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Introduction To Management Control Systems (MCS) : Session 1
Introduction To Management Control Systems (MCS) : Session 1
Chapter 1 Session 1
2 Important Laws
Murphys Law : If anything can go wrong, it will Andersons Law: If you have effective controls, it wont
To study the significance of management control systems in different activities of organizations To understand the nature of management control systems To study the purpose and types of management control systems
Managerial Control
Automation Behaviour Correction Discipline Effectiveness Fear Goals Hierarchy Inspection Jeopardy
What is Control?
The essence of control is ACTION, which adjusts operations to predetermined STANDARDS, and its basis is INFORMATION in the hands of managers Doug Sherwin (1956). So, control involves: Deciding acceptability of results Reference to what was planned Information for measurement and comparison Action for correction Effective use of capabilities to achieve goals
1. 2. 3. 4. 5.
Levels of Control
Strategic Linked to strategy formulation Management Involves translation of corporate goals into objectives Operational Ensures functional efficiency
Top management
Goal-oriented
Mid-level
Resourceallocation oriented Medium-term
First-line supervisors
Task-oriented
Long-term
Short-term
What is a MCS ?
A management control system is the process by which managers ensure that resources are used effectively and efficiently in the accomplishment of organizational objectives. (Anthony, Dearden, Govindrajan, 1992) A management control system is a means of gathering and using information. It aids and coordinates the process of planning and control decisions throughout the organization. It guides the behaviour of managers and employees (Horngren, Datar and Foster, 2003).
MCS includes
Financial data
Nonfinancial data
Formal control system Informal control system
ASSESSOR-
EFFECTORBehaviour Modification
Purpose of MCS
Assist in target- setting Collecting information on actual performance Comparing actual performance with targets Reporting the variations Initiating suitable actions to ensure that the targets are achieved efficiently and effectively.
Types of MCS
FORMAL MCS Arise out of documentation (e.g., budgets, rules, quotas) Management-initiated mechanism for achieving organizational goals. Policies and procedures to be followed by the members. Assists management in strategy implementation. INFORMAL MCS Arise out of employee behaviour (e.g., group norms, organizational culture) Originate with employees; unwritten; affected by sociocultural factors Interpersonal relationships; emergent roles activities engaged in by the members of the organization Increases organizations ability to make adaptive responses
Summary of Chapter 1
Day 1: What is control; why managers need control;what do managers control Levels of control What is MCS; General Electrictypical hierarchy of MCS; elements of an MCS; purpose of MCS Day 2: Attributes of MCS Organizational context of MCS Types of MCS Types of formal and informal MCS
Chapter Highlights
Various approaches to MCS implementation Cybernetic approach Contingency approach Strategic context and MCS design differences Strategy and MCS:Texas Instruments vs. Hewlett Packard case
Initial Data
Initial Action
Source 2
Feedback Data
Action
Levels of Strategy
Characteristic Type
Frequency Measurability Adaptability Risk Cost Time horizon Relation to present Need for flexibility Cooperation required
Corporate Conceptual
Periodic/sporadic Value judgment based Low High Major Long-range Innovative High High
Functional Operational
Periodic/sporadic Periodic Semi-quantifiable Usually quantifiable Medium Moderate Medium Medium Medium-range Mixed Medium Medium High Low Small Modest Short-range Supplementary Low Low
Dependence on budgeting as a Low control tool; emphasis on meeting budgetary requirements Importance of transfer pricing
Sourcing flexibility
High
High
Constrained; synergies important
Low
High; use of arms length market pricing
Based on financial & Based primarily on non-financial criteria financial criteria Primarily subjective; Primarily formulabased on corporate based; based on performance SBU performance
1.
2.
3.
4.
5.
Chapter Highlights
Pre-requisites of MCS design Factors influencing design of MCS Relationship between style, culture and MCS design Impact of IT on MCS design A TQM-focused culture for MCS
Choice of Controls
Action controls: ensures employees perform / do not perform certain actions known to be beneficial / harmful to the organization; employee actions are the focus of control; most popular and direct form of controls. Results controls: encourages desirable employee actions by focusing on their consequences; involves rewarding individuals / groups for generating good results / punishing them for poor results; employees empowered to take necessary action for desired results; encourages talent discovery and development. Personnel and culture controls: complement imperfections in action and results controls. They take steps to ensure employees will control their own behaviour / each others behaviour ; sometimes dominant form of control.
Action Controls
4 basic forms: behavioural constraints, pre-action reviews, action accountability, redundancy. Prevention vs. detection based Behavioural constraintsnegative form of control making it impossible/ difficult for people to do things that should not be done. Can be applied physically ( locks, passwords, limits on access, fingerprint/voicepattern/eye-ball pattern/ magnetic identification-card readers) or administratively (restriction of decision-making authority, separation of duties). Prevention-based. Pre-action Reviewsinvolve formal (approval for expenditures, budget process)or informal (discussion to check project progress) scrutiny of action plans of individuals being controlled. Reviewers approve/disapprove proposed actions, ask for modifications/ careful consideration before approval. Prevention-based. Action accountabilityinvolves holding employees accountable for actions they take; rewarding acceptable (good) actions and punishing unacceptable actions. Redundancyinvolves assigning more people or machines to a task than is theoretically necessary (have a back-up task force for security and computing facilities) to ensure task accomplishment; expensive, conflicting, frustrating. Prevention-based.
Results controls
1. 2. 3. 4. Create meritocracies; Used for employees at many organizational levels In decentralized organizational structures Elements of results controls defining performance dimensions; measuring performance; setting performance targets; providing rewards and punishments
Effectiveness of Controls
1. 2. 1. 2. 3. Action Controls: Managers know what actions are desirable/undesirable. Managers can ensure that desirable actions occur and undesirable actions do not. Result controls: Managers know what results are desired in the area controlled Individuals being monitored have significant influence on results in the desired performance dimensions. Managers can measure results effectively.