MBO, BSC, Triple-Bottomline

CONTEXTUAL FACTORS INFLUENCING MANAGEMENT CONTROL.docx

• Management Control Activities
1. Planning
2. Coordinating
3. Communicating
4. Evaluating
5. Deciding
6. Influencing

Goal Congruence:
1. Organization and employees
2. Between Divisions
• Framework for Strategy Implementation
 Examples of Decisions in Planning and Control Functions
Strategy Formulation
Acquire an unrelated business
Enter a new business
Add direct mail selling
Change debt/equity ratio
Devise inventory speculation
policy
Decide magnitude and direction
of research
Management Control
Introduce new product or brand
Expand a project
Determining advertisement budget
Issue new debt
Implement minority recruitment
programme
Decide inventory levels
Control research organization
Task Control
Coordinate order entry
Schedule production
Run TV commercials
Manage cash Flows
Maintain personnel records
Reorder raw materials
Run individual research projects
•Formal controls
•delegation of tasks, Structured
•rewards, penalties, and approvals to ensure compliance.
 
•Examples: Policies, audit, standard operating procedures (SOPs), budgetary controls,
•financial reporting, performance measurement systems, incentive systems.
•  
•Informal controls
•interpersonal relationships or peer interactions
•informal networks and contacts.
•found in organizations which are innovative and creative.
•Informal controls address some drawbacks of formal control systems
•encourage peer interaction, self-initiation, and creativity.
• 
•Informal and formal controls co-exist
•not independent of the other; Interdependent and complementary
Objectives of management control systems
• Effectiveness, and efficiency of business operations
• Reliability of financial reporting
• Compliance with applicable regulatory and legal framework

•
• CSF
• PI
• KPI

• Triple Bottom Line

•
The triple bottom-line
• measures the financial, social, and environmental performance of a
company.
• The TBL consists of three elements: profit, people, and the planet.
• TBL theory holds that if a firm looks at profits only, ignoring people
and the planet, it cannot account for the full cost of doing business.
Balanced Score Card: 1/4
• A Performance Measurement System
• Combines monetary and nonmonetary measures of performance
• Forces the management to view the corporate from 4 different
perspectives
• Business Units assigned goals, and then measured from four different
perspectives.
• Financial Perspective
• Customer Perspective
• Internal Business Perspective
• Innovation and Learning
BSC: 2/4
• Provides broader performance focus.
• Basis for managing current performance as well as future
performance
BSC: 3/4
• Financial Perspective (How do we look to our shareholders?)
• Customer Perspective (How do we look to our customers?)
• Internal Business Process Perspective (What business processes
are the value drivers?)
• Innovation and Organizational growth and Learning Perspective:
(Are we able to sustain innovation, change, and improvement?)
BSC: 4/4
• Financial Perspective:
• Profit Margins, ROA and Cash Flow
• Customer Perspective:
• Market Share, Customer Satisfaction Index
• Internal Business Perspective:
• Employee Retention, Cycle time reduction
• Innovation and Learning
• Percentage of sales from new products
MBO:
• A responsibility centre exists to accomplish some purposes, termed
objectives.
MBO: The Setting
• Hyderabad Branch is given a sales target of Rs. 100 Crores.
• Pune branch is given a target of selling 100 cars in this quarter.
• Walmart wants to set up three stores in India in the next six months.
• A hospital project is being constructed.

• How will you evaluate the performance of each of the above managers?

• The preponderance of financial goals is because the numbers are

captured in accounting information on a running basis.
MBO:
• Implicit in the revenue/financial budgets are some specific objectives.
• Open a new sales office
• Introduce a new product-line
• Retain employees
• Instal a new computer system.
• Some companies make these objectives explicit and want their
managers to achieve these objectives. This is known as MBO.

• These nonfinancial targets are given to the business divisions and the
managers are accountable for their performance/nonperformance.
MBO:
• You confront your employees by asking the question:
• what are you doing in the next three months?
• What do you want to achieve? Or,
• I want you to launch a new product.
• That’s your task, that’s your objective.

• This is also similar to budgeting exercise, only: it’s nonfinancial.

MBO: Video Resource
• https://www.youtube.com/watch?v=N8L8Cs-X6kc
• Strategy Formulation:
• Goals, Objectives

Strategy Formulation Management Control

Process of deciding on new strategies Process of implementing those strategies
Unsystematic Structured
Rough estimates Accurate information.
Involves judgement Series of steps at predictable intervals.
Fixed Intervals
Fewer people Managers and staff at all levels in the
organization
Task Control
Systems are scientific, mechanical
Managers interact with non-managers, or
with machines.
Focus is on the specific tasks performed by
the units. (say, a manufacturing job)
Task control relates to specified tasks which
require little or no judgement.
Management Control
Human oriented.
Behavioural aspects dominate.
Managers interact with managers.
Focus is on organization units.
MC is concerned with the broadly defined
activities of managers to implement
strategies.
 Examples of Decisions in Planning and Control Functions
Strategy Formulation
Acquire an unrelated business
Enter a new business
Add direct mail selling
Change debt/equity ratio
Devise inventory speculation policy
Decide magnitude and direction of
research
Management Control
Introduce new product or brand
Expand a project
Determining advertisement budget
Issue new debt
Implement minority recruitment
programme
Decide inventory levels
Control research organization
Task Control
Coordinate order entry
Schedule production
Run TV commercials
Manage cash Flows
Maintain personnel records
Reorder raw materials
Run individual research projects
1. The Management Control Environment
1. Understanding strategies
2. Behaviour in Organizations
3. Responsibility Centres: Revenue, Expense, Profit and Investment Centres
4. Transfer Pricing
5. Measuring and Controlling the Assets Employed
2. The Management Control Process
1. Strategic Planning
2. Budgeting
3. Performance Measurement
4. Management Compensation
FACTORS THAT INFLUENCE MANAGEMENT CONTROL

• the nature and purpose of the organization;

• (Profit, non-profit organizations)
• organization structure and size.
• Centralised/decentralized; Reporting structure, span of control; Size and location of the
organisation
• National culture (MNCs):
• Power Distance
• Uncertainty Avoidance
• Masculinity/femininity
• Individualism/collectivism
• Strategic mission and competitive strategy.
•
• corporate strategy and organizational diversification.
• competitive strategy : (Michel Porter’s framework).
• managerial styles.
• organizational slack.
• stakeholder expectations and controls.
• Organizational life cycle.
 Geert Hofstede’s Dimensions of National Culture
Dimension Definition
Power distance Acceptance of hierarchical levels, that is, inequality in
the distribution of power.
Uncertainty avoidance Avoiding risk and uncertainty

Masculinity/femininity Higher masculinity shows higher competitive spirit,

independent thinking, assertiveness, etc. while higher
femininity shows higher interdependence, nurturing
nature, etc.
Individualism/collectivism People’s preference to work as individuals or in a team.
• Formal controls entail delegation of tasks
• Structured
• rewards, penalties, and approvals to ensure compliance.
•  
• Examples of formal controls:
• Policies, audit, standard operating procedures (SOPs), budgetary controls,
• financial reporting, performance measurement systems, incentive systems.
•   
• Informal controls
• interpersonal relationships or peer interactions among individuals and groups
• informal networks and contacts.
• found in organizations which are innovative and creative.
• Informal controls dilute some drawbacks of formal control systems
• encourage peer interaction, self-initiation, and creativity.
•  
• Informal and formal controls co-exist
• not independent of the other; Interdependent and complementary
The Cybernetic Approach to Management Control
• Cybernetics is the study of control and communications, whether in
the machine or the animal.

• Basic Control Process

• Step 1: Determining areas to control
• Step 2: Establishing standards
• Step 3: Measuring performance
• Step 4: Comparing actual performance against standards
• Step 5: Rewarding performance and/or taking corrective action
• Step 6: Adjusting standards and measures when necessary

• MBO
Objectives of management control systems
• Effectiveness and efficiency of business operations
• Reliability of financial reporting
• Compliance with applicable regulatory and legal framework

•
The triple bottom line
• aims to measure the financial, social, and environmental performance
of a company over time.
• The TBL consists of three elements: profit, people, and the planet.
• TBL theory holds that if a firm looks at profits only, ignoring people
and the planet, it cannot account for the full cost of doing business.
SCHEMES FOR Classification Basis Classifications
CLASSIFYING
MANAGEMENT Object of control Action controls
CONTROLS Behavioral restrictions
Pre-action appraisals
MCS could be classified Action accountability
as under: Results controls
1. based on the object of Personnel/Cultural controls
control,
2. based on the extent of Extent of formalization of Formal controls
formalization of control Informal controls
control,
3. based on the time of Time of implementation Open loop control
implementation of of controls Closed loop Control
controls.
Feedforward control
Feedback control
Contextual Factors that influence management control
1. the nature and purpose of the organization; (Profit, non-profit
organizations)
2. organization structure and size. (Centralised/decentralized; Reporting
structure, span of control; Size and location of the organisation)
3. National culture. (MNCs)
4. Strategic mission and competitive strategy.
5. Corporate strategy and organizational diversification.
6. Competitive strategy.
7. Managerial styles.
8. Organizational slack.
9. Stakeholder expectations and controls.
10.Organizational life cycle.
 Geert Hofstede’s Dimensions of National Culture
Dimension Definition
Power distance Acceptance of hierarchical levels, that is, inequality in
the distribution of power.
Uncertainty avoidance Avoiding risk and uncertainty

Masculinity/femininity Higher masculinity shows higher competitive spirit,

independent thinking, assertiveness, etc. while higher
femininity shows higher interdependence, nurturing
nature, etc.
Individualism/collectivism People’s preference to work as individuals or in a team.
SCHEMES FOR Classification Basis Classifications
CLASSIFYING
MANAGEMENT Object of control Action controls
CONTROLS Behavioral restrictions
Pre-action appraisals
MCS could be classified Action accountability
as under:
Results controls
1. based on the object of Personnel/Cultural controls
control,
2. based on the extent of
formalization of Extent of formalization of Formal controls
control, control Informal controls
3. based on the time of
implementation of Time of implementation Open loop control
controls. of controls Closed loop Control
Feedforward control
Feedback control