INTRODUCTION TO

MANAGEMENT CONTROL
SYSTEMS
• Hongreen, Datar and Foster have defined
MSCs “as means of gathering and using
information to aid and coordinate the process
of making planning and control decisions
throughout the organization and to guide the
behavior of its managers and employees”.
Elements of control system

• Every control system has at least four elements:

1. A detector or sensor- report what is actually
happening in the process being controlled
2. An assessor- compare what is actually happening
with desired state or expectations of what should
happen.
3. An effector – take corrective action if there is a
significant difference between actual state and the
desired state has been perceived.
4. Communications network - tells what is happening
and how that compares to the desired state.
• Assume your driving a car on highway where legal speed
is 80km/hour. Control system act as follows:
1. your eyes (sensors) measures actual speed by observing
the speedometer.;
2. your brain (assessor) compare actual speed, and, an
upon detecting a deviation from standard (80km/hour);
3. Directs your foot (effectors) to easy up if the speed is
higher than standard or press down on accelerator if the
speed is low than standard; and
4. Your nerves form the communication system that
transmits information from eyes to brain and brain to
foot.
• Controlling in organization is the measurement and
correction of performance in order to make sure that
enterprise objectives and the plans devised to attain
them are accomplished (Harold Koontz)
• When controlling, you are essentially monitoring
whether you are receiving an expected result of a
process (or during it) or if the outcome deviates from
the expectation.
• If there is a deviation, you take corrective action to
ensure the expected results occur.
• Control process starts by defining standards
against which performance may be measured
such as standard costs and budgets.
• Actual results are measured and any variance
between targets and results are analyzed and
where necessary, corrective actions are taken
• Setting a goal and establishing desired
objectives.– I want to create 2,000 tables in a
month.
• Measuring the achievements of goals and
objectives.– I have made 1,500 tables in a
month.
• Comparing the achieved goals and objectives
with the original objectives. – I wanted 2,000 and
I got 1,500. I wanted to do it in a month and I
have spent a month.
• Analyzing variances and reporting on them.
Determining the underlying causes for the
variations.– I am 500 tables short, but I have met the
deadline. I did not have enough materials on day 10
and I got behind in my goals.
• Taking corrective action to eliminate the variations.– I
have recalculated the requirements for material and I
have e ordered enough for next month.
• Following up and repeating the process.– I have now
created the right amount of tables every month.
• Management control process contain the
same elements as those in normal control
systems :detectors, assessors, effectors, and a
communication system.
• Management control different from normal
control
 Standard is not preset, but a result of a
conscious planning process. Involves both
planning and control
• Management control is not automatic
 Some detectors in organization may be
mechanical, but the managers often detects
important information with her own eyes, ears
and other senses.
 Managers themselves must judge whether the
difference between actual and standard
performance is significant enough to warrant
action, and, if it is, what action to take.
• Requires coordination among individuals
 Unlike controlling an automobile, a function is
performed by single individual, management
control requires coordination among
individuals.
 An organization consists of many parts, and
management control must ensure that each
part works in harmony with one another.
• Action is not mechanical or fixed ( no clear answer for
what should we do for improvement)
– the connection between observed need for action
and the behavior that is required to obtain the
desired action is by no means a clear cut.
– no clear answers for what action a given manager
will take when a significant difference between
actual and expected performance as assessed
A manager acting as assessor may decide costs are too high,
but see no easy or automatic way of bringing cost down to
what the standard sy should be.
• Much management control is self control –
people act in the way they do, not necessarily
because they are given specific instructions by their
superior but, rather, because their own judgment
tells them what action is appropriate.
 Management
• Management is about organizing people and
processes in a manner that helps the
organization achieve specific objectives.
• The management process wants to ensure
different parts work together to attain these
goals
• Organizations are led by hierarchy of managers, with
chief executive office (CEO) at the top, and the
manager of the business units, departments, sections
and other sub units ranked below him or her in
organizational chart.
• The CEO(or , in some organizations, a team of senior
managers) decides on the overall strategies that will
enable organisation to meet its goals.
• Subject to approval of the CEO, the various business
units managers formulate additional strategies that
will enable their respective units to further these
goals.
• Management control process is the process by which
managers at all levels ensure that people they
supervise implement their intended strategies so
that organization’s goals are attained
• A system is a prescribed way of carrying out any
activities or set of activities.
• Includes set of detailed methods, procedures and
routines created to carry out a specific activity,
perform a duty, or solve a problem
• The system used by management to control the
activities of organization is called management
control system
• Many management actions are unsystematic.
 A situation is encountered that the rule of the
system do not deal with, the manager uses his
or her best judgment in acting.
 Many interaction between managers or
managers and subordinate are of this type
• System may suggest the general nature of the
appropriate response to situation.
• The management control systems knits the
organisation together so that each part, by exercising
the autonomy given to it, fulfills a purpose that is
consistent with and contributes to the fulfillment of
the overall purpose of the organisation.
 Boundaries of Management Control

• Management control fits between strategy

formulation and task control
• Strategy formulation is the process of deciding
on the goals of the organization and the
strategies for attaining these goals.
• Management control is the process by which
managers influence other members of
organization to implement the organization’s
strategies
• Task control is the process of ensuring that
specified tasks are carried out effectively and
efficiently
• It is transaction oriented i.e. it involves the
performance of individual tasks according to
rules established in the management control
process.
• Without proper MCS in place, you don’t know if
the business can achieve its goals and if the
strategies you’ve chosen will work according to
plan.
• A well-defined management control system
should evaluate both the business-level and
corporate-level strategies
• Corporate strategy deals with the entire company
• Business level strategy deals with a particular
business unit
 QUESTION
• With examples explain the difference
between management control and task
control
 Management Control Activities

• Planning what the organization should do.

• Coordinating the activities of several parts of the
organization
• Communicating information
• Evaluating information
• Deciding what, if any, action should be taken
• Influencing people to change their behavior
• MC does not necessarily require that all actions
correspond to a previously determined plan, such as
budget. Such plans are based on circumstances
believed to exist at the time were formulated.
• If these circumstances have changed at the time of
implementation, the actions dictated by the plan
may no longer appropriate.
• In other words, confirming to a budget is not
necessarily good, and departure from a budget is
not necessarily bad.
 Behavior consideration
• Senior management obviously wants the
organization to attain its goals, but individual
members of organization have personal goals as
well, and this are not in all respects consistent with
the organization’s goals.
• The central control problem is to induce them to act
in pursuit of their personal goals in a way that will
help attain the organization’s goals as well
• The central purpose of management control
system is to ensure goal congruence; that is,
the system should be designed in such a way
that the actions it leads people to take in
their perceived self interest are in the best
interest of the organization.
 Tool for implementing strategy
• Management controls systems are tools to aid
management in moving organisation towards
its strategic objectives.
• Thus, management control focuses on
strategy execution.
• Strategies are also implemented through
organisation structure, its management of
human resources, and its particular culture.
• Organizational structure specifies the roles, reporting
relationships and division of responsibilities that
shape decision making within organization.
• HRM is the selection, training, evaluation,
promotion and termination of employees
• Culture refers to the set of common beliefs, attitudes
and norms that explicitly or implicitly guide
managerial actions.
 Management control process
• Involves superior – subordinate relationship.
• Control is exercised by superior over the subordinate.
• Management control process involves three
interrelated behavioral activities:
1. Communication- It is superior’s responsibility to be
sure that subordinate knows the organization goals
as they apply to his/her job and that the subordinate
knows what is expected from him/her in the
attainment of these goals.
2. Motivation - subordinate must be motivated to do
his/her best to accomplish the objectives. Superior
is responsible for motivating the subordinate
3. Evaluation – it is the superior responsibility to
evaluate the performance of the subordinate.
Management control Systems and organization
Strategies
• Strategy formulation is the process of deciding on new
strategies, where as management control is the process
of deciding how to implement strategies.
• Important distinction between strategy formulation and
management control is that strategy formulation is
essentially unsystematic.
• Whenever a threat is perceived or new idea surfaces,
strategy formulation take place. Since threats or
opportunities are not discovered systematically or at a
regular interval, strategic decision are unsystematic ( i.e
they can arise at ant time, not according to a set timetable)
• Furthermore, the analysis of proposed strategies
varies with the nature of strategy. Strategic
analysis involves much judgment, and the
numbers used in the process are usually
estimates.
• By contrast , the management control process
involves a series of steps that occur in a
predictable sequence according to a more or less
fixed time table, and with reliable estimates
• Analysis of proposed strategy usually involves
few people. By contrast, the management
control process involves managers and their
staff at all levels of organisation.
 Purposes of a management control system

• Clearly communicate the organization’s goals

• ensure that every manager and employee
understands the specific actions required of him/her
to achieve organizational goals
• communicate the results of actions across the
organization
• ensure that the management control system adjusts
to changes in the environment
 Characteristics of Good Management
Control Systems
• Management control systems should be closely
aligned to an organization’s strategies and goals.
• Management control systems should be designed to
fit the organization's structure and the decision-
making responsibility of individual managers.
• Effective management control systems should
motivate managers and employees to exert efforts
toward attaining organisation goals through a variety
of rewards tied to the achievement of those goals.
 QUESTIONS
• Differences and similarities between Strategy Formulation and
Task Control
• Differences and similarities between Management Control and Task
Control.
• What is goal congruence? What are the informal factors that influence
goal congruence?
• Describe and illustrate significance of human behavior patterns in
management control.
• Explain the concept of goal congruence (informal and formal)
• Explain ideal Management Control in organization and its features
• Explain the various stages of Management Control Process and its
features