Introduction to Management Control Systems

“Management control is the process by which managers influence other

members of the organization to implement the organization's

strategies.”

Definition By Robert Anthony & Vijay Govindarajan

THE MANAGEMENT CONTROL SYSTEMS (MCS)

In the Management language , control traditionally refers to the activities of establishing Standards of Performance, Evaluating actual Performance against these standards, and Implementing corrective actions to accomplish Organizational Objectives.

Nature of Management Control Systems

Control :-

The objective of control is to ensure that the things/activities follow the pre-determined track.

Control System of A Car

Press the accelerator , and your car goes faster, rotate the steering wheel, and it changes direction. Press the brake pedal, and the car slows or stops. With these devices, you control speed and direction, if any of them is inoperative, the car does not do what you want it to . In other words, it is out of control

Control of an Organization

An organization must also be controlled. That is devices must be in place to ensure that its strategic intentions are achieved. But controlling an organization is much complicated than controlling a car

Management control

The process by which management: ensures that people in the organization carry

out organizational objectives and strategies;

encourages, enables, or, sometimes “forces”employees to act in the organization’s best interest.

Management control includes all the devices/mechanisms managers use to ensure that the behavior of employees is consistent with the organization’s objectives and strategies.

world-Class Companies

Consider the world-class companies such as 3M corporation, Dell Computers, Wal-Mart, South west Airlines.

Their long term success is not just because they have developed good strategies, but more importantly, they have designed systems and processes that energize their employees to execute those strategies effectively

Collapse Of Companies

Consider the collapse of companies such as World Com, Enron and Global Crossings. Part of their demise was the lapse in controls. CEO and Top management compensation in these companies was so heavily tied to stock options that executives were motivated to manipulate financials to hold up the short term stock price

The nature of MCS

The central focus of MCS is Business Strategy Implementation.

MCS provides knowledge , insight, and analytical skills related to how a corporation’s senior executive design and implement the on going management systems that are used to plan and control the firms performance

Nature of Management Control Systems

ManagementManagement

ControlControl M.C.S.M.C.S.

SystemSystem

SuccessfulSuccessfulStrategy Strategy ExecutionExecution

BASIC CONCEPTSELEMENTS OF CONTROL PROCESS

g

Entitybeingcontrolled

Effector: BehaviorAlteration, if needed

Detector: InformationAbout what’s happening

ControlDevice

Assessor: ComparisonWith standard

Elements of control system

Every control system has at least four elements

1.Detector or Sensor – A Device that measures what is actually happening in the process being controlled. (to measure actual behavior )

2.An Assessor – A Device that determines the significance of what is actually happening by comparing it with some standard or expectation of what should happen. (compare actual with standard)

Continue . . .

3.An Effectors – A Device that alters behavior if the assessor indicates the need to do so. (called ‘feedback’, it alters behavior if assessor indicates need to do so)

4. A Communications network – A Device that transmit information between the detector and the assessor and between the assessor and the effectors.

Examples of CS

1. Thermostat2. Body Temperature3. Driver of an automobile

Thermostat

1. Thermometer which measures the current temperature of a room (detector)

2. An Assessor which compares the current temperature with the accepted standard for what the temperature should be.

Thermostat

3.An effectors which prompts a heater to emit heat or activates an air conditioner which also shuts off these appliances when the temperature reaches the standard levels

4. A communication network, which transmit information from thermometer to the assessor and from the assessor to the heating or cooling element

Body temperature

1. The sensory nerves scattered through the body

2. The Hypothalamus center in the brain, which compares information received from detectors with the 98.6 f standard.

3. The muscles and organs (effectors) that reduce the temperature when it exceeds the standard and rise the temperature when it falls below the standard

Body temperature

4. The overall communications system of nerves is self regulating. If the system is functioning properly, it automatically corrects for deviations from the standards with out requiring conscious effort.

Automobile Driver

Assume you are driving on a high way where the legal speed 65 kmph. Your control system acts as the following.

1. your eyes measures actual speed by observing the speedometer.

2. your brain compares the actual speed with desired speed, and, upon detecting a deviation from the standard.

Automobile Driver

3. Directors your foot to ease up or press down on the accelerator.

4. As in body temperature regulation your nerves form the communication system that transmit information from eyes to brain and brain to foot.

Management

An organization consist of a group of people who work together to achieve certain common goals. The CEO decides on the overall strategies that will enable the organization to meet its goals.

Subject to the approval of the CEO , the various business unit mangers formulate additional strategies that will enable their respective units to further these goals

The management control process is the process by which managers at all levels ensure that the people they supervise implement their intended strategies.

Contrast with Simple Control Processes (Nature of Mgmt.

Control): The standard is not preset. It involves

planning process Management control is not automatic Management control requires coordination

among individuals The connection from perceiving the need

for action to determining the action required to obtain the desired result may not be clear.

Much management control is self-control

Systems

A system is a prescribed and usually repetitious way of carrying out an activity or a set of activities.

Systems are characterized more or less rhythmic, coordinated, and recurring series of steps intended to accomplish a specified purpose.

Skills & personality of person involved is more important in system

• Here, more or less routine decisions are taken for which recurring series of steps are available

• Management control systems: Far More complex & Judgmental Rules are not well-defined Managers have to use their best

judgment to decide on best course of action

THE ELEMENTS OF MCS

Elements of MCS include Strategic Planning, Budgeting, Resource Allocation Performance measurement Evaluation & rewards Responsibility & transfer pricing

BOUNDARIES OF MANAGEMENT CONTROL: MANAGEMENT CONTROL

Management control is the process by which managers influence other members of the organization to implement the organization’s strategies.

It includes following main activities

Planning- what the org. should do Coordinating-the activities of several parts of

the org. Communicating-information. Evaluating-information. Deciding what if any, action should taken. Influencing people to change their behavior.

MC is the process by which managers influence other members of the organization to implement the organization’s strategies

Activity Nature of End Product Strategy formulation Goals, strategies, policies

Management control Implementation of strategies

Task Control Efficient and Effective performance

of individual tasks

Concepts of MCS

The MCS builds on concepts from Business Strategy, Organizational Behavior, Human Resource and Financial & Managerial Accounting.

Goal Congruence

Managers have personal as well as organization goals

Goal congruence means that, insofar as is feasible, the goals of an organization’s individual members should be consistent with the goals of the organization itself

The MCS should be designed and operated with the principle of goal congruence in mind

MCS…Tool for Implementing Strategy

MCS help managers move an organization toward its strategic objectives It focuses primarily on strategy execution

MCS encompass both financial (‘bottom-line’ of the company-net income , return on equity etc.) and nonfinancial (Product quality, Market share, Customer satisfaction ) performance measures

MCS provide information in developing new strategies (Today’s control Tomorrow’s strategy) :

Interactive control focuses management attention on positive and negative developments, which signal the need for new strategy formation

Information of non-financial nature is used to make strategic decisions

Framework for Strategy Implementation (exhibit 1.3 & 1.4)

Strategy Implementation mechanisms:

Organization structure Management controls Human resource management Culture

Performance

Strategy Formulation

• It is the process of deciding on goals of the organization and the strategies for attaining those goals

• Strategies are important, big plans, showing the direction in which senior management wanted the organization to move

• Need for formulating strategies usually arises in response to a perceived threat or opportunity

• Complete responsibility should never be assigned to a particular person or organizational unit

Difference between strategy formulation & Management control

It is the process of deciding on new strategy

It is essentially unsystematic

Rough estimation for strategic analysis

Strategy process involves few people

It is the process of implementing those strategy

It is systematic It uses reliable

estimates for analysis

Management control process involves all level staff in the organization

Strategy Formulation Management control

Task Control

• It is the process of assuring that specified tasks are carried out effectively and efficiently

• Task control is transaction-oriented• Many task control activities are scientific i.e.

using management science and operations research techniques

• Most of the information in an organization is task control information

• Many activities performed by managers in the past have been automated and are task control activities

Difference Between Task Control & Management Control

Task control system are scientific

Either human beings are not involved at all or the interaction is between managers &nonmanagers

It focus on specified task

It Is relates to specified tasks

It can not turn in to science

Managers interact with other managers

It focus on organizational unit

It is concerned with broadly define activities of managers

Task Control Management Control

Strategy-formulation, Mgmt.Control, and Task

Control Least systematic (SF); most systematic (TC);

in between (MC) Focuses on long run (SF); short run (TC); in

between (MC) Using rough approximations data of the

future (SF); current accurate data (TC); in between (MC)

Includes planning and control, but the planning process is much more important (SF); control process is much more important (TC); equal importance (MC)

ExamplesStrategy Strategy

formulationformulationMManagementanagement

controlcontrol

TTask ask CControlontrol

Acquired an unrelated Acquired an unrelated businessbusiness

Enter a new businessEnter a new business

Add direct mail sellingAdd direct mail selling

Change debt/Change debt/eequity ratioquity ratio

Adopt affirmative action Adopt affirmative action policypolicy

Devise inventory Devise inventory speculation policyspeculation policy

Decide magnitude and Decide magnitude and direction of researchdirection of research

Intoduce new product or Intoduce new product or brand w/in product linebrand w/in product line

Expand a plantExpand a plant

Determining advertising Determining advertising budgetbudget

Issue new debtIssue new debt

Implement minority Implement minority recruitment programrecruitment program

Decide inventory levelDecide inventory level

Control research Control research organizationorganization

Coordinate order entryCoordinate order entry

Schedule productionSchedule production

Book TV commercialsBook TV commercials

Manage cash flowsManage cash flows

Maintain personnel Maintain personnel recordsrecords

Reorder an itemReorder an item

Run individual research Run individual research projectproject

Internet for Management Control• Instant access• Costless communication• Multi-targeted communication• Ability to display images• Shifting power and control to the

individual• Facilitates coordination and control• Availability of large amounts of data

Judgments required to design & operate optimal control system

involve:

Understanding relative importance of competing goals

Developing specific objectives for business units, Functional areas and Departments

Determining key variables for an individual’s Contribution to Strategic goals

Evaluating actual Performance Designing right reward structure