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Management Control Systems

Management Control Systems

y Management control system is a type of planning

and control activity that is done in an organization .It is a process by which management influences other members of the organization to implement the organization s strategies effectively and efficiently y Management control system is a means of gathering and using information . It guides the behavior of employees and managers. y Financial Data , Non Financial Data , Formal Control System and Informal Control System


y Controlling is one of the four manageme

nt functions. y Control begins with objectives and standards. y Control measures actual performance. y Control compares results with objectives and standards. y Control takes corrective action as needed. y Control focuses on work inputs, throughputs, and outputs


y Controlling- The process of measuring

performance and taking action to ensure desired results y Control Systems 1. Input Standard - Measures work efforts that go into a performance task 2. Output Standard - Measures performance results in terms of quantity, quality, cost, or time


Control Systems Output Standard

y Measures performance results in terms of quantity, quality, cost, or time.

y Input Standard y Measures work efforts that go into a performance task

Types Of Control Systems

1.Management By Exception y Focuses attention on substantial differences between desired and actual performance 2. Feed forward Controls y Ensure the right directions are set and the right resource inputs are available 3. Concurrent Controls y Ensure the right things are being done as part of work-flow operations 4. Feedback Controls y Ensure that final results are up to desired standards


Types Of Control Systems


Management By Objectives
y MBO (Management By Objectives) y A process of joint objective setting between superior and subordinate

Organizational Control Systems and Techniques

y Control focuses on work inputs, throughputs, an y y y y y

d outputs. Management by objectives integrates planning and controlling. Employee discipline is a form of managerial control. Quality control is a foundation for Total Quality Management. Purchasing and inventory controls help save costs. Breakeven analysis shows where revenues will equal costs.

Evolution of control systems


Goal congruence




Non Monetary

Characteristics of MCS
y A focus on critical points y Integration into established

processes y Acceptance by employees y Availability of information when needed y Economic feasibility y Accuracy y Comprehensibility

Pre-requisite of successful MCS

yProper Planning yClear cut organizational structure yTop Management Involvement yEmployee motivation yEffective Communication ySupporting Accounting and

Information Systems

The six major purposes of controls are as follows

y Controls make plans effective y Controls make sure that organizational

activities are consistent y Controls make organizations effective y Controls make organizations efficient y Controls provide feedback on project status y Controls aid in decision making

Management Control Systems

y Consist of Formal and Informal control

systems: y Formal systems include explicit rules, procedures, performance measures, and incentive plans that guide the behavior of its managers and other employees y Informal systems include shared values, loyalties, and mutual commitments among members of the company, corporate culture, and unwritten norms about acceptable behavior
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Evaluating Management Control Systems

y To be effective, management control

systems should be closely aligned to the firm s strategies and goals y Systems should be designed to fit the company s structure and decisionmaking responsibility of individual managers
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Evaluating Management Control Systems y Effective management control systems should also motivate managers and their employees y Motivation is the desire to attain a selected goal (goal-congruence) combined with the resulting pursuit of that goal (effort)
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y Strategy is a plan, a "how," a means of getting from

here to there. y Strategy is a pattern in actions over time; for example, a company that regularly markets very expensive products is using a "high end" strategy. y Strategy is position; that is, it reflects decisions to offer particular products or services in particular markets. y Strategy is perspective, that is, vision and direction.

Strategic planning
y Strategic planning is the process of

deciding on the goals of the organization and the strategies for attaining these goals

Strategy Planning control

y Strategic control is concerned with tracking the

strategy as it is being implemented, detecting any problems areas or potential problem areas, and making any necessary adjustments y types of strategies- Intended strategies that get realized; these may be called deliberate strategies. y Intended strategies that do get realized; these may be called unrealized strategies. y Realized strategies that were never intended; these may be called emergent strategies.

Strategic Control Systems

y Strategic Control
y means of motivating employees to work at

organizational goals y Statement of goals y Set of assumptions or forecasts (environmental) y Qualitative statement of how business will change y Specific action steps for implementation y Set of financial projections y provide information and feedback (information technology)

Why strategic controls?

efficient use of resources/productivity y Quality - defect free goods, customer complaints, returns, sampling y Innovation - encourage risk taking y CR evaluate employees with customer contact
y Efficiency -

Strategic Controls
y Types of controls

Financial - stock price, ROI, profitability, etc. y Output - efficiency, quality, innovation, CR y Behavioral - rules and procedures, budgets, standardization y Balanced scorecard approach (Kaplan) y A way to look out the rear view mirror (financial) as well as down the road (strategic building blocks) y Financial y Customer y Process y Employee Development

Strategic business unit (SBU)

y An autonomous division or organizational unit, small enough to be flexible and large enough to exercise control over most of the factors affecting its long term performance. y Because strategic Business unit are more agile (and usually have independent mission and objectives), they allow the owning conglomerate to respond quickly to changing economic or market situations.

Levels of strategy formulation


Corporate strategy-it is formulated by the top level corporate management.It is long term strategy encompassing the entire organization.It addresses fundamental questions such as what is purpose of business?what business we want to be in ?how to expand /etc.It will define the overall character & mission of the org.,product/service it will enter/leave allocation of resources,synergy among its SBU

Levels of strategy formulation(contd..)

2.SBU Strategy-Also called as business or competitive Strategy . It is concerned with decision pertaining to the product mix, market segments etc. While corporate strategy decides business portfolio(type of business),the competitive strategy decides the strategies to succeed in the chosen business.

Levels of strategy formulation(contd..) 3.Functional strategy-they are strategies for different functional areas like production , finance , personnel, marketing ,etc. It is management of relatively narrow areas of activity ,which are of vital ,pervasive ,or continuing importance to the total organization . It is responsibility of functional heads

Levels of Strategy
Corporate strategy

SBU 1 strategy

SBU 2 Strategy

SBU 3 Strategy

MKTG strategy

Operations strategy

Finance strategy

HRM Strategy

Operating Strategies

Operating Control
y Operational control systems are designed to

ensure that day-to-day actions are consistent with established plans and objectives. It focuses on events in a recent period. Operational control systems are derived from the requirements of the management control system. Corrective action is taken where performance does not meet standards. This action may involve training, motivation, leadership, discipline, or termination.

Strategic control
looks at the strategy of a process, from implementation to completion, and analyzes how effective the strategy is and where changes can be made to improve it can be affected by external factors and external data. The environment and the market have a lot more to do with strategic control With strategic control a problem may be found, but with evaluation and analysis takes a lot of time Reporting Intervals are long

Operation control
Operational control focuses on dayto-day operations.

is concerned with internal operating factors deals with everyday issues that may arise, such as personnel problems or technological meltdowns Correcting mistakes or taking action to fix problems is more effective in operational control Reporting Intervals are immediate

Examples of decisions in planning and control function:

Strategy Formulation Management Control Task Control Schedule production Manage cash flows Book TV commercials Run individual research project Coordinate order entry

Enter a new business Expand a plant Change debt to Issue new debt equity ratio Add direct mail selling Decide magnitude and direction of research Determine advertising budget Control of research organization

Acquire an unrelated Introduce new business product or brand within product line

Cybernetics Paradigm
y Cybernetics Paradigm: It was devised by Griesinger in

the late 1970s which helps in designing the control process of an organization y The various elements of Cybernetics Paradigm arey Environment: Each organization is surrounded by

external and internal environment to which it responds in case of changes.

y Sensors: The manager interacts with the environment

through sensors which are mechanism to collect data. The mechanism includes formal and informal reports.

Elements of Cybernetics Paradigm

y Perception: The manager extracts the information

from above data and interprets its meaning through a process known as perception.

y Factual Premises: Based on manager s perception

certain beliefs regarding performance and state of external environment are formed known as factual premises.

y Value premises: It is what the decision maker desires.

When a gap occurs between factual premises and value premises then manager is motivated to close the gap.

Elements of Cybernetics Paradigm

y Behavior Choice: It is the choice set available that

will move the managers closer to their goals. The search for suitable alternative is stopped as soon as feasible alternative is found that will close the gap.
y Feedback: The effect of action is determined

through feedback and if the new behavior leads to elimination of the gap then the particular behavior is repeated under similar circumstances.

y Hierarchy of Goals y goal congruence- term used when the same goals are

shared by top managers and their subordinates. This is one of the many criteria used to judge the performance of an accounting system. The system can achieve its goal more effectively and perform better when organizational goals can be well aligned with the personal and group goals of subordinates and superiors. The goals of the company should be the same as the goals of the individual business segments. Corporate goals can be communicated by budgets, organization charts, and job descriptions.

Role of Management control in goal congruence

yMCS facilitates individual time and

energy to channelized in the right direction. yThat is aligning individual and organizational goals.

Organizational Structure
y Organizational structure refers to the

formalized arrangement of interaction between and responsibility for the tasks, people, and resources in an organization y It is most often seen as a chart, often a pyramidal chart, with positions or titles and roles in cascading fashion

Functional Organizational Structure

y A functional organizational structure is

one on which the tasks, people, and technologies necessary to do the work of the business are divided into separate functional groups (such as marketing, operations, and finance) with increasingly formal procedures for coordinating and integrating their activities to provide the business s products and services

Functional org.structure

Organizational Structure
y Functional structure - groups people on the basis of common expertise & resources

Adv: learning (transfer of knowledge within function) monitoring is easier processes become more efficient greater managerial control Dis: control becomes a problem as company grows communication and coordination (between functions) measurement (contribution of function) loss of strategic focus by TMT

Matrix Organizational Structure


The matrix organizational structure is one in which functional and staff personnel are assigned to both a basic functional area and to a project or product manager The matrix form is intended to make the best use of talented people within a firm by combining the advantages of functional specialization and productproject specialization


Matrix Organizational Structure


Matrix Organization
y Based on two forms of horizontal differentiation:

functional and project/product y Advantages: y ee s tend to be highly qualified, professional, & perform best in autonomous, flexible working conditions y ee s can be moved from project to project y leaves TMT to focus on strategy y Disadvantages: y high bureaucratic costs y constant movement of ee s means $ y two boss role can create conflict

Product-Team Structure

The product-team structure seeks to simplify and amplify the focus of resources on a narrow but strategically important product, project, market, customer, or innovation The product-team structure assigns functional managers and specialists to a new product, project, or process team that is empowered to make major decisions about their product


Ex. 11.6

The Product-Team Structure


Network Organizations
y Core group of experts manages the

outsourcing process closely y This forms a hub & spoke type of organization consisting of many contracts y Could create a control problem with contract organizations y Nike - Esprit

Network Structure

Balance Score Card

yThe balanced scorecard is a

strategic planning and management system that is used extensively in business yIt was originated by Drs. Robert Kaplan (Harvard Business School) and David Norton

Why Implement a Balanced Scorecard?

y Improve organizational performance by measuring y y y y y

what matters Increase focus on strategy and results Align organization strategy with the work people do on a day-to-day basis Focus on the drivers of future performance Improve communication of the organization s Vision and Strategy Prioritize Projects / Initiatives

Four Perspectives of BSC

y The Learning & Growth Perspective-This

perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement y The Business Process Perspective-This perspective refers to internal business processes y The Customer Perspective y The Financial Perspective

Balance Score Card

Financial perspective Vision & Strategy Learning & Growth perspective Internal Process Perspective

Customer perspective