van der Stede (2007) argue that personnel controls are aimed at serving three basic purposes and have three main methods of implementation. First, personnel controls help to make it clear to employees what the organization expects from them. Secondly, they are of help in ensuring that every employee has all the capabilities required (such as experience and intelligence) and resources (e.g. information and time) to perform a good job. Third, personnel controls may be used to increase the likelihood that employees will engage in self-monitoring.

The authors suggest that personnel controls can be implemented through three main methods: (1) selection and appointment of staff, (2) training, and (3) job design and provide the necessary resources. According to Merchant & Van der Stede (2007), and the selection and placement can sometimes be considered the most important elements of an MCS (MCS package here). Find the right people in the right place to do a specific job is the highest importance. Therefore, companies devote a great deal of time and effort to do it on sound basis. It is clear that the training addresses the purposes of the above-mentioned disciplines staff through the provision of information about the expectations of the organization and better work practices. Furthermore, it can be training would have a positive impact on employee motivation by giving greater sense of professionalism. Finally, Merchant & Van der Stede (2007) argue that job design can be used and provide the necessary resources to increase the likelihood that an employee will succeed. This could mean, for example, that the functions of staff are not very complicated and there are all the necessary task specific resources in place.

Cultural Controls

Personnel controls are seeking to increase the likelihood of monitoring staff determination, while cultural controls are used to promote mutual monitoring. It is also based on the organization’s culture and traditions of the common standards, beliefs, values, ideologies, attitudes and ways of acting, it creates a strong group pressure on individuals who do not behave malleable. (Merchant & Van der Stede, 2007).

It is, however, questionable whether managers are able to create or shape an organization’s culture even if they wanted to. Merchant and Van der Stede (2007) recognizes that cultures remain relatively stable over time, but to say, however, that managers have five different methods of shaping culture (i.e. cultural controls): (1) codes of conduct, (2) group-based rewards , (3) transfers within organization (4) physical and social arrangements, and (5) tone at the top. Codes of conduct refer to official statements written in general terms describe what is meant by corporate values and commitments of stakeholders, and how these should be reflected in the behaviour of every employee. Sometimes codes of conduct may exceed the above definition, and include behavioural detailed guidance on specific issues. If the violation of these guidelines lead to punitive consequences then kind of control that is classified as an action control.

Team-based rewards an also be seen as the exercise of overlapping control because of its close relations to results controls. The difference lies, according to the authors, in its focus on the various rewards for individual achievement. Thus, the main objective of team-based rewards does not motivate the members of the group to achieve rewards, but to enhance communication and monitoring of mutual expectations within the group. (Merchant and Van der Stede, 2007)

Transfers within the institutions seek to transform culture through staff rotation. It is supposed that managers moving among functions and divisions will provide managers with a better understanding of the organization as a whole. Physical arrangements (such as office plans, architecture and interior decoration), and social arrangements (e.g. dress codes and vocabulary) can also be of help in shaping the organizational culture. Finally, the authors suggest that the proper tone at the top, which comes across through managers’ statements and behaviours, is a way for the formation of the enterprise culture.

2.2.2 Levers of Control Framework

The control framework is a frame that is used widely in the literature of existing management accounting (Simons, 1990, 1991, 1995, 2000; cited in Sorsanen, 2009). The framework consists of fo


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