Chapter I : Management Control Systems CONCEPT OF MANAGEMENT CONTROL Management control is all about ensuring that the necessary

resources are mobilized and are deployed effectively so that the planned objectives are met without much difficulty. It is about the organization, methods and procedures adopted by management to provide reasonable assurance that available resources and assets are properly deployed and safe guarded against waste, mismanagement and frauds. For this appropriate systems and procedures are evolved and the related revenues and expenditures are properly recorded and accounted for, facilitating proper maintenance of accounts and the preparation of reliable financial reports. Management control covers the administrative, accounting and financial management areas. MANAGEMENT CONTROL DEFINED Different authors have defined management control differently.. (a) Robert Anthony and Vijay Govindrajan: Management control is a process by which managers influence other members of the organization to implement the organization strategy. (b) William Newman: considers the domain of control system to be the control function of management. According to him-control one of the basic phases of managing, along with planning, organizing and leading. Control is an integral and essential art of the management process and all the managerial efforts of an organization. (c) Robert Anthony: Management control is a total system that embraces all aspects of all the firms operations and assures that all operations are in balance. CHARACTERISTICS OF MANAGEMENT CONTROL The basic characteristics of management control are (a) Management control focuses on programs and responsibility centers. (b) Management control relies on two types of information viz. planned data and actual data. While planned data covers programs, budgets and standards; actual data provides information on what is actually happening in the organization. (c) Management control is a system that includes all the aspects of the organization. It aims at assuring that all aspects are in balance and are operating in close coordination. (d) no activity is possible unless adequate financial resources are available. This does not mean that non financial resource such as number of employess, rejections and spoilages, etc. is not important. These are well integrated with the financial resources. (e) Management control follows a definite pattern and time schedule. The entire process is elaborately defined and set in the policies and procedures manual. (f) Management control should be co-coordinated and integrated to other sub systems operating in the organization. This is the only way to ensure that the organization functions effectively and efficiently.

Explain briefly the various stages of management control Process citing salient features of each. OR Management control process in organisation PROCESS OF MANAGEMENT CONTROL Management control cannot be designed or evaluated without an understanding of the demands of the role being controlled. Greater the understanding greater is the chance of success. The U.S. Department of Transportation-Federal Highway Administration recommends the following management control process. (a) Organizing the process: this step includes all the actions required to manage the process including assignment of responsibilities for planning, directing, and controlling the process. It also includes development of an information system to track the status of evaluation and corrective actions. (b) Segmenting the organization: this step involves segmenting the organization into organizational units. Once this is done the programs and administrative functions in each unit are identified and integrated. (c) Risk assessments: once the administrative functions are identified a risk assessment is conducted to determine which program or functions are most susceptible to laws through waste, fraud or abuse. The risk assessment is conducted on a triennial cycle. (d) Planning further activities: the functions that are subject to significant risk are identified and noted. The organization then develops plans and schedules for the performance of activities designed to strengthen management control systems. These include improving monitoring procedures, issuing or clarifying instructions, requesting an audit, identifying management priorities and resource constraints. (e) Management control evaluations: The evaluation process is initiated to determine where new controls may have to be created or existing controls need to be strengthened. (f) Corrective actions: The organization analyses the recommendations resulting from risk assessment, control evaluations and other related activities. The results are then used for initiating timely and appropriate corrective actions. (g) Reporting: The results of the risk assessment, evaluations and the corrective actions are put in the form of a report and forwarded for further action the report should be prepared regularly giving details of the ongoing evaluations and planned corrective actions. The planned corrective actions naturally lead one towards organizing the process once again and this circular flow of the control process continues.

FACTORS AFFECTING MANAGEMENT CONTROL Effective implementation of management control involves the following factors: (a) Identify the key factors in the business operations. These factors need to be controlled in order to achieve the given targets or goals. (b) The basis for establishing standards of performance such as budgets, standard cost, ratios, etc. these variables form the basis of comparison with actual. (c) Define the information required for measuring the performance. The date may relate to accounting information or operational information. (d) Establishing a reporting system is essential to identify and evaluate performance and reporting the results to superiors. (e) The process of measuring may lack objectivity and thus get biased. This is a common problem faced in social sciences. (f) The traditional measurement system often conceals more than it highlights. The need here is for management control that focuses attention on crucial events and results. (g) The control system should be able to monitor the external environment for it is this environment that affects the earning potential of the organization. (h) Management control specialists should be able to understand and report on measurable and non-measurable variables, the past and the future and the internal and external environment. Failure to do this renders management control ineffective.

DIFFERENCES BETWEEN STRATEGIC PLANNING, MANAGEMENT CONTROL AND OPERATIONAL CONTROL While strategic planning, management control and operational control are inter-related and inter-dependent, there are differences in the fundamental characteristics of these activities. These are listed in the table on next page: A a) Level Strategic Planning Management Control Evolving goals and Performance providing evaluation oriented. resources. Practiced at all Concentrated at the levels top level Focuses on one Focuses on the aspect at a time whole operation that obviously impacts the organizational effectiveness Operational Control Focuses on individual tasks & activities. Confined to the supervisory level. Focuses on efficiency of the individual

b) Focus

c) Complexity

Complex process as many variables have to be simultaneously analyzed in order to evolve an effective strategy d) Element of Involves adoption Judgement of creative and analytical data for formulating foals. This is not possible without judgement. e) Information Information is collected from external sources & is specific to the problem. The information lacks accuracy

Comparatively less Simple as the complex as it attention is on involves simple activities administrative only activities Involves judgment as managers go by the rule book and pursue prescribed procedures Data is financial in nature and is integrated. The analysis includes historical data based on which future approximations are evolved Data is tailor-made for specific operations & is often non-financial. The data is often in real time

f) Purpose Estimates g) involved

of Indicates expected Leads to results results

desired Results in desirable changes in future strategies. Deals with responsibility centres and as such involves supervisors

Persons It is a staff function. Deals with Involves top evaluation, management monitoring & controlling organizational sub units. It involves both top management & line managers

h) discipline

from Originates from Originates from social psychology economics & other physical sciences i) Time Horizon Long drawn process Involves weeks, Involves day-to-day spread over years months & years activities j) Nature of Requires crative & Requires Follows directions activity analytical skills administrative and that are generally persuasive skills. listed in the rule book.

Source Originates economics

Strategic Planning Strategic planning if simply defined it just involves asking following questions; 1. Where are we? What is our present market position? 2. Where do we want to go? What should our position be? 3. How do we get there? 4. When should be there? 5. Whoclients, prospective clientswill help us to get there? 6. How do we measure and evaluate our progress against the plan? But in practice so much of activity is involved in answering the above questions. The fundamental difficulty in strategic planning emanates from the fact that organizations have to work in the environment consisting of various forces influencing the business in various ways. The dynamic nature of the environment also adds to the complexity of the strategic planning. Mistakes in assessing the likely results of a move like introducing a new product, and stepping in to new markets may sometimes prove costlyas was illustrated in the IBMs example. Hence, utmost care must be exercised in strategic planning. The strategic planning involves the following methodology 1. Information-gathering regarding the forces like, organizational structure, orientation of management, economic performance over the past five years, and competitor information, skills of the people in the organization. 2. Analysis and processing of the gathered information in the light of, Firm strengths and weaknesses, Economic performance; firm resource evaluation; Current services provided; Client base opportunities and vulnerabilities; Client perception and service evaluation; External market (economic and industry) factors evaluation; and Competition. 3. Development of plan documentation 4. Making it approved 5. Implementing it and 6. Control and feedback. Adherence to the above said methodology will complete the process of strategic planning.

Strategic planning consists of two aspects goal setting and strategy formulation. Strategic planning involves long term planning and is carried out at the top level of management. The characteristics of strategic planning are as follows: 1. Strategic planning is irregular in nature, i.e. problems, opportunities and solutions do not arise at regular intervals. They are dealt with whenever they are perceived. 2. The process of strategic planning requires a number of estimates and variables to show the expected results of the plan. Therefore, strategic planning is a complex process. 3. The information necessary for strategic planning is derived from the external environmental. The data necessary for strategic planning are market analysis, technological developments etc. 4. Strategic planning essentially involves the process of goal setting. This requires the communication of objectives, policies, guidelines, decisions and results throughout the organization. Since, strategic planning is carried out at the top levels of management and involves relatively few members, communication is simple. 5. Strategic planning is a creative and analytical process. It is more of an analytical process because goal setting during the planning process is done only after analyzing the strengths, weaknesses, opportunities, and threats faced by the organization. However, it is also a creative process because it involves the evaluation of new opportunities and ideas from time to time. 6. Strategic planning is a long-term process and the end result of strategic planning is the generation of policies and goals for the organization. 7. The process of strategic planning is greatly affected by turbulence in external environments. 8. It is extremely difficult to appraise the performance of strategic planning as there are no prescribed standards against which the performance can be measured. 9. Strategic planning relates to some part of the organization rather the total entity.

MANAGEMENT CONTROL SYSTEMS Management Control system refers to a framework or set-up by which the manager controls the actions of his subordinates and the entire operation of an organization. Management Control System facilitates target fixation, collection of information, comparison of actual with targets, identifying and reporting variations and initiating suitable action to ensure attainment of objectives. NATURE OF MANAGEMENT CONTROLS The nature of Management Control System is clearly reflected in the following characteristics: (a) It focuses on those activities that facilitate attainment of targets of responsibilities centres. (b) It functions on the basis of two sets of information viz. planned data and actual data. While planned data includes programmes, budgets and standards, actual data includes actual happenings both within the organization and in the external environment.

(c) Management Control System covers all functional aspects of a companys operation. It ensures that all parts of the operations are in balance with one another. (d) Management Control System is built around financial variables, although nonmonetary variables such as number of employees, rejection and spoilage rates,etc. are also taken in to consideration. (e) Management Control System follows a definite pattern and sequence of activities. This is set forth in the policy and procedure manual. (f) Management Control System is a coordinated and integrated system. This is reflected by the fact that data collected for different purpose is reconciled for evaluation and measuring organizational performance.

SCOPE OF MANAGEMENT CONTROL SYSTEM The management control system process involves communications and interactions in the form of memoranda meetings and conversations. In addition it also includes the following: (a) Programs/Goals: This is a process of deciding the activities predetermined objectives. The process also tries to determine the resource process as well as the resource requirement for achieving the goals. (b) Budgeting: The process of budgeting involves conversion of each programme into monetary terms. This exercise is carried out for each and every responsibility centre. (c) Operating and Accounting: This process is concerned with keeping records of the resources that are actually consumed and the revenues actually earned. Responsibility centers identify the costs and revenues. This data becomes the bases for comparing actual with budgeted, so that deviations are identified, their causes investigated and corrective measures introduced. (d) Reporting and Analysis: No control program can function in the absence of information. Every manager requires both monetary and non-monetary information pertaining to internal and external environment. This helps the manager to coordinate the plans and activities of responsibility centres. Explain briefly the likely features of the Ideal Management control system in Organisation ESSENTIALS OF A GOOD MANAGEMENT CONTROL SYSTEM The success of Management Control System depends on the following factors: (a) Effective Planning: Organization function on the basis of plans, policies and standards. These are communicated to managers who have performance

responsibility. Thus control depends on effective planning without which organization never succeed in analyzing their accomplishments. (b) Involvement of Top Management: The attitude and involvement of the top management determines the effectiveness and efficiency of the Management Control System and ensures timely action for removing the causes of poor performance. (c) Motivation of Employees: Motivation represent an urge to perform and excel. In the absence of motivation, goals often remain unachieved. Dalton and Lawrence tried to establish a correlation between motivation and control. They found that the controls are not appreciated. As such implementing control systems results in reduced motivational, levels amongst subordinates. Managers can motivate subordinates through the following measures: Involving subordinates in goal setting. Focusing on facts rather than on control. Being sensitive to the needs of the subordinates. Evolving appropriate incentive systems. Encourage goal congruency i.e. correlate individual and organizational goals. Evolve effective performance management system. (d) Establish proper communication mechanism: Effective communication facilitates timely flow of information across all levels of management. Communication is useful in communication organizational goals. Practicing control Facilitating reporting

Elucidate the importance of a well structured control system of an organization, and the various activities involved in such management control systems The role of management is to plan, organize integrate and interrelate organizational activities to achieve organizational objectives. This role is facilitated through management control systems. A management control system is a set of interrelated communication structures that facilitates the processing of information for the purpose of assisting managers in

coordinating the parts and attaining the purpose of an organization on continuous basis. Control systems are employed in all organizational. They are concerned with the work of coordination, resource allocation, motivation and performance measurement. The purpose of management control system is to assist management in the coordination of the activities of the organization and in the steering of those activities toward the achievement of the firms overall purposes, goals and objectives. A control system brings unity out of the diverse activities of an organization. The purpose of the control system is to maintain that desired state. Information about the actual state of the organization is compared with the desired state, and if there is a significant difference, action is taken. Another important purpose of the control system is to ensure that the work of each part of the organization is in harmony with that of the other. Control systems are designed to bring about unity of purpose in an organization through the use of diverse efforts of individuals. Control systems in an organization involve the following activities: i. Planning-decides what the organization should do ii. Coordinating the activities of the organization iii. Communicating information to different levels of the hierarchical structure iv. Evaluating information and deciding the action to be taken. v. Influencing people to change their behavior. Describe the illustrate significance of human behaviour pattern in Management control. The control process being behavioral in nature, an understanding of how managers would react to formal systems is essential for the designer of the control system. There being an intimate link between organization behavior and the control systems, knowledge of what motivates managers to achieve results and what organizational processes lead to better goal congruence between the individual and the organizational is essential. The key behavioral concepts that are relevant to control system are Perception Interactions among various levels of management take place within a control Process. In such interactions, it is important to determine what the other party wants because it may not be possible to specify the actions in advance with complete clarity. Also, a different impression may be gathered by managers, in informal discussions, about the seriousness of senior management for achievement/nonachievement of results. The control system may also be perceived by them as being unjust and unfair, especially if some colleagues obtain rewards on the basis of manipulation of performance or through credit snatching. The perception of managers in terms of what is expected of them will thus determine the success of the control system. Since organizations have two dimensions, formal and informal, communication can be manipulated at various levels. Attitudes and Beliefs Attitudes and beliefs are shaped by a manager's learning and his experiences in, social, religious, cultural and organizational settings, and are important determinants of managerial behavior. Since the achievement of targets to some extent depends upon a

positive attitude towards work, attitudes play an important role in the context of management control. Attitudes serve as a frame of reference; provide a benchmark against which facts and events are viewed. If the person in charge of a particular responsibility center gets snubbed without reason in a review meeting, these experiences and the belief that his superior wants to settle scores with him influences his actions in future meetings. Motivation Appropriate stimuli can help influence managerial behavior. It is, needs and motives that influence human beings to behave in the manner they do. It is necessary to know what types of motives propel managers to act in a certain way. The necessary motivating stimulus has to be provided by the top management in order to direct managerial behavior towards attainment of overall organizational goals. Various needs such as physiological, safety, love, ego and self-actualization needs, indicated in Maslow's model of needs hierarchy, have to be catered to in order to motivate managers positively. According to Herzberg's two-factor model, there are two sets of factors, namely, factors that may prevent dissatisfaction (hygiene factors) and factors that may provide satisfaction (motivators). Salary, working conditions, company policy, supervision and work group constitute hygiene factors while motivators include advancement, development, responsibility, recognition, achievement, and the work itself. This framework helps us to understand what motivates managers toward achievement of targets. Mc Clelland identified three basic needs - need for achievement, need for power and need for extension, of which need for achievement is considered significant. Calculated risk taking, personal responsibility for success and failure, and the use of feedback for improving performance characterize achievement motivation. An urge to make an impact, to influence and to control other persons, situations and events characterizes need for power. Concern for others, to be of service to the community and society at large characterizes need for extension. The management control process, should give managers the opportunities to fulfill these needs. Goal Congruence Every individual has his personal goals to achieve when he joins an organization. Just to get a job that assures safety and monetary rewards may be a personal goal. There may at times arise a conflict between individual and organizational goals, more evident in nonprofit organizations such as research and development institutions, and educational institutions. In such organizations, the individual may grow bigger than the ,organization and this may lead to goal conflict. The control system should be so designed as to integrate personal goals with organizational goals, and thus bring about goal congruence. Since managers tend to act according to their perceived self-interest, the' control system must also ensure that these actions of the managers also serve the interests of the organization. The control system should discourage individuals from acting in opposition to the interests of the organization. A close link exists between motivation and goal congruence. Motivation involves desire for a specific goal and the pursuit of the goal. Hence, it has two aspects, namely congruence and effort. The autonomy given to the managers, i.e., the degree of freedom to make decisions, affects the achievement of goal congruence. Therefore, in order to motivate managers to achieve organizational goals, the three important aspects of goal

congruence, managerial effort and autonomy should be given due consideration while designing a control system. Inter-unit Conflict and Cooperation Conflict and cooperation are fundamental to all living systems. The phenomenon of predator-prey relationships and other similar situations in life can also be observed in the context of organizations. Due to the conflicting goals of various responsibility centers, conflicts are inherent among them. The conflict that is generally evident between two mutually interdependent divisions due to each trying to optimize its profits, is resolved by the top management through appropriate transfer price mechanism. An important task of senior management is resolution of inter-unit conflicts, necessary inputs for which can be provided by the control system. A certain level of conflict is desirable for keeping the organization healthy. It should, however, not be allowed to reach unmanageable proportions, as this may lead to dysfunctional consequences. Conflict, arises partly due to competition; therefore, management should encourage healthy competition. Since the achievement of overall goals requires collaborative efforts, the control system should foster cooperation among various responsibility centers through appropriate coordinative mechanisms, such as coordination committees consisting of those in charge of strategic business units. Managerial Styles Management control process involves determination of targets for implementation which can be done using two diametrically opposite styles-the authoritarian (autocratic) and the democratic. While an authoritarian leader sets the standards without consulting the people expected to achieve them, a democratic leader makes sure that the policies, strategies and standards are determined by the group. While an autocratic leader unilaterally decides what is to be done and assigns specific tasks to each individual, a democratic leader decides along with the group what is to be done and lets the group decide who is to do what and ensures that a decision is made. An autocratic leader quite often does not indicate the overall purpose of the activity and just tells the people what is to be done, whereas a democratic leader ensures that everybody understands the overall goals, objectives and plans. Further, while an autocratic leader gives general feedback which is often punitive, a democratic leader gives specific feedback, uses mistakes as an opportunity for coaching and guidance, and tolerates failures. Although autocratic and democratic styles, in theory, represent two ends of a spectrum, in reality, leaders use a mix of both styles. Thus, managers usually use a mix of theory X and theory Y, and rarely theory X or theory Y exclusively. Force Field Analysis Making use of the field concepts of physics, Kurt Lewin developed the field-force analysis according to which, there are certain facilitating factors (driving forces) and certain inhibiting factors (restraining forces) in every situation faced by an individual. The forces that push the existing situation toward the desired goals are driving forces while those that hinder the movement toward the goals are restraining forces. Lewin's force-field analysis framework is closely interlinked with them management control process. Review meetings for performance appraisal of responsibility' centers focus on identifying the facilitating and inhibiting factors for the achievement of targets. Once identified, these factors are further divided into factors that are within the control of the

manager of the responsibility center and those beyond his control: The reasons for nonachievement are analyzed and a remedial action plan is drawn up. Resistance to Change Organizations generally tend to follow the law of inertia even after the introduction of control systems. There is an inbuilt tendency on the part of the organization to resist the movement of the organization from one level of equilibrium to a higher level of equilibrium. The designer of the control systems therefore needs to have a proper understanding of resistance to change. The resistance to change depends upon the size and age of the organization, technology, age of managers, etc. Minimizing resistance to change and making the organization more effective is an important objective of a formal control system. Entrapment Managers sometimes hesitate to backtrack or make changes that can be interpreted as an admission of error. Rather than taking any policy shift, they get entrapped because of their own previous decisions and hence spend more time and energy trying to justify their earlier decisions. Such entrapment is visible in several organizational conflicts. When faced with negative results, managers intensify their efforts by putting in more resources than are justifiable in the given situation. More specifically, entrapment has been defined as follows: Entrapment is formally defined as "a special form of escalation in which parties involved expend more of their time, energy, money or other resources in a conflict than seems appropriate or justifiable according to some external standards." The term escalation refers to an increase in the perceived or actual size of a conflict. Compromising and Sacrificing According to Herbert Simon, managers depict a 'satisficing' behavior and thus managers, in real life tend to seek satisficing solutions rather than optimal solutions. Several times, a compromising solution rather than a satisficing or optimal solution is sought by managers. Though logically, a situation may demand a particular decision, due to pressures and counter pressures, the actual decision taken may be a compromising solution. A particular ministerial position may be given, not necessarily to the most able person but to a person representing a particular pressure group. Dynamic situations requiring constant readjustments, because of changes in underlying forces, are better tackled through compromise. Besides 'satisficing,' 'compromising' is thus an important aspect of managerial behavior at least in certain specific contexts. Another aspect of importance is 'sacrificing'. A sacrificing behavior may be adopted by the person in charge of one responsibility center towards other responsibility centers and the same behavior can be observed in transfer price decisions, particularly in those cultures in which a feeling of sacrificing is inculcated, as in Japan and India. For example, it has been observed in the case of dairy cooperatives in Gujarat that one unit willingly sacrifices the savings it could have otherwise achieved in order to promote growth and stable coexistence of other 'sister units. Socio-Cultural Influences The profound teachings of various scriptures of different religions, now a part of the Indian cultural heritage, have greatly influenced at least some of the Indian managers and businessmen. Cultural and religious stimuli affect every person in the society, explicitly or implicitly. To some extent, the organization culture too gets influenced by these stimuli.

Culture and religion, through their impact on the collective subconscious, affect managerial actions. The influence of these scriptures on the functioning of organizations has been recognized by Western authors. Indian writers, too, have made efforts to look into our cultural heritage and draw lessons from it for managing modem corporate organizations. The meaningful learnings extracted from our scriptures could assist managers in performing their tasks more effectively. Since scriptures shape attitudes and beliefs, their impact on management control process is revealed implicitly or explicitly, in the manner of handling certain situations by managers. Need for contingency approach in control system Contingency theory was propounded in response to the universalistic approach that argues that there is an optimal scheme for control design which is applicable in all settings and firms. In contrast, contingency theory states that the appropriateness of different control systems depends on the business setting. Contingency approach is an extension of scientific management theory. The theory also states that the appropriateness of different control systems depends on the setting of the business. The term contingency implies that the structure and process are contingent on various external and internal factors. Contingency theory focuses on the interaction between the organization and its environment. It is assumed that the organization imports energy and resources from the environment and converts them into goods, services and byproducts. The goods, services and by-products are then exported to the environment, thus changing the environmental circumstances in which the organization operates. Technology It bas been recognized that technology influences the design of control systems. New computer systems enable companies to respond to changes in the environment an refashion corporate policies rapidly. Technology can help managers to use resources more effectively and to collect data for strategic and operational decision-making. The increased use of technology has brought in new control systems that can help managers identify specific problems in administration or factory operations. Organizational structure A modern organizations structure should be such that it can cope with a high degree of uncertainty as new tasks are constantly incorporated into the production or work process. The contingency approach helps in designing a control system that meets the demands of complex organizational structures. Environment In order to survive, organizations have to adapt to the demands of their environment management controls in an organization are greatly influenced by the type of competition faced by the firm. The contingency approach helps to develop a highly sophisticated control system in line with the intensity of competition the firm faces. Contingency theory greatly expanded the scope of strategy and management control