Management Control Systems in the American Auto Industry

Introduction to Management Control Systems

Over the last several decades, the issue of employee motivation has been increasingly brought to the forefront of business management. Part of the reason for this is that globalization has made businesses more competitive, forcing both large and small organizations to utilize strategies that will increase total productivity. An organization must have various tactics and tools in place to ensure that employees are motivated, while also preventing the organization from taking unusual amounts of risk. As a result, various businesses have developed outcomes and control systems to address these different issues.

Simply put, a control system is when managers collect various pieces of data to analyze and improve an organization's ability to achieve its objectives — such as high productivity and increasing revenues. A few of the most common ways an entity would use a control system include: various accounting systems, measuring the effectiveness of a division or team, and employee incentives ("What are Management Control Systems," 2010). This is significant because it shows how such systems are used by a wide variety of businesses around the world to remain competitive in an ever-changing global marketplace.

In the case of the American automobile industry, management control systems have been contributing to the decline in market share for all of the major manufacturers. This has caused many managers within the industry to seek out control systems that can be successfully integrated into their organizations. To fully understand how to implement effective outcome and control systems requires: identifying functional and dysfunctional control systems, examining various data for implementing and evaluating control systems, analyzing the essentials for quality management and techniques, and understanding the impact this will have on the personal and professional life of an individual. Together, these elements provide the greatest insights into how the American auto industry can implement and maintain effective management control systems.

Identifying Functional and Dysfunctional Control Systems

The first step in successfully implementing and maintaining an effective management control system requires examining which systems are functioning most effectively and which are dysfunctional. This means looking at specific characteristics within an organization that could help identify a dysfunctional control system. The most notable characteristics include: a crisis atmosphere, organizational insanity, a sense of false beliefs by management, a lack of values, and an absence of effective decision-making by managers ("Symptoms of a Dysfunctional Organization," 2005). These characteristics highlight the most common problems that managers will face when a dysfunctional control system is in place.

In the case of the American automobile manufacturers, they have been dealing with a dysfunctional control system that is slow to respond to changes in employee needs and consumer demands. The industry became a victim of its own success after the end of World War II, when the Big Three were the dominant manufacturers in the world. As Europe and Japan rebuilt, their management control systems ensured that better products were delivered to consumers at lower prices. These two factors — quality and price — are the biggest issues that faced the Big Three, as they were slow to respond to changes in the marketplace. Over time, this lack of focus, combined with the inability to provide quality products and maintain competitive prices, meant that many consumers began to purchase automobiles from foreign competitors.

During the 1980s, there were brief changes to the management control systems — such as the new ones utilized at Chrysler. However, once key personalities left the company or the industry (such as Lee Iacocca), the Big Three began to use dysfunctional systems to address various management control issues. During the 1980s and early 1990s, manufacturers began using a system that focused on improving quality by: providing various warranties on vehicles sold, improving communication between managers and staff, and delivering the kinds of vehicles that consumers were demanding through just-in-time inventory. This allowed the industry to go through a period of revitalization for several years.

After the merger between Chrysler and Daimler-Mercedes was announced in 1998, it marked a shift in the management controls of the industry, where managers began to collaborate less with employees and started building and supplying cars based on speculation. This shows how the Big Three moved from a functional to a dysfunctional control system. In many ways, when the industry experiences extended success, a shift occurs in the organizational control system used. A functional management control system improves responsiveness to consumers, but once the company regains market share, managers tend to lose focus entirely. At that point, it is only a matter of time before the organizational control system becomes dysfunctional (Flamholtz, 1998, pp. 81–90).

Developing and Evaluating Management Control Systems

To effectively develop and evaluate a management control system, a number of key elements must be in place. The most notable include: effective communication, financial controls, strategic controls, and the ability to monitor the management control system. Effective communication involves establishing policies and procedures that ensure improved communication within an organization. One way to achieve this is to require managers to communicate regularly about how the underlying product can be improved. Financial controls involve monitoring the various costs used to create a product, including everything from labor costs to raw material costs. Strategic controls are tactics that managers use to increase long-term bottom-line growth while avoiding excessive risk. The ability to monitor management controls involves having a procedure in place to ensure that the company and its staff are effectively responding to changes in the market.

In the case of the Big Three, this approach will help ensure that an effective management and control system is in place. If managers begin to engage in excessive risk or revert to dysfunctional systems of the past, this framework allows the company to see what is happening in real time and correct these issues so that the company can continue to adapt to industry changes. Utilizing this kind of system can help American automobile manufacturers adjust to changes occurring in the marketplace without taking large risks, making them more competitive against foreign manufacturers over time (Flamholtz, 1998, pp. 81–90).

Conclusion

For the individual, it is important to learn from these lessons and push the company to eliminate unproductive control systems. The individual's views about the market and the direction they see the company going will affect their families and their career. Those managers and employees who are willing to tell top management what is wrong with the company will slowly earn the respect of senior leaders while ensuring that the organization embraces change. A good example of this can be seen at Ford Motor Company during the 1970s. The President of the company, Lee Iacocca, determined that small cars were becoming very popular within the industry. To prepare for these changes, he signed an agreement with Honda to provide the engine for the Festiva. Once he returned to Detroit, however, Henry Ford II — the CEO — killed the deal. This is significant because Iacocca's vision shows how the ideas of an individual can have a dramatic impact on the future of a company. The deal that Iacocca created could have meant that the industry would go through a revitalization, as the new ideas would have created a management and control system that quickly adapted to changes within the marketplace (Johnson, 2005, pp. 85–107).

For the individual, this would have meant greater financial stability from a personal standpoint, while professionally they would have been finding ways to provide the vehicles that the general public was demanding before competitors could. When an effective management and control system is in place, it ensures that everyone has a rewarding career because the system ensures the stability of the company.

Clearly, the American auto industry has faced a number of challenges in implementing and maintaining an effective management and control system. The Big Three would implement changes to the system, yet they became victims of their own success. It is at this point that the system would evolve into one that took large amounts of risk while becoming more dysfunctional. Over time, this ensured that the industry was unresponsive to changes from consumers, ultimately leading to declining market share and falling sales.

To mitigate these effects, a system must be utilized that embraces: effective communication, financial controls, strategic controls, the ability to monitor the management control system, collaboration, flexibility, the use of benchmarks, and knowledge management. Together, these elements will ensure that the industry is able to adapt to changes occurring both internally and externally. If this kind of management and control system is embraced by the Big Three, it will ensure that they can respond quickly to various changes and withstand the constant ups and downs of the industry by having a management and control system that responds to what is occurring in a timely manner.

Symptoms of a Dysfunctional Organization. (2005). Retrieved July 9, 2010 from Copper Comm website: http://www.coopercomm.com/dysfnorg.htm

What are Management Control Systems. (2010). Retrieved July 9, 2010 from Wisegeek website: http://www.wisegeek.com/what-are-management-control-systems.htm

Flamholtz, E. (1998). Case Studies in Changing the Game. Changing the Game (pp. 81–90). New York, NY: Oxford University Press.

Ireland, D. (2008). Promoting Integrity and Ethical Behavior. Understanding Business Strategy (pp. 33–39). Mason, OH: South Western.

Johnson, R. (2005). Lee Iacocca Confronts the Ford Family. Six Men Who Built the Modern Auto Industry (pp. 85–107). St. Paul, MN: Mountainbrooks.