Management Control Systems

Unit – 1
Marion D’silva
 Context Setting

• Organization -system of interrelated parts working in

conjunction-goals
• Management - process whereby all resources/capitals
integrated-goals
• Role of Mgmt. -plan, organize, integrate, interrelate
organization activities/resources-output-outcome
• Role facilitated through appropriate MCS + Processes
• Business model - set of activities-transforms inputs-output-
outcomes
• Inputs? Outputs? Outcomes? Activities? Relationships?
 The Tasks/Responsibilities of Management

• Henry Mintzberg one of the distinguished management scholars

sees the managers responsibilities as consisting of ten roles which
he grouped into three as:

• Interpersonal Roles: leadership, figurehead and liaison

• Information Roles: Receiving information about the organization,

disseminating information to the staff and transmitting it to the
outside world

• Decision Roles: Entrepreneurial, disturbance handling, resource

allocation and negotiation roles
 Basic Concepts
• Eg’s of Real Life Control Systems
• Control
• An organization must also be controlled, i.e., devices must be in
place to ensure that its strategic intentions are achieved
• But controlling an organization is much more complicated than
controlling a car.
• Management
• Management in business and human organization activity is simply
the act of getting people together to accomplish desired goals
• Management comprises planning, organizing, staffing, leading or
directing, and controlling an organization (a group of one or more
people or entities) or effort for the purpose of accomplishing a goal.
• System
• A system is a prescribed and usually repetitious way of carrying out
an activity or a set of activities
• System is a set of interacting or interdependent entities, real or
abstract, forming an integrated whole
 What is Control?

• Important characteristic of systems is control

• Centers on prevention & correction of deviation in systems
behavior-against standards specified
• Self regulating systems-key element for control is feedback
– Information regarding output values-standards-degree of deviation-
fed to other elements of the system structure
• Systems
– Closed or open/ closed-information tight systems
• Information loop closed-control mechanism capacity to get desired output
– Open systems-no information tight control
• Relationships among elements/ between sub system/environment not known
Control Process
 Organization control systems-Distinguishing
characteristics?

• Different from automatic control systems?

– Involvement of people
• Information about actual state-compiled/compared ( with
desired state)
– Desired state decided by people
– Course correction recommended by people
– Action taken by people
• Therefore very complex-self control important behavioral
assumption-mostly does not occur
Management Control System
 Cases Example-Poor Control Systems
• In 2001, Enron Corp., the global energy giant, collapsed in one of the largest cases
of bankruptcy filing in U.S. corporate history.
• Tyco International, a diversified manufacturing and service company, had to
abandon plans to split into four parts, because of doubts about its accounting
practices. The stunning news that WorldCom, the telecom giant, had artificially
inflated its earnings by $3.8 billion rocked the corporate world and shook
investors’ confidence in stock markets. WorldCom's accounting irregularities
involved the deliberate mis-recording of expenses as capital expenditures, in order
to inflate its cash flows. The accounting irregularities included transfers between
internal accounts of $3.06 billion in 2001 and $797 million in the first quarter of
2002.
• As these examples illustrate, the absence or malfunctioning of control systems can
lead to huge losses, and even to corporate bankruptcy.
• Defective products and poor coordination between departments also arise due to
weak control systems.
 Boundaries of Management Control

• Planning
– Desired states/goals/plans/timelines-decided by
management

• Actual performance
– Compared to planned performance

• Planning and Control Systems

 Framework for Planning & Control

• Three levels of management: Corporate/ Divisional/

Operating
• Corporate: strategic objectives of entire organization
• Divisional: responsible for particular regions/product
divisions
• Operating: executives charged with unit
operations/accomplishment of specific tasks
 Three levels of Decision making

• Institutional: Strategic thinking & planning-general

objectives/ problems in context of dynamic external
environment

• Managerial: gathering, coordinating, allocating

resources for organization-plan budgets/deciding
expenditure/ formulating policies

• Technical: acquire & utilize technical knowledge for

operational controls-inventory control/scheduling.
 Three Stages of Planning and Control
• Strategic Planning:
– Deciding goals/ SWOT/strategies/ risks/ risk management/
expansion/diversification

– Long term implications of value creation

– Increase/decrease/transformation of capital to achieve desired

outcomes

– Availability/quality/ affordability of inputs for long term value

creation-sustainability

– Inputs for strategic planning- external environment/ high degree of

uncertainty/ ambiguity
 Management Control
• Process of evaluating, monitoring and controlling sub units
• Effective and efficient allocation and utilization of resources-to achieve pre
determined goals
• Focus on line managers responsible for department performance
• Therefore control exercised by management over managers-evaluating
performance of responsibility centre against planned performance
• Planned performance decided in “consultation” based on activities and
resources made available -physical and monetary terms-built around
financial structure
• Continuous monitoring-corrective action-resource reallocation-better
coordination
• Conflicts inherent between managers-resource mobilization/allocation-
intense interaction
 Operational Control
• Responsibility centre managers-effective & efficient managing tasks/activities
allocated

• Individual tasks/activities/transactions-procuring raw material right

quality/quantity-selling specific products to specific customers

• Likely to be programmed/ repetitive in nature-decision rules/ less subjective

judgments

• Quantitative models for optimal decision making-input/output relationship easier

to determine

• Engineered costs-cost incurred as per level of activity

• Exactness of data very important/ mostly non monetary/ control on physical units-
units produced/ labour hours/

EX: Planning and Control are like Siamese twins

Interrelationship-SP/MC/OC
Read these
points in
detail…
 Four Paradigms of Control

The four paradigms are:

• Adaptability
• Integration Across Organization
• Optimal mix of Control and Coordination
• Reinforcing Cooperative Instincts
The First Paradigm - Adaptability

• A control system is one that enables organizations to adapt themselves

to their environment, know what they want and achieve it with optimal effort

The Second Paradigm – Integration Across Organization

The Third Paradigm - Optimal mix of Control and Coordination

• It deals with coordinating control systems with self-control and

designing and implementing systems for controlling the not-so-sincere people

The Fourth Paradigm – Reinforcing Corporate Instincts

• An assumption about human beings that they want to contribute,

achieve, innovate and work competently even if they do not have specific
external inducements to be so
 Four Levers of Control
1. Core values
• Controlled by Belief systems, such as mission statements, vision
statements, credos and statements of purpose

2. Risks to be Avoided
• Controlled by Boundary Systems, such as Codes of conduct, predefined
strategic planning methods, asset acquisition regulations, operational
guidelines

3. Strategic Uncertainties
• Controlled by Interactive Control Systems, such as incorporating process
data into management interaction, face to face meetings with employees,
challenging data, assumptions and action plans of subordinates

4. Critical Performance Variables

• Controlled by Diagnostic Control Systems, such as output measurement,
valuation standards, incentive systems and compensation systems
Four Levers of Control
 Tensions in Control Systems
• Conflict of choices
• Conflict of interest
• Six sources of tensions
A. Tensions arising due to the need to make strategic
choices
B. Tensions due to goal divergence among
stakeholders and the efforts needed to imaginatively
establish goal congruence.
C. Tensions due to managerial limitations of cognitive
powers
• Recognizing Conflicts
 Six sources of Tension
A. Tensions arising due to the need to make strategic choices
• The tension between profit, growth and control
• The tension between long-term and short-term needs
B. Tensions due to goal divergence among stakeholders and the
efforts needed to imaginatively establish goal congruence
• The tension between the several stakeholders all of whom want a
bigger share of the pie
• The tension between the varying and often conflicting motivation
of the employees
• The tension between different professional aspirations, propensities
and functional skills of the different segments of an organization
C. Tensions due to managerial limitations of cognitive powers
• The tension between the need and desire to seek opportunities and
the constraint due to limitation of the span of attention
Goal Congruence
Goal Congruence
Goal Congruence
 KEY VARIABLES IN SELECTED INDUSTRIES

• Insurance Industry
Number of claims settled in a given period of time and number of claims
outstanding
Number of policies processed in a given period of time
Growth rate in insurance business with respect to each policy
One time premium/ repeat premium policies

• Hotel Industry
• Room occupancy rate-ARR
• Number of complaints by customers
• Amount of food wasted in the restaurant
• Percentage of revenue contributed by the restaurant
• Percentage of absenteeism among employees
• Management Training Institute
• Number of students appearing for an entrance examination
• Percentage of absenteeism among students
• Number of research projects undertaken and completed
• Time spent by faculty on teaching and research
• Time spent on management development programs
• Power Industry
• The inputs for a power industry are coal and water. The output variables
• include transmission losses. The key variables include the following:
• Quantity and quality of coal
• Availability of wagons for transportation of coal
• Availability of water
• Capacity utilization
• Preventive and breakdown maintenance