Chapter

1 Nature of Management
Control System

MCS IS MUST FOR ORGANISATIONS PRACTICING DECENTRALISATION

Introduction
The importance of the subject matter covered in the courseware has been felt
upon the collapse of companies such as: Tyco, Global Crossing, WorldCom, and
Enron because of lapse in controls. CEOs and top management compensation
in these companies were so heavily tied up with stock options that executives
were motivated to manipulate financials to buoy the short-term stock price.
Similarly, the long-term success of world-class companies such as: Emerson
Electric, Lincoln Electric New York Times, Worthington Industries, 3 M
Corporation, Nucor Corporation, Dell Computer, Wal-Mart, South West Airlines,
Cisco Systems and Analog Devices were not just because they have developed
good strategies, but more importantly, they have designed systems and
processes that energize their employees to execute these strategies effectively.
What Is a Management Control System (MCS)?
A MCS is a set of inter-related communication structures that facilitates the
processing of information for the purpose of assisting managers in co-ordinating
the parts and attaining the purpose of an organization on a continuous basis. All
organizations use control systems, both formal and informal.
Here we are concerned with three words: control, management and systems.
Control
Every control system has at least four elements:
1. A detector or sensor - a device that measures what is actually happening
in the situation being controlled.
2. An assessor i.e., a device for determining the significance of what is
happening i.e., comparison with some standard or expectation.
3. An effector i.e., a device that alters behaviour if the assessor indicates the
need. This device is often called "feedback.“
4. A communication network, i.e., devices that transmit information between
the detector and the assessor and between the assessor and the effector.

Cont….
These four basic elements of any control system are given in Figure.

Control 2. Assessor: Comparison

Device with standard

1. Detector–Information
about what is happening

3. Effector-Behavior
alteration if needed

Entity being
controlled

Elements of a Control Process

Cont….
Management
An organization consists of a group of people who work together to
achieve certain common goals (in a business organization, an important goal
is to earn a satisfactory profit). In an organization, you have a hierarchy of
managers, with the Chief Executive Officer (CEO) at the top, the managers of
the business units, departments, sections and other sub-units below the CEO.
Depending on the size and complexity of the organization, there may be several
layers in the hierarchy. Except for the CEO, each manager is both a superior and
a subordinate. Each one supervises people in his own organization unit and is a
subordinate of the manager to whom he reports.
Systems
A system is a prescribed way of carrying out an activity or set of activities,
usually, the activities are repeated. Most systems are less precise than
computer programs, their instructions do not cover all eventualities and the user
of the system must make judgements when these eventualities occur.
Nevertheless, a system is characterized by more or less rhythmic, recurring, co-
ordinated series of steps that are intended to accomplish a specific purpose.
ELEMENTS OF MCS

1. Strategic planning

2. Budgeting

3. Resource allocation

4. Performance measurement

5. Evaluation & Reward

6. Responsibility center allocation

7. Transfer pricing
Boundaries of Management Control
Management Control is one of the several types of planning and control
activities in an organization. The other two control and planning activities are:
(a) strategic planning and (b) task or operational control.
Strategic planning occurs at top management levels; task control at the lowest
levels in the organization and management control is in between.
The relationship of these activities is given below:
Activity Nature of the end product

Strategy Goals Strategies and Policies

Formulation

General
Relationship
Management Implementation of Strategies
Control among
Planning
and Control
functions
Task Control Efficient and Effective performance
Of Individual Task
Cont….
Management Control
Management control is the process by which managers influence the other
members of the organization to implement the organization's strategies. Several
aspects of the process are given below:
Management Control Activities
Management control involves a variety of activities including:
1. Planning what the organization should do
2. Co-ordinating the activities of several parts of the organization
3. Communicating information
4. Evaluating information
5. Deciding what, if any, action should be taken
6. Influencing people to change their behaviour
Cont….
Goal Congruence
Although systematic, the management control process is by no means
mechanical; it involves interactions among individuals, which cannot be
described as mechanical. Managers have personal as well as organizational
goals. The central control process is to induce managers to act in pursuit of their
personal goals in ways that will help attain the organization's goals as well. Goal
congruence means that as far as feasible, the goals of an organization's
individual members should be consistent with the goals of the organization itself.
The management control system should be designed and operated with the
principles of goal congruence in mind.
 Tools for implementing strategy
 Financial and non-financial emphasis
 Aid in developing new strategies
Strategic Formulation
Strategic formulation is the process of deciding the goals of the organization and
the strategies for attaining these goals.
Distinction Between Strategic Formulation and Management Control
1. Strategic formulation is essentially unsystematic. Whenever a threat is
perceived or when a new idea surfaces, strategic formulation takes place.
By contrast, the management control process takes place according to a
more or less fixed timetable and the steps occur one after another.
2. Strategic formulation involves only part of the organization; it may result in a
change in one or a few existing strategies. The management control
process, necessarily involves the whole organization and more important
various parts are co-ordinated with one another.
3. Analysis of a proposed strategy usually, involves relatively few people – the
sponsor of the idea, headquarters staff and senior management. By
contrast, the management control process involves managers and their staff
at all levels in the organization.
Task Control/Operational Control
Task control is transaction oriented i.e., it involves the control of individual tasks.
Rules to be followed in carrying out these tasks are prescribed as part of the
management control process.
Distinction Between Task Control and Management Control
1. Many task control systems are scientific, whereas, management control can
never be reduced to science.
2. In task control, either human beings are not involved at all or the interaction
is between a manager and a non-manager. Whereas, in management
control, managers interact with other managers.
3. Task control requires a different task control system for each type of task,
whereas, the management control system is basically similar throughout the
organization.
4. In task control, focus is on specific task performed e.g. manufacturing Job
No. 59268 or ordering 100 nos. of part 3009. In management control, the
focus is on organization units.
Formal Control Process and Role Played by Accounting
Systems and Information Handling System
Figure is a broad framework of the formal management control process. A
strategic plan implements the organization's goals and strategies. All available
information is used in making this plan. The strategic plan is converted to an
annual budget that focuses on the planned revenues and expenses for individual
responsibility centres. Responsibility centres are also guided by a large number
of rules and formal information. They carry out the operations assigned to them
and their outcomes are measured and reported. Actual results are compared
with those in the budget. In case of satisfactory performance, there is feedback
to the responsibility centre in the form of praise or other reward. If not, the
feedback leads to corrective action in the responsibility and possible revision of
the plan.

Cont….
 Goals and Rules Other
Strategies Information Reward
Feedback

Strategic Budgets Responsibility

Planning Centre Reports Was
operation vs. Plan performance
satisfactory?

Corrective
Revise Revise Action Measurement
Communication

The Formal Control Process

Impact of the Internet on Management Control
The pace of information revolution accelerated with the invention of the
computer, is gaining momentum in the 1990s with the advent of the Internet.
The Internet provides major benefits in the following ways:
1. Instant access use: On the web, the huge amount of data can be sent to
anyone anywhere in the world in a matter of seconds.
2. Multi-targeted communication: The Internet has a vastly expanded one-
to- any reach; one web entry can reach millions of people.
3. Costless communication: Communication with customers via the internet
avoids the costs of salaries of telephone operator.
4. Ability to display images: The Web enables the customers to see the
products being offered for sale.
5. Shifting power and control to the individual: The individual is the "king".
Consumers are in control and can use the web 24 hours a day at their own
conveyance without being interrupted or unduly influenced by sales
representatives or telemarketers.
The Domain of Management Control System
There is a difference of opinion about the proper domain of control systems
among experts in the field. There are many views: Antony and Govindarajan in
their book "Management Control System", Eleventh Edition, consider strategic
planning, management control and task control as three separate interrelated
process of planning and control. Management control is seen by them as the
process by which managers influence the other members of the organization to
implement the organization strategies." In their views, the proper domain for
management control system is the successful implementation of strategy. They
do not consider adaptation and innovation as an integral part of the Management
Control Process.
William Newman in his book Constructive Control Design and Use of Control
Systems, considers the domain of control systems to be the control function of
management and believes that "control is one of the basic phases of managing
alongwith planning, organizing and leading." Control is seen as an essential part
of the management process and a part of all the managerial efforts of an
organization.