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.
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?
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.
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.
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.
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.
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.
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 four control systems: (1) beliefs, (2) boundary, (3) diagnostic, and (4) interactive systems. Simons (2000) stresses that an effective control environment is achieved through the integration of all four levers control, because "the power of these levers in the implementation of the strategy lies not in how to use each alone, but in how they complement each other, when used together. Interaction between positive and negative forces creates a dynamic tension. "
Four levers create tension in that two levers (the beliefs and interactive control systems) create positive energy, while the remaining two levers create negative energy (Simons, 1995; cited in Sorsanen, 2009). In other words, the beliefs and interactive systems are used to address the need for organizational innovation, while the boundary and diagnostic systems are used to make sure of achieving the goals set in advance (Simmons, 1990, 1991.1995, 2000; cited in Sorsanen, 2009). The following sections provide a more detailed picture of these levers of control.
Beliefs and boundary systems
Belief systems can be defines as “a clear set of organizational definitions that senior managers communicate formally and strengthen scientifically for the provision of core values, purpose and direction of the organization” (Simons, 1995; cited in Sorsanen, 2009). Thus a system of beliefs communicates the fundamental values related to business strategy in order to inspire employees to engage in the search for new opportunities. The communication of beliefs is often conducted through a mission or vision statement and credos (Simons, 1995; Widener, 2007; cited in Sorsanen, 2009). According to the definition of Simons' (1995, 2000), these ways of communicating beliefs can be regarded as a system when they are (1) formal, (2) based on the information, and (3) used by the managers to keep on or changing patterns of organizational activities.
Systems of boundary, on the other hand, establish limits to strategically undesirable actions. According to Simons (1995; cited in Sorsanen, 2009), a boundary system, and “delineates the acceptable limits area of activity of strategic organizational participants”. The communication of boundaries is often conducted through codes of business conduct (Simons, 1995; Widener, 2007; cited in Sorsanen, 2009). Through the imposition of codes of conduct of these with incentives of punitive nature managers try to ensure that subordinates do not engage in activities that could jeopardize the safety of business and not a waste of resources through projects or actions that are not in line with business strategy (Simons, 1995; cited in Sorsanen, 2009).
To sum up, the beliefs and boundary systems both intend to motivate employees for the opportunity to seek, but the belief systems do that in a positive way through inspiration, while the systems of the boundary to do it in a negative way through the demarcation of the opportunity domain. In addition, it should be noted that the beliefs and boundary systems are not cybernetic, i.e. there is no place in the feedback process that will enable corrective action by managers. Apart from the lack of this feature of these systems provide space for organizational search activity and, therefore, form a basis for diagnostic and interactive systems-more traditional cybernetic management control systems (Simons, 1995; cited in Sorsanen, 2009).
Diagnostic and interactive systems
Diagnostic and interactive control systems both refer to feedback and measurement systems, but the difference between these two systems lies in how it is used by managers. That is, managers choose to use certain control systems in an interactive manner and others diagnostically (Simons, 1990; cited in Sorsanen, 2009). Designed diagnostic systems can be predictable to ensure achieving the goal, and therefore, the implementation of strategies (Simons, 1995, 2000; cited in Sorsanen, 2009). Moreover, allowing these systems to monitor and reward managers achieve the goals set in advance through the review of critical performance variables. Diagnostic systems, along with boundary systems, intend to restrict the conduct of staff and allocation of scarce attention (Simons, 2000; cited in Sorsanen, 2009).
Unlike diagnostic control systems, managers pay frequent and regular attention to interactive control systems and, therefore, personally involved in it. This attention signals the need for all members of the organization to focus on the issues addressed by the interactive systems, any issues that are of strategic importance. It is expected to promote active dialogue and frequent discussion on aspects of strategic uncertainties. Therefore, interactive control systems activate organizational learning and, ultimately the emergence of new strategies (Simons, 1990, 1991.1995, 2000; cited in Sorsanen, 2009).
In short, the primary purpose of using feedback and measurement systems diagnostically is to provide the incentive and guidance to achieve organizational goals, while the use of interactive control systems intends to stimulate dialogue and organizational learning. With regard to organizational learning, Simons (1995; cited in Sorsanen, 2009) argues that diagnostic control systems facilitate single loop learning, while the interactive control systems to facilitate the double-loop learning. Finally, Simons (1995; cited in Sorsanen, 2009) stresses that managers choose usually only one system of management control to be used interactively (typically project management systems, profit planning systems, brand revenue budget, intelligence systems and human development systems (Simons, 1991; cited in Sorsanen, 2009) and that the control system used interactively in one firm may be used diagnostically in another.
2.2.3 MCSP by Malmi & Brown
Malmi & Brown,s (2008) classification of the theoretical MCS package is based on work of Brown (2005), who developed this model by analyzing and summarizing the nearly four decades of MCS research. According to Malmi and Brown (2008), the classification approach provides a broad enough, yet parsimonious, approach to study the phenomenon empirically. In addition, it states that the purpose of this classification is "to facilitate and stimulate discussion and research in this area, rather than proposing a final solution to all relevant conceptual problems." As shown in Figure 1, in a framework that includes five types of controls: (1) planning, (2) cybernetic, (3) reward and compensation, (4) Administrative and, (5) cultural controls. The following sections will outline these controls in more detail as in Figure 1.
Malmi and Brown (2008) divide planning into action planning and long-term planning. The earlier has a tactical focus and identifies objectives and actions for the near future (usually a period of twelve months). The latter has a more strategic focus and it sets objectives and actions over the medium term and long term. The authors argue that it could be considered as a pre-planning of control because of three specific reasons. First, planning draws effort and behaviour through the development objectives of the functional areas of the organization. Secondly, through the provision of standards to be achieved with regard to objectives, planning demonstrates the level of effort and behaviour expected from members of the organization. Thirdly, planning can help to achieve the goal of matching across organization through the functional zones, and thus control the activities of groups and individuals.
In addition, the authors suggest that planning can accomplish two distinct tasks. First, it may be used to support the ex ante decision-making. Second, it may be used as described above, i.e. to create harmony within the organizations goal. To be loyal to the MCS definition set out above, in the first case planning should not be described by the MCS, whereas in the latter case it should.
Cybernetic controls base their functioning literally on the cybernetic logic. According to Otley & Berry (1980; cited in Sorsanen, 2009), control, in its full cybernetic sense means monitoring activities and take necessary measures in order to ensure that desired ends are achieved. Malmi & Brown (2008; Green & Welsh 1988; cited in Sorsanen, 2009) determined cybernetic control as having five specific properties. In addition, Malmi and Brown (2008) emphasizes that cybernetic system can be either a decision support system or control system depending on how it is used. Consequently, they state that "the linking of behaviour to goals, and determine accountability for the differences in performance takes a cybernetic system as a system of information for decision support, to a management control system."
Cybernetic controls has four systems, each of which has a large stream of literature by the associated, namely, (1) budgeting, (2) financial measures, (3) non-financial measures and (4) hybrids that include both financial and non-financial measures. Regardless of the large amount of criticism, budgeting still has a role to play in contemporary organizations (Ekholm and Yen, 2001; cited in Sorsanen, 2009). Specifically, when used as a control, budgeting focuses on planning acceptable levels of behaviour and performance appraisal in the light of these plans (Malmi and Brown, 2008).
Financial measurement systems hold staff accountable for certain financial measures. These could include the economic value added (e.g. EVA) and return on investment. To consider non-financial measures is important for organizations today, especially because of its ability to identify the drivers of performance, as well as to overcome the shortcomings of financial measures. (Malmi and Brown, 2008) A typical example of the measurement system is a hybrid of the Balanced Scorecard (BSC), which has received considerable attention among academics and practitioners in recent years.
Reward and Compensation Controls
Reward and compensation controls intended to stimulate and increase the performance of individuals and groups within organizations by linking rewards to the achievement of objectives. It has been said that the reward and compensation controls are of help in controlling the direction of staff effort (individuals focus on the tasks), and duration of effort (how long individuals can devote themselves to the task), and the intensity of effort (the amount of attention individuals devote to the task) (Bonner and Sprinkle, 2002; Malmi and Brown, 2008; Berglund & Rapp, 2010).
Malmi and Brown (2008) assume that the organizations tend to offer rewards and compensation for various reasons, i.e. not all rewards and benefits associated with cybernetic controls. Organizations may, for example, try to keep the employees through bonuses. Therefore, it is important to consider "alternative remuneration and compensation plans, their intended purposes, and their links to the different controls" (Malmi and Brown, 2008)
There are three sets of administrative control systems that Malmi and Brown (2008) argue will help guide employee behaviour, organization design and structure, governance structure as well as procedures and policies. Organizational design and work structure as control systems through the organization of individuals and groups in a way that encourages both certain types of connections and relationships, and enable the conduct of staff is consistent and predictable. Malmi and Brown (2008) stress that such design and structure of the organization is subject to change from the perspective of managers, and can be classified as control systems, rather than be viewed as a contextual variable. This view is supported by Otley and Berry (1980; cited in Sorsanen, 2009) who state: "In fact, the organization could itself be seen as a process of control, when he spoke of groups of people feel the need to cooperate in order to achieve the purposes for which require their joint."
In general, the structures of governance within the firm direct employee behaviour through the company monitoring behaviour and official lines of authority and accountability (Malmi and Brown, 2008). More specifically, the authors suggest that governance structures include, for example, the company's board structure and composition, different management and project teams, and systems (such as meetings and schedules of meetings) that enables different functions and organizational units to coordinate their activities both vertically and horizontally.
Policies and procedures apply bureaucratic approach to direct the behaviour of the employee. Thus, policies and procedures include, for example, standard operating procedures as well as rules and policies. In addition, action controls (i.e. behavioural restriction, prior action review, and accountability of action) proposed by Merchant and Van der Stede (2007) reckon among policies and procedures. (Malmi and Brown, 2008)
The debatable issue whether organizational culture can be described as an MCS, i.e. whether managers are able to use culture as a device or system in order to ensure that the behaviours and decisions of their employees are in line with organizational goals and strategies were discussed above. According to Malmi & Brown (2008), culture is a system of control when it is used to regulate behaviour. Therefore, the authors explicitly assume that it is a question of whether managers are willing to use culture as a control system or not. This study recognizes that culture is relatively stable across time and sometimes may be outside the scope of managers to control, but, nevertheless, it is assumed here that culture can be used - at least to some extent - as an MCS.
Malmi & Brown (2008) refer three aspects of cultural controls: (1) value-based controls, (2) symbol-based controls, and (3) clan controls. Value-based controls are based on Simons' (1995; cited in Sorsanen, 2009) belief systems, which are going to communicate core values derived from the company's business strategy. Malmi & Brown (2008) argued that values have an impact on behaviour through a three-level. The first level refers to a deliberate recruitment of individuals whose values consistent with those of the organization. On the second level individuals are socialised in an attempt to change the values in order to comply with organizational values. Finally, "values are explicated and behaviour of staff in agreement with them, even if they do not personally committed."
Symbol-based controls refer to visible expressions is that establishment of organizations to develop a culture of a particular type. These could include, for example, construction / design work space and dress codes. For example, according to Malmi and Brown (2008), an open plan office could be put in place in an attempt to create a culture of communication and cooperation. The third set of cultural controls, i.e. clan controls, rest upon an assumption that organizations have a distinct sub-cultures, or clans, and that all the clans have members who participate a range of skills and values instilled in them through the process of socialization. Clan controls direct employee behaviour by creating values and beliefs through ceremonies and rituals of the clan (Malmi & Brown, 2008).
2.2.4 Reasons for Selection and De-Selection of Presented Frameworks
At the outset, it should be noted that (Simmons, 1990, 1991, 1995, 2000; Sorsanen, 2009) framework, rather confirms the distribution of management interest between management control systems of various types of control systems available to senior management. In addition, the distinction between interactive and diagnostic systems relates to the manner in which certain control systems are used by senior management. In other words, Simons says that a specific MCS can be used either diagnostically or interactively. As one of the main purposes of this thesis is to study models that MCS packages take in practice, and the frame Simons' thought does not provide a sufficiently broad conceptualization in terms of the various organs of management controls tools and systems. On the basis of previous studies, and the frame Simons' seems to be in a better position for MCS studies addressing strategy formulation, implementation and change.
After all, the object-of-control framework proposed by Merchant and Van der Stede (2007) is relatively similar to the classification of Malmi and Brown (2008). However, there are three main differences that deserve consideration. First, Malmi and Brown (2008) consider planning as a separate type of management control, while the merchant and Van der Stede (2007) take a narrower view classification planning (as well as budgeting) as a sub kind of financial results controls. Malmi and Brown (2008) appropriately argue that planning as an MCS does not necessarily require any link to the funding. In fact, Malmi and Brown (2008) include strategic and operational planning in management control as long as they are effective in guiding what people are doing. Regardless of this difference neither of the frameworks fails explicitly to consider in planning as a means to direct employee behaviour, which is inconsistent with (Fisher, 1998; cited in Sorsanen, 2009), who says that control is separable from the planning aspect. Simons (1995; cited in Sorsanen, 2009), in contrast, says that strategic planning can never be an interactive control system, since it focuses on the implementation of the strategy that is rooted to diagnostic control systems.
Secondly, Malmi and Brown (2008) thought a more extensive conceptualization of administrative controls available to managers - including the organizational structure, which is usually considered as a contingent variable owned by the previous research MCS. Moreover, Merchant and Van der Stede in (2007) action controls (i.e. constraints of behaviour, review the pre-work, and accountability of action) represent only one third (policies and procedures) as Malmi and Brown (2008) propose administrative controls available. Thirdly, the frameworks appear to classify control systems of an equivalent nature under different groups of controls. Specifically, while Merchant and Van der Stede (2007) look personnel controls (selection and placement, training, as well as job design and provide the necessary resources), as a distinct group of controls, Malmi and Brown (2008) would include selection under cultural controls, placement and job design under administrative controls, and training under both cultural and administrative controls depending on the purpose of the training. It would provide the necessary resources, however, is not classified as an MCS because it is merely a precondition for suitable employment and does not direct employee behaviour as such (Malmi and Brown, 2008).
With regard to the classification Malmi and Brown (2008), it is important to bear in mind that this model as such lacks a reputation as a generally accepted framework. In spite of the lack of previous empirical research, this model is a compilation of significant MCS studies, and thus has a great deal of academic background. Strength lies in the framework of a wide range of controls it includes in the MCSP. In addition, the manner in which Malmi and Brown (2008) has pictured the different controls in Figure 1 is not irrelevant. Cultural controls at the top to indicate that they are supposed to represent a wide range, yet subtle controls that change slowly, thus, provide a contextual framework for other controls. Planning, cybernetic, and reward and compensation controls are linked tightly in practice and, thus, are presented in sequential order from left to right. Finally, administrative controls at the bottom "create a structure in which those engaged in planning, cybernetic, and reward and compensation control" (Malmi and Brown, 2008). In conclusion, the classification of Malmi and Brown (2008) provides us with an umbrella under which MCS packages can be studied in a more comprehensive fashion.
Balance Scorecard Approach
According to Kaplan and Atkinson (1998: 368), “The Balanced Scorecard translates mission and strategy into objectives and measures, organized into four perspectives: financial, customer, internal business process, and learning and growth.” Conventionally, businesses used to monitor and reward performances based on financial measures such as earning per share (EPS), net income, and return on investment (ROI) (Rajendra P. S., et al, 2011).
The basic purpose for discussion of balanced scorecard approach is to create value in the business in this fast changing world of the Internet, information technology and global economy. A profitable strategy today does not give guarantee profitability tomorrow. There are risks involving everyday in business due to ever changing environment of e-business. Balanced Scorecard (BSC) framework provides us a comprehensive approach of planning and implementation of the business strategies for attaining the mission and goals of the organization. So, ‘the Balanced Scorecard gives a mechanism generally by which the management of a company can align their goals and strategy with the objectives and measures that provides a monitoring mechanism to assess how well the entity is doing in terms of achieving its goals and objectives. If there are any deviations, then corrective action can be taken in a timely manner' (Rajendra P. S., et al, 2011).
There are four perspectives of Balanced Scorecard such as, Customers, Financial, Internal Business Process and learning and growth. Financial perspective deals with the traditional measures and objectives and measures for instances, return on investment (ROI) and earnings per share (EPS). These measures provide us a method to evaluate how well the firm has performed in terms of its financial objectives. Customer Perspective provides a company can be established metrics that can measure the customer's satisfaction. A satisfied customer will be a loyal customer and in turn generates more returns for the entity. With the help of Internal Business Process Perspective, company can measure how its business performs more profitable and compete in the market. Businesses developed some metrics that can measure the effectiveness, efficiency, quality, and other relevant factors connected with profitable strategies. The fourthly, Learning and Growth Perspective bespeaks with the preparedness of the employees to meet the challenges of the fast changing environment. These metrics connected with the training and know-how of the employees (Rajendra P. S., et al, 2011).
Internet/E-Business Balanced Scorecard (IEB BSC)
There are also four dimensions of E-Business Balanced Scorecard such as E-Business Financials, User Orientation, Operational Excellence, and Future Orientation. Fundamental purpose of E-Business Financials is to meet or exceed the company's financial objectives through its e-business. The User Orientation connected with the objectives as provider of services and products through e-business. Operational Excellence perspective deals with the aims to provide most effective e-business processes including manufacturing of products. The fourth dimension directly connected with Future Orientation through developing e-business competencies that meet future challenges by providing training and educating staff in e-business (Rajendra P. S., et al, 2011).
The research methodology has fundamental role for guiding the entire research process. This chapter covers the research approach and research design with the justification of selecting and deselecting specific methods. The structure of the chapter following the sequence starting with differentiating in research methods, research design, and adopted case study as a research strategy with explaining the reasoning why such an approach has been used in this research rather than other obtainable alternatives. Finally the chapter elaborated data collection resources primary and secondary, the data collection techniques such as observations, experiments, survey and interviews, and research validity and reliability.
Research methods enlighten to a systematic approach for data collection, which can be considered as ways or tools to solve / answer a particular research problems or questions. They play several roles such as: “logic or ways of reasoning to arrive at solutions; rules for communication, which explain how the findings have been achieved; rules of intersubjectivity, by which outsiders have the opportunity to examine and evaluate research findings” (Ghuari & Gronhuag, 2005:40).
Figure 2: Research Methods, Source: Ghauri & Grönhaug, 2005:40)
Research Method bespeaks to the collection of data through analysis, historical reviews, experiments, observations and case study for the purpose to solve research problem. In addition, they can be elaborated as a systematic, orderly, and focused ways of data collection for the objective of obtaining information from them to answer a particular research question or problem (Ghuari & Gronhuag, 2005:109).
3.1.1 Research Philosophy: Qualitative and Quantitative
There are different research methods used for data collection such as Qualitative and Quantitative Research, Deductive, Inductive and Abductive Research. These research approaches elaborated the particular methods and procedures for data collection to specific research problems.
According to research scholar Ghuari & Gronhuag (2005:109) in the Qualitative research methods findings are not derived by quantification procedures or statistical methods but mainly focusing on interpreting and / or understanding the ideas or information to get results while Quantitative research methods describing the measurement of quantified data.
The follwoing table expressed the difference between qualitative & quantitative Research methods:
Emphasis on understanding
Emphasis on testing and verification
Focus on understanding from respondent's / informants point of view
Focus on facts and /or reasons for social events.
Interpretation and rational approach
Logical and critical approach
Observations and measurements in natural settings
Subjective 'insider view' and closeness to data
Objective 'outsider view' distant from data
Hypothetical-deductive; focus on hypothesis testing
Particularistic and analytical
Generalization by comparison of properties and context of individual organism
Generalization by population membership
Table 1: Quantitative and Qualitative Methods, (Ghauri & Grönhaug, 2005:110)
3.2 Research Approaches: Inductive, Deductive, and Abductive
In the social science research different methods such as Inductive, deductive and Abductive are used for the collection of data. Ghauri and Gronhaug (2005:15) explained in the inductive reasoning general conclusion can be drawn from the empirical observations while in the deductive reasoning conclusions draw through logical reasoning, it might be not true in reality but it is logic. It can be described in other words “the logical process of deriving a conclusion from a known premise or something known as true while inductive reasoning is the systematic process of establishing a general proposition on the basis of observations or particular facts Ghauri and Gronhaug (2005:16).”
According to Levin-Rozalis (2004) Abductive and Inductive approaches have direct related with Qualitative Research, while deductive approach is associated with Quantitative Research.
According to Jankowicz (1991) research methods and techniques for data collection in research could be better lead by the research problems and purposes.
We analyzed that the Qualitative research has been directly related to our research problems because our research has been not derived conclusions from static measures. However, it collected by using qualitative approach. We conducted investigation of the mechanisms of Management Control System package of MCB Bank of Pakistan. In addition, the Qualitative research approach has been closely connected with Inductive and Abductive approaches as discussed above, so our research has gone with those approaches. We are not using the Deductive approach in our research because our conclusions will be based on real information gathered from the Bank management not rely only on logical reasoning.
3.3 Research Design: Exploratory, Descriptive, and Causal
The research design guides us to draw a sketch, a plan, a framework for data collection and its analysis. It explained different categories of the research, researchers'choice to select particular research design for the empirics of the study and prescribe conclusions from data collection. In the research three main research designs are as Exploratory, Descriptive, and Causal (Ghauri & Gronhaug, 2005:56).
According to (Ghauri & Gronhaug, 2005:56-57) selection of research design leads the overall research strategy to collect desired information and research activities for example, what data to collect and how it should be collected.
The research purpose drives the research design, when the research purpose is to discover, interpret and innovative type of solutions of the research problems, exploratory research design should be best. Exploratory research design demanded great skills of collecting and analyzing data because it required strong attention and ability of observation, getting information, and conducting explanation that is theorizing (Ghauri & Gronhaug, 2005:58).
Ghauri & Gronhaug (2005) argued that a qualitative approach mostly connected to an exploratory research design. By keeping in mind the above discussion, we supposed our research purpose would be directly handled by the Qualitative Research Approach and an Exploratory Research Design would be best for this type of research.
3.4 Selected Research philosophy
Ghauri & Grönhaug (2005:40) stated as selection of research method depends on the actual problem in focus to underlying the particular method that leads to correct solutions.
This research followed qualitative school of thought for fulfilment of research purposes and answers the research questions. We want to investigate the Mechanisms of Management Control System package of MCB Bank of Pakistan. The research will be more discussing the types of Management Control System practically used at different levels of the organization including branch level also. In addition to how Management Control System play its vital role in shifting traditional management approach to online environment. For this purpose data will be collected from different ideas, information and interpreting views from the management as well as employees. Qualitative Research Methods will be best fit for this type of research problems. Because there is no use of statistical and measurement methods that lead to Quantitative Research Methods.
3.5 Research Strategy
The research conducted in social science through five different ways such as surveys, experiments, history, archival analysis and case study (Yin (1994, 2003). The case study approach is mostly used in descriptive or exploratory research (Yin, 1994; Ghauri & Gronhaug, 2005:
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