You are on page 1of 37

Management Control System

Introduction
Goals: goals are targets pursued by organization. Defined as: broad statement of what the organization wants to achieve in the long run or on a permanent basis. Goals are timeless statement. They are the wheels that keep an organization going. In many corporations, the goals originally set by the founder persists for generations. E.g.. Ford, Walt Disney, Eastman Kodak, Sam Walton Wal-Mart

Organizational Goals
Profitability Maximizing Shareholders Value

Risk Management
Other Goals: by Posner & Schmidt
Organizational Effectiveness High Productivity Good Organization Leadership High Morale Good Organizational Reputation Organizational growth Organizational Stability Value to Local Community

Service to Public

Goal Congruence
Every individual has Personal Goals

Many a times, conflict between Personal & org. Goals


Hence, this necessitates a development of a control system that integrates the personal goals with org.

goals so that goal congruence is achieved Goal congruence means the action people take in accordance with their perceived self-interest and also in the best interest of the organization. MCS should be designed and operated with the principle of goal congruence in mind.

Goal Congruence

Individuals work in different hierarchies and handles different responsibilities & may have different goals.

But they must come together as far as Companys Goal is concerned, its called Goal Congruence
5

Goal Congruence Examples


Example 1 The HR manager has devised a HR training

program to enhance the skills of its sales personnel, with an objective to enhance their productivity But if company is in strategic need of attaining a certain sales volume in a given quarter, it can not do so on account of non availability of personnel.

Goal Congruence Examples


Example 2 The marketing department has planned

an impressive advertising campaign, which promises good returns, But say due to cash crunch Companys current financial position may not let to lose the strings Example 3 Production Manager may get a good applause for reducing cycle time; But at what cost? Building up the high inventory i.e. higher investment in current assets. While doing so he just overlooked the financial interest of the company.

Informal factors that influence Goal Congruence

External Factors

Internal Factors

Informal factors that influence Goal Congruence


External Factors : External factors are norms of
desirable behavior that exist in the society of which the organization is a part E.g.: Silicon Valley Major Source of new Work Ethics business creation & wealth Attitudes Attracts people with Entrepreneurial Loyalty Spirit, a zest for hard work, high ambition Pride in doing job Over the last 50 years HP, Microsoft, Apple, Sun Microsystems, Oracle Diligence Known as the centre of Technology Type of industry Innovation Nation

Informal factors that influence Goal Congruence

Culture
Common beliefs, Shared Values, Norms of Behavior, Assumptions that are indirectly accepted and openly/directly manifested throughout Cultural norms are extremely important since they explain why two organizations with identical formal management control systems, may vary in terms of actual control. A company's culture usually exists unchanged for many years. Certain practices become rituals, carried on almost automatically because "this is the way things are done here. Organizational culture is also influenced strongly by the personality and policies of the CEO, and by those of lower-level managers with respect to the areas they control. Attempts to change practices almost always meet with resistance, and the larger and more mature the organization, the greater the resistance is.

Informal factors that influence Goal Congruence


Internal Factors Management Styles : Strongest Impact on Management
Control Attitude of CEO Attitudes of Subordinates Attitudes of Superiors Managers come in all shapes and sizes. Some are charismatic and outgoing; others are less ebullient. Some spend much time looking and talking to people (management by walking around); others rely more heavily on written reports.

Example
Reginald Jones 1970 More Discipline, Formal, dignified, refined, bright, willing to & able to delegate authority Jack Welch 1980 outspoken, impatient, informal, an entrepreneur. Growth 1981 -1999 through mega acquisition, shift from manufacturing to services, rapid globalization into Europe & Asia, Implementation Six Sigma Quality, Integration of Internet into All GEs Businesses. Result - Sales Increase Fourfold, from $27 Billion to $101 Billion , profits six folds, from $1.6 Billion to $9.2 Billion. GEs Stock price increased by 3100% from $4.2 to $133.75 Billion Jeff Immelt 2001 Confident, friendly, and likeable leader . Where Welch was feared within GE, Immelt is Adored. Immelt Focus Use of Technology, Customer Orientation, Business Mix, Management Diversity GE Well Deserved reputation for producing sterling Business Managers who had different styles but a common ability to lead successfully

Informal factors that influence Goal Congruence


Internal Factors
Informal Organization Line Management - official authority and responsibilitiesof each manager. Production Manager General Manager In extreme situations, the production manager may not pay adequate attention to messages received from Gen. Manager, especially likely to occur when the latter is evaluated on production efficiency rather than on overall performance The realities of the management control process cannot be understand without recognizing the importance of the relationships that constitute the informal organization.

Informal factors that influence Goal Congruence


Internal Factors Perception & Communication Operating managers must know what are goals & what actions are supposed to be taken to achieve them. Despite many Formal & Informal channels of Information, Its not always clear what senior management wants to do. Conflict of Interest

The Formal System


Rules

Physical Control

Manuals

System Safeguards

Task Control Systems

The Formal System


Rules
Formal Instructions, Job Descriptions, Standard Operating Procedures, Manuals, Guidelines Rules Range Until modified, do not change Rules as guidelines- permitted or indeed expected to depart from them, either under specified circumstances or when their own judgment indicates about the departure being in the best Interest of the organization Ex: Credit Policy Positive requirements Fire drills Prohibitions unethical, undesirable, Illegal

The Formal System


Rules

Physical Control

Security Guards Locked Showrooms Vaults Computer Passwords Television Surveillance

The Formal System


Rules
Much judgment required Written Instructions Procedures Practices Some rules become outdated Re-examination of the rules to ensure that they are still consistent with the current senior management Pressure of day today activities, updating is overlooked which may result into having those rules which are obsolete

Manuals

The Formal System


Rules

System Safeguards

Cross Checking Authorization Safeguarding Assets Internal Control Auditing

The Formal System


Rules

Task Control Systems

Automation Responsibilities Checking Reviewing Reporting

Formal Control Process


Goals and Strategies
Rules Other Information

Reward (Feedback

Strategic Planning

Budgeting

Responsibility Centre Performance

Report Actual Versus Plan

Performance Measurement

Measurement

Review

Corrective Action

Feedback Communication

Functional Structure
CEO
Staff

Production Manager
Staff

Marketing Manager Staff

Manager

Manager

Manager

Plant 1

Plant 2

Plant 3

Manager Region A

Manager Region B

Manager Region C

Types of Organizational Structure


Functional
People are grouped based on their expertise and skills Vertical hierarchy is stronger Calls for centralization Cannot adapt easily to environmental changes

Disadvantages: Advantages: No clear way of determining Specialized Knowledge effectiveness No way of measuring contribution Better Decisions towards profit Supervision Dispute grievance Efficiency Inadequate for diversified products & markets Tends to be silos24

Business Unit Structure


CEO
Staff

Manager Business Unit A


Staff

Manager Business Unit B


Staff

Manager Business Unit C


Staff

Plant Manager

Marketing Manager

Plant Manager

Marketing Manager

Plant Manager

Marketing Manager

Responsible for all the function involved in producing & marketing a specified product line Based on Product range/specific market/geographical location, divisions are formed & they act as separate companies Responsible for planning & coordinating work of separate functions and for resolving disputes between them Performance measured on the basis of profit of BU. A valid criterion since it reflects the activities of both. BU Managers exercise broad authority but Headquarters reserves certain key prerogative. HQs may be responsible for obtaining & allocating funds Also approves budget, judges performance of BU manager, sets their compensation, and if situation warrants, remove them HQs establishes Charter for Product, territory.

Divisional Also known as Product Structure or Strategic Business Unit (SBU)

HQs establishes Company wide policies may be codified in to few & general or in several thick volumes of manuals HQs staff may assist BU in specialized areas like Human Resource Legal Affairs Public Relation Controller & treasury matters HQs functions are crucial; without them the BU would be better off as a separate companies

Advantages: Provides a training ground for general management Imbibes entrepreneurship skills in BU manager Being nearer to market than HQs, Managers make sound decisions The unit as a whole can react to new threats or opportunities

Disadvantages: Possibility of work duplication Unit manager is presumably generalist whereas subordinates are functional specialists may lead to problems both within BU and with HQs Disputes between Business units Disputes between Business Units and HQs

Matrix Organization
Chief Executive Officer

Functional Manager A Functional Manager B Functional Manager C

Project Manager X Project Manager y Project Manager Z

Matrix Organization
Matrix Integrates desired features of Functional and Divisional structure Evaluation of performance of such organizational entities is very difficult This form of organization is very complex, from the point of view of management control system Along with hierarchy, there is some form of lateral authority, influence or communication Employee reports to two supervisors simultaneously Managers share the resources Firms that follow this structure are TCS, WIPRO, 30 Shell etc.

Advantages: Promotes interaction between functions and so useful where such interactions are necessary or desirable
Matrix structure offers advantages such as faster decision making process, efficiency and effectiveness Matrix organization has advantage of motivation and coordination

Disadvantages: it may pose problems such as added complexity in control function, assignment of responsibility and authority etc. Lot of time is consumed in conflict resolution The configuration dilutes priorities and creates conflicts product lines and functional lines over the allocation of resources.

Functions of the Controller


The person who is responsible for designing and operating the management control systems . In many organization, CFO = Controller. Nowadays, CIO = Controller 1. Designing and operating information & Control Systems 2. Preparing Financial Statements and Financial reports for shareholders & other parties 3. Preparing, Analyzing, and interpreting financial reports 4. Analyzing budget proposals from various segment of the company and consolidating them into an overall budget. 5. Supervising internal auditing and accounting control to ensure validity of information 6. Establishing adequate safeguards against theft and fraud 7. Developing personnel in the controller Organization 8. To advice management on financial implication of decisions under consideration
9. Tax returns

Controllers involvement in managerial function depends upon Financial orientation of the company Importance of planning, budgeting and reporting in the organization The extent to which controller is involved in business decisions Characteristics of a good controller Personal integrity and professional commitment Accounting knowledge and analytical skills Understanding business problems and recommending actions Building effective interpersonal relationships Recognizing the responsibility towards the division as well as corporate management
33

Controller

Business Unit Controller


Dotted line Relationship Here the controller reports to BU Manager, who is immediate boss, and ultimate authority in hiring, training, transfer, compensation, promotion, and firing.
Quote of Bernard Doyle of General Electric: our controllership structure is based on a strong functional reporting line. The business unit controllers report directly to the general managers of their business units but they have a functional or dotted line responsibility to the CFO of the company. The glue that holds it together is that the people in those business unit functional jobs can be appointed only from a slate of candidates the corporate CFO first approves, and he has the unqualified right to remove these people. But, as importantly, these people are the CFOs of their business units. They are team players.

Business Unit Controller


Solid line Relationship Here the controller reports to Corporate Controller who is also boss of the business unit controller and having authority for hiring. Quote of Helmut Maucher, CEO of Nestle :
As controller, you report to BU manager. The Bu manager has complete responsibility for the unit. However, in rare cases something may happen that means your loyalty to the unit manager is finished and your loyalty to the company takes over. I want a clear line of command, but everything has its limits; and , in that case, you cannot excuse yourself. I want your loyalty in general to the BU manager; but if he has five girlfriends and drinks too much, you must tell us at headquarters. This is your higher priority of loyalty.

Alternative Controller Relationship


Dotted Line Solid Line Corporate Controller Corporate Controller

Business Unit Manager

Business Unit Manager

Business Unit Controller

Business Unit Controller

Controllers Relation to Line Organization


Controller sometimes acts as line manager but their decisions can be overruled by actual line managers. Sometimes they do take decisions. For E.g. deciding the propriety of expense listed on a travel voucher

The Business Unit Controller He has divided loyalty between corporate controller & Unit Manager. If he reports to Corporate Controller, he is treated as spy rather than trusted aide by unit manager. And if he is reporting to unit manager, he may not give objective reports on Business Unit.
37