Management Control Systems

Session 1

Syllabus
• University paper – 100 marks • Portion
– Financial Goal setting – Organizational Growth ( Responsibility centers / profit centers) – Mechanics of determining profit objectives of profit centers – MCS in special sectors – Performance measurement of assets employed

Session 1
• Nature of management control systems • Understanding strategies • Organization Hierarchies and Behavior

if needed) Entity being controlled .Basic concepts – Control Control Device Assessor (comparison with standard) Detector (information about what is happening) Effector (behavior alteration.

Basic concepts – Management • Led by hierarchy of managers • The complexity of the organization determines the number of layers • All managers other than the CEO are both supervisors and subordinates .

Compare Simple control process • The standard is preset • This is automatic • A function performed by a single individual • The connection from perceiving the need for action to obtaining the desired result is clear • Control is maintained by an external regulating device Management control process • The standard is not preset • This is not automatic • Co-ordination among individuals • The connection from perceiving the need for action to obtaining the desired result may not be clear • This is self control .

Basic concepts – Systems • A prescribed and usually repetitious way of carrying out an activity or a set of activities • However many management actions are unsystematic. .

• MCS begins after the formulation of the organizations goals and strategies • MCS encompass both financial and non financial performance measures. This can affect the development of strategies of an organization.What is management control systems • Is a process by which management influences other members of the organization to implement the strategies effectively and efficiently • MCS is necessary in any organization that practices decentralization. • MCS shall fit in the firms strategy. • There is a focus on strategy execution . • The CEO has the responsibility to formulate the company’s strategies that are expected to attain the organization objectives . MCS is used by the management to exercise control over the implementation of strategies.

Sets forth the standards of measurement.What is MCS – an effective system should include • Strategic plan – should be communicated • Profit plan – budget provided direction to the organization. • Motivation – employees should be motivated • Effective management information system – to control the activities of an organization .

Management control boundaries • Planning what the organization should do • Co-ordinating the activities of several parts of the organisation • Communicating information • Evaluating information • Deciding what if any action should be taken • Influencing people to change their behavior .

Management control boundaries Strategy formulation Goals. Strategies and policies Management control Implementation of strategies (operational & financial) Task control Efficient and effective performance of individual tasks .

it operates in accordance with the strategies.Strategy formulation • Process of deciding on the goals of the organisation and the strategies for attaining the same. • Goals are overall aims of the organisation • Once a firm has formulated the strategies. .

Strategy formulation involves • • • • • • Framing a mission and objectives Analysis of internal environment Analysis of external environment GAP analysis Framing alternative strategies Choice of strategy .

. • Management control involves the behavior of managers and this cannot be shown in the form of equations. • There is generally a fixed time table and series of steps in accordance with which management control takes place.Management control • Process of implementing strategies.

.Task control • Process of ensuring that specified tasks are carried out effectively and efficiently • This is transaction oriented • Performance of individual tasks according to the rules established in the management control process. • This is a focus of many management science and operations research techniques.

• This can be achieved through a medium of human beings or machines.Task control – Operational • Process used for ensuring the tasks which are specified are carried out efficiently and effectively • Involves the control of individual tasks. • They are scientific in nature .

direct expenses.Task control – Financial • Process by which the management ensures that an organization carries out its financial plans effectively. . • The focus is on short term plans • The control includes control of direct wages. manufacturing overheads etc.

Distinction between Strategy/ Management/ task Strategy formulation • Deciding on new strategies • Unsystematic • Analysis involves few people Management control Task control • Consists of seeing that rules are followed • Is a science • There limited interaction between manager and subordinate • Focus is on specific tasks • Implementing of strategies • Systematic • This involves managers and staff at all levels • Focus is on organization units .

Strategy • Derived from Greek word “strategos” which means general • It is the determination of the basic long term goals & objectives of an enterprise and the adoption of the course of action and the allocation of resources necessary for carrying out these goals. .

• A company develops its strategies by matching its core competencies with industry opportunities • Strategies can be found at two levels i. • This is a future oriented plan • This is universally applicable to businesses as well as non-business organizations.Understanding strategies • Strategy is the determination of the basic long term goals and objectives of an enterprise and the adoption of the course of action and the allocation of resources necessary for carrying out these goals • To formulate strategies.e whole organization and for business units within an organization. one has to know the objectives and policies that should be followed. .

Role of strategies in business • • • • • • • Minimize risks Decision making To achieve objectives Facilitate organizing Control Motivation Optimum use of resources .

Can be written in explicit terms Policy • Statements or guidelines for decision making • It is a contingent decision • Guidelines for decisions which can be delegated downwards • It is an overall guide that governs and controls the managerial action • It is a general statement which can be expressed or implied . risks etc. • It is a specific statement.Strategies/ Policies Strategy • Major courses of action or plans which help in achievement of organizational goals • Rule for decision making • Cannot be delegated downward • This is concerned with uncertainties.

. tactics • Means by which previously determined plans are executed • Employed at lower levels of management to implement the plans • Framed for a short period of time • Fewer elements of uncertainty and risks • They are concerned with specific part of the organization • May be free from personal values of those who take tactical decisions.Strategies/ tactics Strategy • Major plans that are to be undertaken and allocated the resources to achieve these plans • Developed at top management • For a long period of time • Higher uncertainty in case of strategy formulation and implementation • Important for the entire organisation • Affected by the personal values of the person involved in the strategy formulation process.

Types of strategy • Corporate level • Business level .

.Corporate level strategy • Is about being in the right mix of businesses • The issues are – The definition of businesses in which the firm will participate – Deployment of resources among those businesses.

Corporate level strategy High • Single industry Degree of relatedness • Related diversification • Unrelated diversification Low High Extend of diversification .

Corporate level strategy details • Features Single industry • Only one industry Related diversification • Sharing of core competencies/ resources across businesses • P&G • J&J Unrelated diversification • Totally autonomous business in very different markets • GE • examples • Macdonals .

Corporate level strategy • • • • Stability Growth Retrenchment Combination .

Business level strategy • How to create and maintain competitive advantage in each of the industries in which the company has chosen to participate • Depends upon the mission and the competitive advantage • The corporate office and the business unit general manager are involved in identifying the mission of the individual business units. .

Planning models used • BCG – tow by two growth share matrix • GE– three by three industry attractiveness business strength matrix • There is a need to choose from the following – – – – Build Hold Harvest Divest .

BCG .

Analyze your portfolio using BCG • Oliver is the market leader in handsaws with 40% of the market. and Oliver has 15%. • Both Oliver and Manor Way have invested heavily in gardening tools and expect sales to increase in the future since people have more leisure time and a larger disposable income. • What about the javelins? . There is little house building and nowadays many amateurs use power tools. • Manor Way has a high share in the new market for sandpaper replacement products. • Manor way still make a range of barbed fish hooks which are now banned in some markets. Maner Way has 10% of the new market. Manor Way has only 25%. They have 5% of this growing market. Their Wayplate is a steel sandpaper replacement for which they have sole rights. However it is still quite profitable.

Manor way still make a range of barbed fish hooks which are now banned in some markets. .As you can see. each of the products is positioned upon the Matrix. and Oliver has 15%. Both Oliver and Manor Way have invested heavily in gardening tools and expect sales to increase in the future since people have more leisure time and a larger disposable income.they were thrown away long ago. You'll notice that the Javelins do not appear . Maner Way has 10% of the new market.

GE planning model .

Business unit competitive advantage • What is the structure of the industry in which the business unit operates • How should the business unit exploit the industry structure • What will be the basis of the business unit competitive advantage • Use the Porter’s five forces model .

Five force model .

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the interface between human behavior & the organization. • It is for the purpose of applying the above knowledge towards improving an organizations effectiveness • The determinants of organizational behavior – people – Structure – Technology .Behavior in organization's • This is a study of human behavior in organizational settings.

Impact of MCS on Organizational Behavior
• Good MCS influence behavior in a goal congruent manner. • They ensure that individual members actions taken to achieve personal goals also helps to achieve the goals of the organization.

The managers jobs
• Applying different functions and duties to the various organizational resources • They have to assist in executing the strategies • Most important function is controlling – the process of monitoring and correcting the actions of the organization and its people to keep them headed towards their goals. • Receiving & transmitting information are integral aspects • There are different skills required in order to get success in performing the task.

The organizational Hierarchies
Top level management Middle level management Lower level management
BOD/ CEO
Departmental heads/ Junior executives Foreman/ first line supervisors workers

Employees

• The MCS should be designed and operated with the principal of goal congruence in mind. . but the same is in the interest of the organization. • The system motivates people to take actions for their self interest.Importance of goal congruence • They goals of an organization's individual members should be consistent with the goals of the organization itself.

Factors affecting goal congruence • Formal – – – – – Rules Manuals System safeguards Task control systems Physical controls • Informal – – – – – – Work ethic Work culture Management style Perception and communication Informal organization Co-operation and conflict .

Types of organization • • • • Functional Business Matrix Network .

This is an organization in which we can define as a system in which functional department are created to deal with the problems of business at various levels. For example. The concept of Functional organization was suggested by F. This means that subordinates receives orders from several specialists. Taylor who recommended the appointment of specialists at important positions. Functional authority remains confined to functional guidance to different departments. This helps in maintaining quality and uniformity of performance of different functions throughout the enterprise. • . managers working above them. the functional head and Marketing Director directs the subordinates throughout the organization in his particular area.Functional organisation • Functional organization has been divided to put the specialists in the top position throughout the enterprise.W.

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• Each functional area is put under the charge of functional specialists and he has got the authority to give all decisions regarding the function whenever the function is performed throughout the enterprise. staff and function. marketing and personal relations.Features of Functional Organization • The entire organizational activities are divided into specific functions such as operations. • Complex form of administrative organization compared to the other two.Line. finance. • Three authorities exist. • Principle of unity of command does not apply to such organization as it is present in line organization. .

Specialists may be asked to judge the performance of various sections. . • Expansion.Greater efficiency is achieved because of every function performing a limited number of functions. • Effective Control.Better division of labour takes place which results in specialization of function and it’s consequent benefit.Specialization compiled with standardization facilitates maximum production and economical costs.Management control is simplified as the mental functions are separated from manual functions. • Efficiency. • Economy.Merits of Functional Organization • Specialization.Expert knowledge of functional manager facilitates better control and supervision. Checks and balances keep the authority within certain limits.

They may not agree on certain issues. • Lack of Co.ordination. Therefore.There may be conflicts among the supervisory staff of equal ranks. • Difficulty in fixing responsibility. there is no unity of command.The functional system is quite complicated to put into operation. coordination becomes difficult. • Costly. • Conflicts.Disciplinary control becomes weak as a worker is commanded not by one person but a large number of people.Because of multiple authority. Thus. especially when it is carried out at low levels. it is difficult to fix responsibility. .Demerits of Functional Organization • Confusion.Maintainance of specialist’s staff of the highest order is expensive for a concern.

Business unit .

This change in structure can facilitate strategy implementation by improving coordination between similar divisions and channeling accountability to distinct business units. The span of control becomes too large at top levels of the firm. They are managed as self contained planning units for which discrete business strategies can be developed. Two disadvantages of an SBU structure are that it requires an additional layer of management. controlling and evaluating divisional operations become increasingly difficult for strategists. which increases salary expenses. Increases in sales often are not accompanied by similar increases in profitability. size. and diversity of divisions in an organization increase. The SBU has its own business strategy. and the role of the group vice president is often ambiguous. These organizational entities are large enough and homogeneous enough to exercise control over most strategic factors affecting their performance.Features of a business unit • • Strategic Business Unit or SBU is understood as a business unit within the overall corporate identity which is distinguishable from other business . The SBU structure group’s similar divisions into strategic business units and delegate’s authority and responsibility for each unit to a senior executive who reports directly to the chief executive officer. • • • • • . objectives and competitors As the number.

"product b" customer service department. this company would organize functions within the company as follows: "product a" sales department. this is the most difficult system to maintain as the sharing power is delicate proposition. Weak/Functional Matrix: A project manager with only limited authority is assigned to oversee the cross. Functional managers provide technical expertise and assign resources as needed. • • • .functional aspects of the project. However.Matrix organization • The matrix structure groups employees by both function and product. "product b" sales department. Using the matrix structure. "product a" customer service department. "product a" accounting. The functional managers maintain control over their resources and project areas. a simple lattice emulating order and regularity demonstrated in nature. in order to take advantage of the strengths. It brings the best aspects of functional and projectized organizations. as well as make up for the weaknesses. Power is shared equally between the project manager and the functional managers. This structure can combine the best of both separate structures. Matrix structure is amongst the purest of organizational structures. Strong/Project Matrix: A project manager is primarily responsible for the project. An example would be a company that produces two products. Balanced/Functional Matrix: A project manager is assigned to oversee the project. A matrix organization frequently uses teams of employees to accomplish work. of functional and decentralized forms. "product a" and "product b". "product b" accounting department.

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act and react efficiently. In essence. managers in network structures spend most of their time coordinating and controlling external relations. usually by electronic means.the new network organizations contract out any business function. which aligns with its low-cost strategy. . H&M can be more flexible than many other retailers in lowering its costs. and innovation problem in markets and industries. While business giants risk becoming too clumsy to proact (such as). H&M is outsourcing its clothing to a network of 700 suppliers.Network organization • Another modern structure is network. that can be done better or more cheaply. The potential management opportunities offered by recent advances in complex networks theory have been demonstrated including applications to product design and development. more than two-thirds of which are based in low-cost Asian countries. Not owning any factories.

Formal control process Goals & strategies Rules Other information Reward Strategic planning Revise Budgeting Responsibility centre performance Report actual versus plan measurement Was performance satisfactory Revise Corrective action Feedback communication .

• Supervise internal audit & accounting control procedures • Prepare & analyze performance reports .Functions of a controller • Designing & operating information & control systems in an organization • Developing personnel in the organization & participating in the training & development of the personnel to carry out their functions effectively .

organizing. • He has divided loyalty . he has to do planning.Business unit controller • As a head of an organizational unit. co-ordinating and controlling functions.

Which level of managers are involved in it.Questions 2011 • Define MCS. How does MCS differ from simpler control processes. divisional and matrix organization. Where are the other two suitable • What are organization structure and management control implications of corporate level strategies. . • Briefly describe functional. which is the most appropriate from the point of control.

What are the merits/ demerits of creating SBUs • How does corporate level strategies differ from business unit level strategies. What are the informal factors that influence goal congruence. • Short note on MCS in a matrix organization • What do you understand by goal congruence. . How is the performance measured.Questions 2010 • Explain briefly the various stages of management control process citing salient features of each. What are the conditions required for creating an SBU. How does it relate to strategic planning & operations control • What is an SBU. • Briefly describe overall framework of management control. How is budgeting done at SBU under different strategic mission.

• Organizations with business divisions format have observed that divisional controllers experience divided loyalty in carrying out their functions. causing a possible dysfunction. • What do you understand by goal congruence. . How should such a situation be resolved. Define the role of controller which suits your suggestion. What are the informal factors that influence goal congruence. • Short note on MCS in a matrix organization.Questions 2009 • Explain briefly the various stages of management control process citing salient features of each.

Questions 2008 • Differences of strategy formulation and task control • Differences of management control and task control .

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