Management Control Systems

Part 2

Debasis Das Exemplar Consultancy

Designing The Control Process & Managerial Controls

Debasis Das

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Attributes of Systems-1
• • System – Association of parts related to each other Managerial Control System – Interrelated communication structures that help managers achieve organization purpose. Sub units linked in a Macrostructure Autonomy – Local decision making capabilities Feedback – Positive & negative Controls/Homeostats(Self-regulating) Entropy (chaos & uncertainty) – Systems to deteriorate and become chaotic


• • •

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Attributes of Systems-2 • Control – Through control of key variables. feedback to reduce chaos & uncertainty • Cause & effect – Measurements and changes • Adaptive – Not all responses could be defined beforehand • Learning – Find and learn to find answers Debasis Das JSB 606 4 . measure values.

highly complex Insights from Cybernetics used to design controls and control systems Debasis Das JSB 606 5 .Cybernetic Paradigm Of Control Notunderstood processes Inputs Human brain Outputs Probabilistic.

Cybernetic Paradigm Control Process Environment Griesinger 1979 of Decision maker Goals Value premises Feedback Sensor Perception Factual premises Behavior choice Effector Debasis Das JSB 606 6 Comparator Behavior repertoire .

Essential Elements of Repetitive Control System • • • • • • • • Set goals and performance measures Measure achievement Compare achievement with goals Compute variances Report variances Determine causes of variance Take action to eliminate variance Follow up to ensure goals are met Debasis Das JSB 606 7 .

limited in number • Controls should establish balance rather than financial alone • Single point responsibility • Compare projected performance to actual performance to derive control actions for the next period Debasis Das JSB 606 8 .Designing Management Controls-1 • Establishing controls is a constructive process • Objectives should be measurable • Controls should focus on objectives and key results.

Designing Management Controls-2 • Look for early warning predictors • May be possible and desirable to sample the variable • Establish an acceptable range of variations for variables • Focus on exceptions to desired result and report to the person responsible ASAP • Severity of problem should be confirmed independently monitor and confirm control is working • Develop a discerning view of controls. apply judgment and interpreting results ebasis Das JSB 606 9 .

Means-Ends Analysis 1 G 2 G1 G2 G3 G4 3 G11 G12 G13 …………………………………………………………………. G43 Debasis Das JSB 606 10 ..

Control Process Relating Superior-Subordinate Superior Control System Feedback from superior effector Behavior repertoire Subordinate Control System Interconnection Between goals Superior goal affects the subordinate goals Superior behavior repertoire can influence the subordinate effector Feedback from the superior enters the subordinate system through the sensor Debasis Das JSB 606 11 .

Loose Coupling & Organizational Slack Debasis Das JSB 606 12 .Decentralization.

hold each decision maker to a small part of the organization purpose.Need For Decentralization • Decision making capability of humans is limited • Limited to 7 + or minus 2 chunks of information • Decentralizing decision making is a must. establish sub-goals. • Decision makers must find ways to deal with the complexity Debasis Das JSB 606 13 .

ROI and other corporate goals enter indirectly through the means-end chain indirectly Debasis Das JSB 606 14 .Loose Coupling • A multiplicity of goals & objectives • A sub-units local set is derived from the means-end chain • MCS must knit the sub-units together to bring unity in diversity • Decentralization means profit.

extra resources for innovation and adaptation • Combined overreaching goals.Organizational Slack • If a firm is successful in achieving its goals & objectives. • Difference between total payments and necessary payments is the organizational slack. there may not be pressure for increasing coupling between goals & objectives of sub-units. mixed teams can help trim the slack Debasis Das JSB 606 15 . acts as cushion against variability. extra inventories and extra time to market. • However. Includes costly support services.

• Identify stakeholders that are crucial.Stakeholder Controls • One primary function of executive: take contributions of a stakeholder. The ones that affect the org most and the ones the org affects most. Debasis Das JSB 606 16 . Do it efficiently as competition exists. convert to inducements sufficient to maintain their co-operation for org goals & objectives.

provide reports • Decision making procedures • Planning processes – Strategic planning – Business planning – Long-range planning (programming) – Operating budget Debasis Das JSB 606 17 .Communication Structures Supporting the control Process • Formal/informal scanning of the environment of the sub-unit (both internal and external) • Feedback from external scanning. performance measurement from internal accounting • Internal accounting can provide comparison.

Impact of IT on Control Systems • Bringing unity out of diversity – Order entry and inventory management – Speadsheets for what-if scenarios – Performance measurements • Providing inputs to operational & strategic decision making – Decrease in cost of information processing helping activity based costing (ABC) – Improved inventory control makes monitoring of customer demands possible Debasis Das JSB 606 18 .

Micro. Macro Frameworks-1 Environment Decision maker Micro framework Value premises Perception Factual premises Behavior choice JSB 606 Comparator Goals Griesinger 1979 Sensor Behavior repertoire Debasis Das 19 . Intermediate.

Macro Frameworks-2 Infrastructure Intermediate Framework Management Style & Culture Formal Control Process Rewards Debasis Das JSB 606 Coordination & Integration 20 . Intermediate.Micro.

Macro Frameworks-3 Initial Conditions External Environment (Uncontrollable) Management Systems Internal External Improvements ENTITY Critical Success factors & impediments + Performance Measures + Status X Stakeholders Goals & Strategies Ideal Debasis Das JSB 606 21 . Intermediate.Micro.

Key Success Variables in MCS Debasis Das JSB 606 22 .

environment.(Key Budgeting Factors) • Indicators or variables that influence business in a big way • Small change in these factors causes big changes in business • External – Technology. competitive situation • internal – Tasks. strategy Key Variable Debasis Das JSB 606 23 .

Interrelations-Internal & External factors External Business Environment Internal Character Industry Character Significant Functions Stakeholders Objective of Business Competitors Corporate Strategy Debasis Das JSB 606 24 .

types of stakeholders. competitors • Internal factors->task. significant function.Key Variables & Sources • External factors ->nature of business.environment • Stakeholders-nature of stakeholders and risk taking • Competitors-substitutes and complements • Objective.Business environment Debasis Das JSB 606 25 .competitive strategy • Industry character. strategy • Nature of Business. industry character.

Identification of Key Variables • Identification through input-output analysis (classify variables) – Input – Production – Marketing & selling – Liability management – Asset management Debasis Das JSB 606 26 .

Input • • • • • QTC analysis Q for quality Time or time to availability Cost or cost of the input Product leadership (including support) depends on the QTC of the raw materials Debasis Das JSB 606 27 .

Production • Production processes – Quality processes ensure product quality • Technology – Technology for superior product. engineering cost. particularly for perishable goods Debasis Das JSB 606 28 . technology transfer issues. easy and long time support • Cost of production – Infrastructure cost. discretionary cost • Time schedule & delivery – Important in most industries.

Marketing & Selling • Selling information – Ordering position – Maturity schedule of credit sales • Marketing information – Market share – Ad & promotion expenses Debasis Das JSB 606 29 .

Liability Management • Cost of borrowing – Operating profit over cost of capital – EAV. economic value added • Nature of capital – Risk is proportional to cost of participation – Budeget needs to take the nature of capital into account Debasis Das JSB 606 30 .

Asset Management • Higher the turnover the better – fixed – Current • Working capital turnover ratio is important • Total asset turnover ratio Debasis Das JSB 606 31 .

Key Variable Classification • Environmental variables – Determines scope. diversity. uncertainty associated with business • Strategy variables – Affects long term goals & values • Process variables – Variables affecting interaction between employees and the processes • Structure variables – Centralized and decentralized reporting structure & how they affect processes Debasis Das JSB 606 32 .

Key Variables-Ensuring Control • Across the board control required • Identify sufficient number of key variables to achieve that • Easy to measure key variables may not be meaningful • Multivariate techniques such as factoring or cluster analysis can lead to key variables Debasis Das JSB 606 33 .

Key Control Indicators & Control Mechanism • Ability of control mechanism is indicated by efficiency and effectiveness of key variables • Effective Coordination necessary • Businesses with multiple profit and responsibility centers must have key indicators representative of these centers Debasis Das JSB 606 34 .

Techniques to identify • Traditional techniques – Observation of deviation method – Mean reduction techniques • Modern techniques (statistical methods) – Regression analysis – Factor & cluster analysis Debasis Das JSB 606 35 .

Limitations of Key Variables Analysis • Absence of consensus among managers • Absence of proper scale of measure. absence of clarity • Dependence on quantitative data and ignoring qualitative information Debasis Das JSB 606 36 .

Designing MCS Debasis Das JSB 606 37 .

Introduction • Understand the environment • Understand the hierarchy of control flow • Leads to goal congruence • Users should be able to appreciate & internalize the goals Debasis Das JSB 606 38 .

Process of Designing • Identify org hierarchy • Understand the process of the business • Establish linkages between stakeholders towards goal congruence • Establish information flow between departments and sub-units • Design the system • Implement the system Debasis Das JSB 606 39 .

Identifying Hierarchy • Org hierarchy supports the control system • Depends on org structure • Often a standard is available in industry. study that • There may be a need for changing the hierarchy Debasis Das JSB 606 40 .

• Centralized – Decisions follow top down. bottom up and across op data and decision flow Understanding Business Process Debasis Das JSB 606 41 . either way • Matrix – Top down. operational data flow bottom up • Decentralized • Substantial decision making power at sub-unit – Operational data and information flow.

profitability.Establishing Linkages toward goal congruence • General goals – Profit. wealth creation • Specific goals – Specific to business • Keep stakeholders informed • Establishing goals – Establish general purpose – Establish specific modalities – Identify exact goals to deliver above two • Enabling congruence – Task & job description Debasis Das JSB 606 42 .

compressing data to fit. design & develop the info system. delivering the form. Analysis. test and implement – Form design (info report) • Understanding the purpose. enabling tabulation facility Debasis Das JSB 606 43 .Formal Info System Flow • Proper information flow essential between subunits – Designing information system • Requirement study.

particularly assessor and feedback systems • Closed end control system – Correction in one direction – No interaction between feed back system and assessor system independently Debasis Das JSB 606 44 .Designing the Control System • Open end control system – The control system loop is such that info flow between subsystems.

Open End Control Input System Assessor Control device/System Feedback device/system Debasis Das JSB 606 45 .

Closed End Control Input System Assessor Control device/System Feedback device/system Debasis Das JSB 606 46 .

Implementation Techniques • Sharp Cut-off • Parallel run • Phased implementation Debasis Das JSB 606 47 .

Implementation Process Develop Control system Build Control System Use Control System Is it Adequate ? Yes Implement Control system Debasis Das JSB 606 48 .

Organizing. Strategy & Control Debasis Das JSB 606 49 .

Introduction
• Control system helps goal congruence • System should help implement strategy

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• Goal & Objectives are the boundary conditions • Goals & objectives may change • These reflect short term as well as longterm needs. Design needs to take into account both. • Goals & objectives may translate into conflicts. Design must take care these do not cause problems
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Goals & Objectives-Boundary Constraints

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Strategy-Pathway
• Strategies-processes through which internal/external environment changes are dealt with • Strategy-broken down into tasks. Operational strategies make them realizable. • Strategy is the blueprint used to design the control system • System corrects itself through multiple feedback mechanisms.
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Strategy Evaluation • Criteria to evaluate strategy – Internal consistency – External and environmental consistency – Applicability in view of resources available – Risks associated – Time frame of implementation and result orientation – usefulness Debasis Das JSB 606 53 .

Behavioral Aspects
• • • • • • • • • • Perception Attitudes & beliefs Motivation Goal congruence Sub unit conflict and resolution Managerial styles Resistance to change Entrapment Compromising & sacrificing Socio-cultural influences
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Perception
• Interaction by personnel and managers with the control system generates a perception of the system • Seriousness of management is gauged from this perception

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Attitudes & Beliefs
• Attitudes and beliefs of managers and employees are the result of the culture and background they come from • These attitudes and beliefs serve as reference and benchmark for the system in the long run

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Motivation • Motivation of managers decide the drive to use the system • Motivation comes from two sources – Personal factors (Maslow) – Power centric needs – People seek positive affirmation of performance • Control system must have positive reinforcement built-in to succeed Debasis Das JSB 606 57 .

Goal Congruence • Individuals work towards their own goals • Organization needs to fulfill its own • To ensure the two synergize. strong motivation and clear roadmaps are needed • Success of the control system hinges on how close these two could be brought Debasis Das JSB 606 58 .

Sub unit Conflict & Resolution • Sub units may have conflicting goals • Competition for resources exist • Cannibalization by sub units may happen • Transfer pricing and ERP solutions mitigates the problems • Coordination committees can help Debasis Das JSB 606 59 .

Managerial Styles • Style can range from autocratic to participative/democratic • An effective blend is used in practice. • The business determines what blend is to be used Debasis Das JSB 606 60 .

Force Field Analysis • According to Kurt Lewin two forces create conflicts in an individual • Facilitating force enable an individual • Inhibiting force opposes the facilitating force • These conflicts need to be resolved by review meetings at sub unit levels Debasis Das JSB 606 61 .

Resistance to Change • A large organization does not like to change • It is apprehensive of change • Control system designer needs to be aware of this and minimize the same Debasis Das JSB 606 62 .

Entrapment • Being trapped due to own decision • Sometimes bad decisions taken is not reversed as it will show the manager took a bad decision • Multiple feedback mechanism enables the system/organization to weigh good and bad side and take a balanced view Debasis Das JSB 606 63 .

Compromising & Sacrificing • Sometimes compromising decisions (most satisfying) are taken due to pressure groups. These decisions may not be the most effective • Sometimes a sacrificing attitude is necessary to change the course of business or to develop a business Debasis Das JSB 606 64 .

Socio-Cultural Influences • Social and cultural influences the workers grew up with influences the attitude to work • These influences affect the way a control system works Debasis Das JSB 606 65 .

Joint Goals through Responsibility Centers • Set up goals jointly by management and workers • Management by objective (MBO) • Set up business centers that are responsibility of individual managers Debasis Das JSB 606 66 .

control on input and output available Debasis Das JSB 606 67 . maximize profit • Investment centers – Assets are created.Responsibility Centers • Revenue centers – Where revenues are generated • Expense centers – Difficult to assess monetary value of output. costs of inputs available • Profit centers – Input and output value can be assessed.

discretion of management. output relationships can be measured (profit centers) • Infrastructure costs – Costs that have concrete outcome in the long term Debasis Das JSB 606 68 . input. 40 to 60 percent of cost of business • Engineered costs – About 30%.Cost Patterns • Discretionary costs – Management related costs.

Costs Across Value Chain R&D Design Production Marketing Discretionary Costs Infrastructure costs Engineered Costs Debasis Das JSB 606 69 .

Benchmarking • Checking against other businesses for implementing best practices • Compare processes • Could be one time or a continuous process Debasis Das JSB 606 70 .

Advantages of Benchmarking • Better understanding of wants (expectations) of customers • Better economic planning of purposes • Increase in productivity • Better current practices and search for change • Better competitiveness Debasis Das JSB 606 71 .

identify leading edge practices • Implement new and improved business practices Debasis Das JSB 606 72 .Collaborative Benchmarking • Identify problem areas • Identify other industries that have similar processes • Identify organizations that are leaders • Survey companies for measures & practices • Visit “best practices” companies.

Cost of Benchmarking • Visit costs • Time costs • Benchmarking database costs Debasis Das JSB 606 73 .

Organizational Infrastructure. Organizational Design and Control Systems Debasis Das JSB 606 74 .

Decentralization • Depends on size of organization and span of control • Decentralized organization works better in terms of goal congruence • A manager operates better in decentralized form as it provides continuous learning & improvement Debasis Das JSB 606 75 .Centralization vs.

Flat organization.Control Factors in Organizational Design • Three factors that decide organizational design are – Coordination • Centralized organization is best in terms of coordination. making decisions repeatedly. centralized system costs increase due to rework. Matrix: most effective Debasis Das JSB 606 76 . Matrix organization functional managers collaborate to develop coordination – Cost Effectiveness • Multiple channels in decentralized system increases efficiency. coordination – Communication • Decentralized: bottom up. devoid of market reality. Matrix works best in keeping costs optimal. loaded with market reality but devoid of strategy. in decentralized organization functional managers handle the extra cost and bottlenecks. motivation. Centralized: top down.

Adaptive Control & Adaptive Organization • Environmental uncertainty • Environmental complexity • Environmental diversity • Environmental Hostility Debasis Das JSB 606 77 .

Characteristics of Adaptive Organization • Implicit Control System • Training & Development • Integrity of individual & Organization • Global standards Debasis Das JSB 606 78 .

creativity and innovation in operation and execution • Degree & dimension of the autonomy is decided by style of management & processes used • Involvement of functional managers.Divisional Autonomy • Flexibility. trust and confidence Debasis Das JSB 606 79 .

goals • Measuring efficiency by ROI • Establishing an inter-profit center Relationship Debasis Das JSB 606 80 .Responsibility Centers & Performance Measures • Measure efficiency and effectiveness – Efficiency is like measuring productivity – Effectiveness measure is measuring against targets.

Approaches to MCS Debasis Das JSB 606 81 .

Theory of Universalism • Technology • Organizational structure • Environment Debasis Das JSB 606 82 .Theory of Contingency.

Strategy & Control Systems • Without strategic plans • With strategic plans Debasis Das JSB 606 83 .

Business w/o Strategic Plans Option a Option b Option c Option d Budget The Business Debasis Das JSB 606 84 .

Business with Strategic Plan Option a Option b A Plan B Budget Of The Business Option c Option c Debasis Das JSB 606 85 .

Strategy & Control Vision & Mission Reward Strategy Plan Budget Deviation/ measurement Feedback to the system Debasis Das JSB 606 86 .

Corporate strategy & Diversification • Single Business Firm • Related diversification • Unrelated diversification Debasis Das JSB 606 87 .

control deviation in production process & prompt delivery Debasis Das JSB 606 88 .Response of Control System to Corporate Strategy • Response of control system will depend on diversification sought – Unrelated: higher decentralization & training – Related: competency to be controlled.

deciding competence level.Strategies Available for Business Unit • Deciding market opportunities. understanding internal & external strengths • Understanding that competitive strength of one business unit to another will vary. allocate resources separately • Level of attractiveness in which the business unit exists Debasis Das JSB 606 89 .

Hold market share. increase market share • Hold – High market share. even when just breaking even • Divest – Low market share & growth • Harvest – Maximum short run earning.Strategic Choices • Build – Potential exists. make the most of it Debasis Das JSB 606 90 .

Five Forces Theory & Competitive advantage • Course of control action depends – Intensity of rivalry between competitors – Bargaining power of customers – Bargaining power of suppliers – Threat from substitutes – Threat of new entrants Debasis Das JSB 606 91 .

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