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Q.1. State and explain the factors that affect Management Control? Ans: Management Control is The process by which managers influence other members of the organization to implement the organizations strategies.

The factors that affect Management Control are: Beliefs systems These systems give direction to the organization control by formulating its mission, strategy and core values. These systems consist of a set of organizational definitions which are formulated, formally communicated and frequently reconfirmed by senior management to provide values, purpose and direction to the organization. Beliefs systems are used to inspire and direct the search for new opportunities. This type of system can be denoted as behavioural. Boundary systems These systems indicate risks to be avoided and actions which organizational members are expected not to take. They provide sets of working arrangements, codes of conduct and rules and procedures. Boundary systems are used to set limits on opportunity-seeking behaviour. This type of system can be denoted as instrumental.
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Diagnostic control systems These systems measure and monitor the execution of the mission and strategy with predefined performance indicators. On the basis of the feedback and feed forward information provided by these systems, managers take corrective and preventive actions to keep the organization on track. These systems also foster the achievement of predefined targets by using rewards. Diagnostic control systems are used to motivate, monitor and reward achievement of specified goals. This type of system can be denoted as both instrumental and behavioural. Interactive control systems These systems are formal communication systems that managers use to involve themselves in activities of employees and employees use to communicate bottomup ideas and initiatives. These systems foster dialogue between the various organizational levels. Interactive control systems are used to stimulate organizational learning and the emergence of new ideas and strategies. This type of system can be denoted as behavioural.

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Q.2. What factors influence the success of Management Control System? Ans: The following factors are necessary for the success of a Management Control System: 1. Responsibility structure, Content, Integrity, Manageability and Alignment For the success of the Management Control System, the organization needs to have a clear and formalized responsibility structure, in which a clear parenting style and clear tasks and responsibilities have been defined. These are then applied consistently at all management levels. The management control system has a content which enable organizational members to use financial and non-financial performance information. This information has a strategic focus through the use of critical success factors and key performance indicators. The performance information is integer which means it is reliable, timely and consistent. It is also manageable: management reports and management control systems are user-friendly and more detailed performance information is easily accessible through information and communication technology systems. Finally, other management systems in the organization, such as the human resources management system, are well aligned with the management control system, so what is important to the organization is regularly evaluated and rewarded. 2. Accountability The effectiveness of the performance management system is also determined by the degree in which organizational members actually feel responsible for their results and their willingness to use the system to obtain performance information which may help to improve the results. A noncommittal organizational climate is a real threat for the desired performance-orientation of an organization. The degree in which one feels responsible is expressly different from the degree in which one is made responsible. To stimulate feelings of responsibility, an organization has to take two elements into consideration: relevance of controls and freedom to act. The degree in which organizational members feel responsible for their results is connected to the relevance of the performance indicators which measure their responsibility area. The more relevant these indicators are in the opinion of the organizational members, the stronger the stimulus will be for them to get involved themselves. For example, an operational manager will generally not be stimulated to take action when the results of the overall company are lagging. However,
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when it is made clear to him that the lagging results of his own unit are the cause of this, he will be strongly motivated to take responsibility and work on improving the results. It shows that the defined CSFs and KPIs have to be evaluated regularly on their relevancy for control purposes by asking the question: Do they still give an accurate picture of the performance of a managers responsibility area and its link with overall organizational performance? After all, there may have been many internal and external changes since the indicators were originally formulated and the content of the performance information may thus no longer be representative. Taking responsibility for results requires that organizational members are given a certain leeway so that they have the opportunity to influence their results favourably and the freedom to take action. This implies that people have to be authorized by their managers to take independently and swiftly action on problems without having to ask permission first. It also asks for involvement of organizational members in defining the right KPIs for their responsibility areas. 3. Management Style A manager with an effective style is able to explicitly steer on results while simultaneously giving support to employees to help them in obtaining the desired results. Steering entails making clear agreements, monitoring, discussing progress issues and calling upon the own responsibility of employees. Support asks for a coaching management style which is aimed at enlarging peoples insight into their possibilities for influencing their own results and at stimulating their feelings of responsibility. When the management style is restricted to only steering, a directive style without much regard for the importance of individual responsibility will be the result. However, when the management style is limited to only supporting and coaching, decreased commitment and disorientation will be the result. The combination of result-oriented steering and coaching equals the style of result-oriented coaching. To stimulate this management style, an organization has to take three elements into consideration: visible commitment, clear steering and support. Visible commitment entails that management uses the performance management system in such a way that it is clear and visible to the other members of the organization. To focus the attention of organizational members maximally on the desired performance, forceful steering by management is necessary. Forceful steering is characterized by setting clear goals, drafting clear improvement plans, monitoring
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progress in a disciplined way and swiftly formulating additional corrective actions if necessary. While steering is primarily focused on increasing accountability, support is aimed at stimulating the sense of individual responsibility of organizational members. 4. Action Orientation Action orientation is the degree in which performance information actually stimulates action taking to improve performance. Action orientation is a good predictor of the effectiveness with which performance management is being applied. After all, if performance information does not lead to action, the added value of this information will be nil. To stimulate action orientation, an organization has to take three elements into consideration: integration, corrective action management and preventative action management. Integration is the degree in which performance information is integrated in daily operational management. Corrective action management entails organizational members taking immediate action on lagging results in order to influence these results favourably. Preventative action management entails organizational members taking preventive action on unfavourable prognosis in order to prevent problems from actually occurring.

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Q.3. Write a note on Strategic Planning, Management Control and Operation Control and its relationship? Ans: Strategic Planning: It is an organization's process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy. In order to determine the direction of the organization, it is necessary to understand its current position and the possible avenues through which it can pursue a particular course of action. Generally, strategic planning deals with at least one of three key questions: 1. "What do we do?" 2. "For whom do we do it?" 3. "How do we excel?"

In many organizations, this is viewed as a process for determining where an organization is going over the next year ormore typically3 to 5 years (long term), although some extend their vision to 20 years.

The key components of 'strategic planning' include an understanding of the firm's vision, mission, values and strategies. The vision and mission are often captured in a Vision Statement and Mission Statement. 1. Vision: outlines what the organization wants to be, or how it wants the world in which it operates to be (an "idealised" view of the world). It is a long-term view and concentrates on the future. It can be emotive and is a source of inspiration. For example, a charity working with the poor might have a vision statement which reads "A World without Poverty." 2. Mission: Defines the fundamental purpose of an organization or an enterprise, succinctly describing why it exists and what it does to achieve its vision. For example, the charity above might have a mission statement as "providing jobs for the homeless and unemployed." 3. Values: Beliefs that are shared among the stakeholders of an organization. Values drive an organization's culture and priorities and provide a framework in which decisions are
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made. For example, "Knowledge and skills are the keys to success" or "give man bread and feed him for a day, but teach him to farm and feed him for life". These example values may set the priorities of self-sufficiency over shelter. 4. Strategy: Strategy, narrowly defined, means "the art of the general." A combination of the ends (goals) for which the firm is striving and the means (policies) by which it is seeking to get there. A strategy is sometimes called a roadmap which is the path chosen to plough towards the end vision. The most important part of implementing the strategy is ensuring the company is going in the right direction which is towards the end vision.

Organizations sometimes summarize goals and objectives into a mission statement and/or a vision statement. Others begin with a vision and mission and use them to formulate goals and objectives.

Many people mistake the vision statement for the mission statement, and sometimes one is simply used as a longer term version of the other. However they are meant to be quite different, with the vision being a descriptive picture of future state, and the mission being an action statement for bringing about what is envisioned (i.e. the vision is what will be achieved if the company is successful in achieving its mission). For an organisation's vision and mission to be effective, they must become assimilated into the organization's culture. They should also be assessed internally and externally. The internal assessment should focus on how members inside the organization interpret their mission statement. The external assessment which includes all of the businesses stakeholders is valuable since it offers a different perspective. These discrepancies between these two assessments can provide insight into their effectiveness.

Management Control: Management control can be defined as a systematic effort by business management to compare performance to predetermined standards, plans, or objectives in order to determine whether performance is in line with these standards and presumably in order to take any remedial action required to see that human and other corporate resources are being used in the most effective and efficient way possible in achieving corporate objectives. Also control can be defined as "that
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function of the system that adjusts operations as needed to achieve the plan or to maintain variations from system objectives within allowable limits". The control subsystem functions in close harmony with the operating system. The degree to which they interact depends on the nature of the operating system and its objectives. Stability concerns a system's ability to maintain a pattern of output without wide fluctuations. Rapidity of response pertains to the speed with which a system can correct variations and return to expected output. A political election can illustrate the concept of control and the importance of feedback. Each party organizes a campaign to get its candidate selected and outlines a plan to inform the public about both the candidate's credentials and the party's platform. As the election nears, opinion polls furnish feedback about the effectiveness of the campaign and about each candidate's chances to win. Depending on the nature of this feedback, certain adjustments in strategy and/or tactics can be made in an attempt to achieve the desired result.

Operational Control: Operational control systems are designed to ensure that day-to-day actions are consistent with established plans and objectives. It focuses on events in a recent period. Operational control systems are derived from the requirements of the management control system. Corrective action is taken where performance does not meet standards. This action may involve training, motivation, leadership, discipline, or termination.

Evaluation Techniques for Operational Control: 1. Value chain analysis: Firms employ value chain analysis to identify and evaluate the competitive potential of resources and capabilities. By studying their skills relative to those associated with primary and support activities, firms are able to understand their cost structure, and identify their activities through which they can create value. 2. Quantitative performance measurements: Most firms prepare formal reports of quantitative performance measurements (such as sales growth, profit growth, economic value added, ration analysis etc.) that managers review at regular intervals. These measurements are generally linked to the standards set in the first step of the control process. For example if sales growth is a target, the firm should have a means of
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gathering and exporting sales data. If the firm has identified appropriate measurements, regular review of these reports helps managers stay aware of whether the firm is doing what it should do. In addition to there, certain qualitative bases based on intuition, judgement, opinions, or surveys could be used to judge whether the firms performance is on the right track or not. 3. Benchmarking: It is a process of learning how other firms do exceptionally high-quality things. Some approaches to bench marking are simple and straightforward. For example Xerox Corporation routinely buys copiers made by other firms and takes them apart to see how they work. This helps the firms to stay abreast of its competitors improvements and changes. 4. Key Factor Rating: It is based on a close examination of key factors affecting performance (financial, marketing, operations and human resource capabilities) and assessing overall organisational capability based on the collected information.

From these definitions it can be stated that there is close link between planning and controlling. Planning is a process by which an organisation's objectives and the methods to achieve the objectives are established, and controlling is a process which measures and directs the actual performance against the planned goals of the organisation. Thus, goals and objectives are often referred to as Siamese twins of management. The managerial function of management and correction of performance in order to make sure those enterprise objectives and the goals devised to attain them being accomplished.

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Q.4. Write a note on Financials Goals: ROI, RI. Ans: Return on Investment (ROI) It is the measure of the earning power of assets. The ratio reveals the firm's profitability on its business operations and thus serves to measure management's effectiveness. It equals net income divided by average total assets; also called rate earned on total assets. Other versions of ROI exist, such as net income before interest and taxes divided by average total assets. Return on investment is a commonly used measure to evaluate divisional performance.

Residual Income (RI) It is the operating income that an investment centre is able to earn above some minimum return on its assets. It is a popular alternative performance measure to Return on Investment (ROI). RI is computed as: RI = Net Operating Income - (Minimum Rate of Return on Investment Operating Assets)

Residual income, unlike ROI, is an absolute amount of income rather than a rate of return. When RI is used to evaluate divisional performance, the objective is to maximize the total amount of residual income, not to maximize the overall ROI percentage figure. For example, assume that operating assets are $100,000, net operating income is $18,000, and the minimum return on assets is 13%. Residual income is $18,000 - (13% $100,000) = $18,000 - $13,000 = $5000. RI is sometimes preferred over ROI as a performance measure because it encourages managers to accept investment opportunities that have rates of return greater than the charge for invested capital. Managers being evaluated using ROI may be reluctant to accept new investments that lower their current ROI, although the investments would be desirable for the entire company. Advantages of using residual income in evaluating divisional performance include: 1. It takes into account the opportunity cost of tying up assets in the division; 2. The minimum rate of return can vary depending on the riskiness of the division; 3. Different assets can be required to earn different returns depending on their risk: 4. The same asset may be required to earn the same return regardless of the division it is in; and 5. The effect of maximizing dollars rather than a percentage leads to goal congruence.
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Q.5. Define ROI; give its advantages and disadvantages. Is ROI an end of financial objectives? Explain. Ans: Return on Investment A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. The return on investment formula:

Advantages There are three apparent benefits of an ROI measure: 1. It is a comprehensive measure i.e. anything that affects financial statements is reflected in this ratio. 2. ROI is easy to calculate, easy to understand, and meaningful in an absolute sense.E.g.an ROI of less than 5% is considered low on an absolute scale, and an ROI over 25% is considered high. 3. It is a common denominator that may be applied to any organizational unit responsible for profitability, no matter what its size or in what business it practices. The performance of different units may be compared directly to each other .Also, ROI data is available for competitors that can be used as a basis for comparison, which is not possible for EVA approach for comparison.

Disadvantages 1. The ROI approach provides different incentives for investments across business units. For example a business unit that is currently achieving a ROI of 30% would be most reluctant to expand unless it is able to earn a ROI of 30% or more on additional assets; a lesser return would decrease its overall ROI below its current 30% level. Thus this business unit might forgo investment opportunities whose ROI is above the cost of capital but below 30%. Similarly a business unit that is currently achieving a low ROI say 5%, would benefit from anything over 5% on additional assets. As a consequence, ROI creates a bias towards little or no expansion in the high profit business units, while at the

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same time, the low profit units are making investments at rates of return well below those rejected by high profit units. 2. Decisions that increase a centres ROI may decrease its overall profits. For instance in an investment centre whose current ROI is 30%,the manager can increase its overall ROI by disposing of an asset whose ROI is 25%.However if the cost of capital tied up in the investment centre is less than 25% the absolute rupee profit after deducting capital costs will decrease for the centre.

ROI - not the end of financial objectives It must be noted that return on investment is a ratio. The term ratio refers to the numerical or quantitative relationship between two items/variables. The underlying principle of ratio analysis is that it makes related information comparable. However ratios by themselves mean nothing. Thus, the return on investment must be compared with: 1. A norm or a target 2. Previous ROI achieved in order to assess trends, and 3. The ROI achieved in other comparable companies

Thus, ROI should be considered only as a tool for analysis rather than as the end of financial objectives. There are more objectives that a financial manager of a firm should aim at fulfilling.

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Q.6. What is EVA? How is it superior and what are its drawbacks? Process of implementation and improvement in EVA, explain with a numerical. Ans: 1. EVA is a financial performance metric developed by STERN STEWART & CO. This financial performance measure captures the true economic profit of an organisation in terms of wealth creation for the shareholders. EVA is net operating profit minus an appropriate charge for the opportunity cost of all capital invested in the company. 2. EVA = NOPAT (Net operating profit after tax)-(Capital x Cost of Capital) 3. Net operating Profit after tax (NOPAT) is the profit earned by a business or company from its operating activities after tax deduction. It is a good measure of profitability as it does not include items such as income from investments and goodwill amortisation, which are non-operating items by nature. 4. Capital is the amount invested in the business or company. 5. The cost of capital is the opportunity cost of all the capital invested in the business, that is, it is the minimum rate of return if the money is invested in other investment opportunities of comparable risk. It is calculated as the weighted sum of the cost of debt and the cost of equity.

Therefore, EVA is an estimate of the amount by which earnings of the company exceed or fall short of the return that the shareholders and lenders could have got had they invested money elsewhere. Consequently, a positive value of EVA indicates that the company is in good financial health. EVA indicates the wealth a business has created or destroyed as it takes into consideration all capital costs, including the cost of equity.

The EVA approach is superior to the ROI approach in the following way 1. First, with EVA all business units have the same profit objective for comparable investments. The ROI approach on the other hand, provides different incentives for investments across business units. For example a business unit that is currently achieving a ROI of 30% would be most reluctant to expand unless it is able to earn a ROI of 30% or more on additional assets; a lesser return would decrease its overall ROI below its current 30% level. Thus this business unit might forgo investment opportunities whose ROI is
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above the cost of capital but below 30%. Similarly a business unit that is currently achieving a low ROI say 5%, would benefit from anything over 5% on additional assets. As a consequence, ROI creates a bias towards little or no expansion in the high profit business units, while at the same time, the low profit units are making investments at rates of return well below those rejected by high profit units. 2. Decisions that increase a centres ROI may decrease its overall profits. For instance in an investment centre whos current ROI is 30%, the manager can increase its overall ROI by disposing of an asset whose ROI is 25%. However if the cost of capital tied up in the investment centre is less than 25% the absolute rupee profit after deducting capital costs will decrease for the centre.

Advantages of EVA 1. It makes a number of adjustments to conventional earnings in order to eliminate accounting anomalies and bring them closer to true economic results. 2. It allows the design of incentive compensation system for managers based on improvement in EVA. Under an EVA bonus plan the only way managers can earn more money is by creating greater value for shareholders. 3. It provides better goal congruence than ROI. 4. EVA helps in achieving goal congruence between managers and shareholders as it links the compensation and incentives of mangers and other employees with the EVA measures. 5. It facilitates communication and cooperation among divisions and departments by providing a common language for employees across all corporate functions. This helps to improve organisational culture. 6. EVA helps to link the strategic planning function with the operating divisions, and it eliminates the mistrust that typically exists between the operations and finance dept. 7. It provides significant information beyond traditional accounting measures like Earning per share EPS, Return on Assets (ROA), Return on Equity (ROE). It streamlines and speeds up the decision making process.

Drawbacks of EVA
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1. EVA fails to measure the impact of inflation on the performance of the company. 2. EVA is biased in favour of large, low return based business. 3. EVA encourages widening of the asset base. Unplanned increase in assets base could cause problems for the firm.

Improvement in EVA There are three ways to increase EVA and thereby the shareholders wealth 1. Improve operating efficiency so that higher NOPAT can be achieved. 2. Invest capital in projects where the rate of return is greater than cost of capital. 3. Withdraw capital from projects where the rate of return is less than cost of capital.

Example Solution: Cost of Capital Employed = (2816 x 16.54) / 100 = Rs. 465.77 crores Calculation of NOPAT PAT but before exceptional items Add: Interest after taxes NOPAT 1541 5 1546 Average Debt - 50 crores Average Equity 2766 crores Cost of Debt 7.72% Cost of Equity 16.7% WACC 16.54% PAT but before exceptional items 15.41 crores Interest after taxes 5 crores

Therefore, EVA = NOPAT COCE = 1546 465.77 = Rs. 1080.23 crores

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Q.7. Write notes on Business Unit Strategies, Goal Congruence, Managerial Styles, Generic Competitive Strategies, and Levels of Strategy. Ans: Business Unit Strategies Although all of these strategic dimensions have the potential to influence the utility of various managerial characteristics, this study focuses only on the implications of variations in strategic mission. By definition, strategic mission (or portfolio strategy) signifies the nature of the SBU's intended trade-offs between market share growth and short term earnings/cash flow maximization. Presently, potential strategic missions span a continuous spectrum. At one end of the spectrum are SBUs whose mission is to increase market share and competitive position even though short term earnings and cash flow generation may be low or negative; these SBUs are likely to have weak competitive positions in relatively attractive industries. At the other end are SBUs whose mission is either divestiture or the maximization of short term earnings and cash flow even though a slippage in the SBU's market share and competitive position may ensue; these SBUs are likely to have strong competitive positions in relatively unattractive industries. Although most strategy researchers have tended to operationalize strategic mission as a nominal variable, a closer examination of the typologies developed indicates that these nominal approaches are essentially consistent with the continuous approach. For instance, the six categories of Hofer and Schendel (1978) - share increasing strategies, growth strategies, profit strategies, market concentration and asset reduction strategies, turnaround strategies, and liquidation or divestiture strategies and the eight categories of MacMillan (1982); aggressive build, gradual build, selective build, aggressive maintain, selective maintain, competitive harasser, prove viability, and divest - all reflect a more or less steady transition from a pure build strategy at one end to a pure harvest or divest strategy at the other.

Goal Congruence Different 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, (their action must speak Cos language.) Goal Congruence is a term used when the same goals are
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shared by top managers and their subordinates. This is one of the many criteria used to judge the performance of an accounting system. The system can achieve its goal more effectively and perform better when organizational goals can be well aligned with the personal and group goals of subordinates and superiors. The goals of the company should be the same as the goals of the individual business segments. Corporate goals can be communicated by budgets, organization charts, and job descriptions. Every individual working in an organization has got his own motive to do the work. Individuals act in their own interest, based on their own motivations. And it is always not necessarily consistent with the Companys goal. In a goal congruence process, the actions the people are led to take in accordance with their perceived self-interest are also in the best interest of the organization i.e. Goal congruence ensures that the action of manager taken in their best interest is also in the best interest of the organization.

Significance of Goal Congruence 1. Ensures frictionless working 2. Ensures achievement of organizations goal/strategic objective 3. Ensures coordination & motivation of all concerned 4. Ensures consistency in the working of all concerned 5. Gives fair chance to its employees to achieve their personal goals 6. Enhances the loyalty towards the company 7. Satisfies prime requirement of MCS

Managerial Styles 1. Autocratic An Autocratic style means that the manager makes decisions unilaterally, and without much regard for subordinates. As a result, decisions will reflect the opinions and personality of the manager; this in turn can project an image of a confident, well managed business. On the other hand, strong and competent subordinates may chafe because of
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limits on decision-making freedom, the organization will get limited initiatives from those on the front lines, and turnover among the best subordinates will be higher. There are two types of autocratic leaders: the Directive Autocrat makes decisions unilaterally and closely supervises subordinates; the Permissive Autocrat makes decisions unilaterally, but gives subordinates latitude in carrying out their work 2. Paternalistic A more Paternalistic form is also essentially dictatorial; however, decisions take into account the best interests of the employees as well as the business. Communication is again generally downward, but feedback to the management is encouraged to maintain morale. This style can be highly advantageous when it engenders loyalty from the employees, leading to a lower labor turnover, thanks to the emphasis on social needs. On the other hand for an autocratic management style the lack of worker motivation can be typical if no loyal connection is established between the manager and the people who are managed. It shares disadvantages with an autocratic style, such as employees becoming dependent on the leader. 3. Democratic In a Democratic style, the manager allows the employees to take part in decision-making: therefore everything is agreed upon by the majority. The communication is extensive in both directions (from employees to leaders and vice-versa). This style can be particularly useful when complex decisions need to be made that require a range of specialist skills. For example, when a new ICT system needs to be put in place and the upper management of the business is computer-illiterate. From the overall business's point of view, job satisfaction and quality of work will improve, and participatory contributions from subordinates will be much higher. However, the decision-making process could be severely slowed down unless decision processes are streamlined. The need for consensus may avoid taking the 'best' decision for the business unless it is managed or limited. As with the autocratic leaders, democratic leaders are also two types i.e. permissive and directive. 4. Laissez-faire
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In a Laissez-faire leadership style, the leader's role is as a mentor and stimulator, and staff manages their own areas of the business. Thus it is only successful with Inspirational leadership that understands the different areas of initiative being taken by subordinates, and Strong and creative subordinates who share the same vision throughout the organization. It is a style that is best for strong, entrepreneurial subordinates in an organization with dynamic growth in multiple directions. This style brings out the best in highly professional and creative groups of employees; however in cases where the leader does not have broad expertise and ability to communicate a strong vision, it can degenerate into disparate and conflicting activities. Lacking a strong maestro as leader, there is a risk in both focus and direction.

Levels of Strategy 1. Corporate-Level Strategy Corporate-level strategies address the entire strategic scope of the enterprise. This is the big picture view of the organization and includes deciding in which product or service markets to compete and in which geographic regions to operate. For multi-business firms, the resource allocation process cash, staffing, equipment and other resources are distributed typically established at the corporate level. In addition, because market definition is the domain of corporate-level strategists, the responsibility for diversification, or the addition of new products or services to the existing product/service line-up, also falls within the realm of corporate-level strategy. Similarly, whether to compete directly with other firms or to selectively establish cooperative relationship strategic alliances alls within the purview corporate-level strategy, while requiring on-going input from business-level managers. 2. Business-Level Strategies Business-level strategies are similar to corporate-strategies in that they focus on overall performance. In contrast to corporate-level strategy, however, they focus on only one rather than a portfolio of businesses. Business units represent individual entities oriented toward a particular industry, product, or market. In large multi-product or multi-industry organizations, individual business units may be combined to form strategic business units (SBUs). An SBU represents a group of related business divisions, each responsible
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to corporate headquarters for its own profits and losses. Each strategic business unit will likely have its own competitors and its own unique strategy. A common focus of business-level strategies are sometimes on a particular product or service line and business-level strategies commonly involve decisions regarding individual products within this product or service line. 3. Functional-Level Strategies Functional-level strategies are concerned with coordinating the functional areas of the organization (marketing, finance, human resources, production, research and development, etc.) so that each functional area upholds and contributes to individual business-level strategies and the overall corporate-level strategy. This involves coordinating the various functions and operations needed to design, manufacturer, deliver, and support the product or service of each business within the corporate portfolio. Functional strategies are primarily concerned with: Efficiently utilizing specialists within the functional area. Integrating activities within the functional area (e.g., coordinating advertising, promotion, and marketing research in marketing; or purchasing, inventory control, and shipping in production/operations). Assuring that functional strategies mesh with business-level strategies and the overall corporate-level strategy.

Generic Competitive Strategies

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Q.8. What do you understand by MBO? Give its advantages, disadvantages, problems related to and relevance of MBO in Indian Business? Ans: Management by Objective An effective management goes a long way in extracting the best out of employees and make them work as a single unit towards a common goal. The term Management by Objectives was coined by Peter Drucker in 1954.

What is Management by Objective? The process of setting objectives in the organization to give a sense of direction to the employees is called as Management by Objectives. It refers to the process of setting goals for the employees so that they know what they are supposed to do at the workplace. Management by Objectives defines roles and responsibilities for the employees and help them chalk out their future course of action in the organization. Management by objectives guides the employees to deliver their level best and achieve the targets within the stipulated time frame.

Need for Management by Objectives (MBO) 1. The Management by Objectives process helps the employees to understand their duties at the workplace. 2. KRAs are designed for each employee as per their interest, specialization and educational qualification. 3. The employees are clear as to what is expected out of them. 4. Management by Objectives process leads to satisfied employees. It avoids job mismatch and unnecessary confusions later on. 5. Employees in their own way contribute to the achievement of the goals and objectives of the organization. Every employee has his own role at the workplace. Each one feels indispensable for the organization and eventually develops a feeling of loyalty towards the organization. They tend to stick to the organization for a longer span of time and contribute effectively. They enjoy at the workplace and do not treat work as a burden. 6. Management by Objectives ensures effective communication amongst the employees. It leads to a positive ambience at the workplace.
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7. Management by Objectives leads to well defined hierarchies at the workplace. It ensures transparency at all levels. A supervisor of any organization would never directly interact with the Managing Director in case of queries. He would first meet his reporting boss who would then pass on the message to his senior and so on. Everyone is clear about his position in the organization. 8. The MBO Process leads to highly motivated and committed employees. 9. The MBO Process sets a benchmark for every employee. The superiors set targets for each of the team members. Each employee is given a list of specific tasks.

Unique features and advantages of the MBO process The principle behind Management by Objectives (MBO) is for employees to have a clear understanding of the roles and responsibilities expected of them. They can then understand how their activities relate to the achievement of the organization's goal. MBO also places importance on fulfilling the personal goals of each employee. Some of the important features and advantages of MBO are: 1. Motivation Involving employees in the whole process of goal setting and increasing employee empowerment. This increases employee job satisfaction and commitment. 2. Better communication and Coordination Frequent reviews and interactions between superiors and subordinates help to maintain harmonious relationships within the organization and also to solve many problems. 3. Clarity of goals 4. Subordinates tend to have a higher commitment to objectives they set for themselves than those imposed on them by another person. 5. Managers can ensure that objectives of the subordinates are linked to the organization's objectives.

Limitations of Management by objectives Process 1. It sometimes ignores the prevailing culture and working conditions of the organization. 2. More emphasis is being laid on targets and objectives. It just expects the employees to achieve their targets and meet the objectives of the organization without bothering much about the existing circumstances at the workplace. Employees are just expected to
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perform and meet the deadlines. The MBO Process sometimes does treat individuals as mere machines. 3. The MBO process increases comparisons between individuals at the workplace. Employees tend to depend on nasty politics and other unproductive tasks to outshine their fellow workers. Employees do only what their superiors ask them to do. Their work lacks innovation, creativity and sometimes also becomes monotonous.

How To Make MBO Effective? 1. Support from all: In order that MBO succeeds, it should get support and co-operation from the management. MBO must be tailored to the executive's style of managing. No MBO programme can succeed unless it is fully accepted by the managers. The subordinates should also clearly understand that MBO is the policy of the Organisation and they have to offer cooperation to make it successful. It should be a programme of all and not a programme imposed on them. 2. Acceptance of MBO programme by managers: In order to make MBO programme successful, it is fundamentally important that the managers themselves must mentally accept it as a good or promising programme. Such acceptances will bring about deep involvement of managers. If manages are forced to accept NIBO programme, their involvement will remain superfluous at every stage. The employees will be at the receiving-end. They would mostly accept the lines of action initiated by the managers. 3. Training of managers: Before the introduction of MBO programme, the managers should be given adequate training in MBO philosophy. They must be in a position to integrate the technique with the basic philosophy of the company. It is but important to arrange practice sessions where performance objectives are evaluated and deviations are checked. The managers and subordinates are taught to set realistic goals, because they are going to be held responsible for the results. 4. Organizational commitment: MBO should not be used as a decorative piece. It should be based on active support, involvement and commitment of managers. MBO presents a challenging task to managers. They must shift their capabilities from planning for work to planning for accomplishment of specific goals. Koontz rightly observes, "An effective

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programme of managing by objective must be woven into an entire pattern and style of managing. It cannot work as a separate technique standing alone." 5. Allocation of adequate time and resources: A well-conceived MBO programme requires three to five years of operation before it provides fruitful results. Managers and subordinates should be so oriented that they do not look forward to MBO for instant solutions. Proper time and resources should be allocated and persons are properly trained in the philosophy of MBO. 6. Provision of uninterrupted information feedback: Superiors and subordinates should have regular information available to them as to how well subordinate's goal performance is progressing. Over and above, regular performance appraisal sessions, counselling and encouragement to subordinates should be given. Superiors who compliment and encourage subordinates with pay rise and promotions provide enough motivation for peak performance.

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Q.9. What is decentralization? What are responsibility centres? Distinguish between engineered expense centre and discretionary expense centre. Ans: Decentralization is the process of dispersing decision-making governance closer to the people and/or citizens. It includes the dispersal of administration or governance in sectors or areas like engineering, management science, political science, political economy, sociology and economics. Decentralization is also possible in the dispersal of population and employment. Law, science and technological advancements lead to highly decentralized human endeavors.

A central theme in decentralization is the difference between: 1. A hierarchy, based on authority: two players in an unequal-power relationship; and 2. An interface: a lateral relationship between two players of roughly equal power.

The more decentralized a system is, the more it relies on lateral relationships, and the less it can rely on command or force. In most branches of engineering and economics, decentralization is narrowly defined as the study of markets and interfaces between parts of a system. This is most highly developed as general systems theory and neoclassical political economy. Decentralization is the policy of delegating decision-making authority down to the lower levels in an organization, relatively away from and lowers in a central authority. A decentralized organization shows fewer tiers in the organizational structure, wider span of control, and a bottom-to-top flow of decisionmaking and flow of ideas. In a centralized organization, the decisions are made by top executives or on the basis of pre-set policies. These decisions or policies are then enforced through several tiers of the organization after gradually broadening the span of control until it reaches the bottom tier. In a more decentralized organization, the top executives delegate much of their decisionmaking authority to lower tiers of the organizational structure. As a correlation, the organization is likely to run on less rigid policies and wider spans of control among each officer of the organization. The wider spans of control also reduce the number of tiers within the organization, giving its structure a flat appearance. One advantage of this structure, if the correct controls are in place, will be the bottom-to-top flow of information, allowing decisions by officials of the organization to be well informed about lower tier operations. For example, if an experienced technician at the lowest tier of an organization knows how to increase the efficiency of the
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production, the bottom-to-top flow of information can allow this knowledge to pass up to the executive officers.

A responsibility center is an organization unit that is headed by a manager who is responsible for its activities and results. In Responsibility Accounting revenues and costs information are collected and reported by responsibility centers. There are four types of responsibility centers, according to the nature of the control over the inputs and outputs: 1. Revenue center 2. Cost or Expense center 3. Profit center 4. Investment center

Engineered

Discretionary

Should be measurable in monetary terms, More difficult to measure in physical quantities outputs in physical quantities. or precisely on monetary terms.

Compare it to actual costs and the difference Difference between budgeted expenses and is indicative of efficiency or lack thereof. actual expenses does not indicate efficiency.

Multiply standard cost per unit x no. of units Discretionary means, management allocates produced or processed = this is the ideal cost. them based on established polices (not arbitrarily).

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Q.10. Profit Centre, types of profit centres, manufacturing, R&D with reference to profit centres and budget preparation. Ans: Profit centre A profit centre is a section of a company treated as a separate business. Thus profits or losses for a profit centre are calculated separately. A profit centre manager is held accountable for both revenues, and costs (expenses), and therefore, profits. What this means in terms of managerial responsibilities is that the manager has to drive the sales revenue generating activities which leads to cash inflows and at the same time control the cost (cash outflows) causing activities. This makes the profit centre management more challenging than cost centre management. Profit centre management is equivalent to running an independent business because a profit centre business unit or department is treated as a distinct entity enabling revenues and expenses to be determined and its profitability to be measured.

The software provides two types of profit centres: Service-type Profit Centres Retail-type Profit Centres

A Service-type Profit Centre is used for operations that perform service; combinations of labour and parts. Service Profit Centres are further categorized into Service Categories. A Retail-type Profit Centre is used for retail sales only. Retail Profit Centres are further categorized into Sales Departments.

Manufacturing with reference to profit centres In large companies, especially manufacturing companies, it has become a fairly common occurrence to break the company into small pieces, with each piece operating as a profit centre that has to compete for business. In this manner, a large business can suddenly find itself operating as a small business. For example, say the Acme Company produces a finished product that is composed of five smaller parts. Instead of operating as one large company that produces all five parts needed for the finished product, Acme has decided to split into six separate units one that assembles and sells the finished product, and five smaller companies that each produce one of the parts needed for the finished product. Beyond Acme, there are other companies that
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produce those same five parts needed to produce the finished product. Each of the five part manufacturers is now operating as a separate profit centre, reporting to Acme's corporate office. Each has to determine its own methods of operation, and each has to determine how it is going to show a profit. There may be internal agreements in place that mandate that each of the five units will continue to work together to produce the finished product, or Acme may throw things wide open by stating that there is no corporate mandate forcing the five divisions to continue to work together.

If the latter model is chosen, the corporation may have decided that, while the company could continue making steadybut smallprofits if it kept using the five units together as it had for decades, there was a chance that the company could make huge profits if it made each of the five units accountable for its own bottom line and opened up the manufacturing process to both internal and external competition. In such a radical environment, it was conceivable that one of the five units could go bankrupt and cost the company money, but senior management believed that the hugely increased profits in the other four units, and the resulting higher profit margin realized by the sale of the finished product, would more than offset the loss of one unit. Thus, each of Acme's five units, formerly divisions within the larger company that were not accountable for directly generating profits, were now separate entities that had to show a profit to continue operating. Each of the units had gone from a cost centre mentalitybuying materials to produce part of a product that showed up on the company's overall bottom lineto a profit centre mentality, responsible for showing a profit based solely on the production and sale of its one part.

Research & Development The value of R&D as strategic infrastructure can be judged based on parameters such as inimitability, durability, appropriability, substitutability, and competitive superiority. The monetary value of the on-going R&D projects can be arrived at by calculating the net cash flows for two different time periods - from the beginning of the R&D project to its end, and from the beginning of the utilization of the R&D outputs to the end of the forecasted economic life of the project. Conducting an R&D audit is one of the ways of monitoring and controlling an
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organization's research and development activities. The R&D audit would typically cover issues such as alignment of R&D objectives with the overall objectives of the organization, budget allocation, expense tracking, recruitment of competent personnel, treatment of commercially unviable projects, coordination of R&D activities with concerned departments, and availability of necessary inputs and equipment. Management control of new product development is done through tools/techniques such as the Stage-Gate framework, the balanced scorecard, and concurrent engineering. The Stage-Gate framework has six stages, each representing a set of activities that are included as a part of the new product development project. These stages incorporate aspects such as customer preferences, quality of product, and product-market fit. The gates in the framework are the points at which the project is evaluated for quality through a stringent reviewing process. They help in differentiating between valuable and less valuable projects.

Budget Preparation Budgets can be defined as a quantitative statement, for a defined period of time, which may include planned revenues, expenses, assets, liabilities, and cash flows. Budgeting refers to the process of designing, implementing, and operating budgets. Budgeting, as a control tool, provides an action plan to ensure that the organization's actual activities are least deviated from the planned activities. Budgets are used to give an overview of the organization and its operations. They are useful in resource allocation where resources are allocated in such a way that the processes which are expected to give the highest returns are given priority. Budgets are also forecast tools and make the organization better prepared to adapt to changes in the environment. They should be developed in such a way that they take into account the strategic requirements of each of the functions. Budget formulation consists of a series of activities: creating a budget department or appointing a budget controller, developing guidelines for budget preparation, developing budget proposals at the department/ business unit level, developing the budget for the entire organization, determining the budget period and key budget factors, benchmarking the budget, reviewing and approving the budget, monitoring progress, and revising the budget. Steps in Budget Formulation Creating a budget department or appointing a budget controller
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Developing guidelines for budget preparation Developing budget proposals at department/business unit level Developing the budget for the entire organization Determining the budget period and key budgets factors Benchmarking the budget Budget review and approval Monitoring progress and revising the budgets

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Q.11. Transfer Pricing and its objectives, methods of transfer pricing and its determination with one numerical example. Ans: Transfer Pricing Definition The price that is assumed to have been charged by one part of a company for products and services it provides to another part of the same company, in order to calculate each divisions profit and loss separately. Transfer pricing is a mechanism for distributing revenue between different divisions which jointly develop, manufacture and market products and services. An economic theory behind optimal transfer pricing with optimal defined as transfer pricing that maximizes overall firm profits in a non-realistic world with no taxes, no capital risk, no development risk, no externalities or any other frictions which exist in the real world. In practice a great many factors influence the transfer prices that are used by multinational corporations, including performance measurement, capabilities of accounting systems, import quotas, customs duties, VAT, taxes on profits, and (in many cases) simple lack of attention to the pricing.

Objectives of Transfer Pricing Transfer pricing systems are designed to accomplish the following objectives: 1. To achieve goal congruence. The transfer prices should be such that actions which will have the effect of increasing a divisions reported profit will also have the effect of increasing the companys reported profit. This maximizes the likelihood that the division managers will act in the companys best interests. 2. To ensure that divisional autonomy is maintained. In principle the top management of a company could simply issue precise instructions to divisions as to what goods to transfer to each other, in what quantities, and at what prices. This would seem to solve the problem of transfer pricing at a stroke, and to achieve optimization (for the company as a whole) by diktat. However, most organizations are unwilling to go down this road, because of the enormous benefits of allowing divisional autonomy. It would be very difficult to make division managers accountable for their profits if they were not given a free hand in making important decisions.

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3. To ensure that the information provided (e.g., division Profit & Loss Accounts) is useful for evaluating the economic performance of divisions and the managerial performance of division managers.

Methods of Transfer Pricing There are three general methods for establishing transfer prices. Market-based transfer price: In the presence of competitive and stable external markets for the transferred product, many firms use the external market price as the transfer price. Cost-based transfer price: The transfer price is based on the production cost of the upstream division. A cost-based transfer price requires that the following criteria be specified: Actual cost or budgeted (standard) cost. Full cost or variable cost. The amount of mark-up, if any, to allow the upstream division to earn a profit on the transferred product. Negotiated transfer price: Senior management does not specify the transfer price. Rather, divisional managers negotiate a mutually-agreeable price. Each of these three transfer pricing methods has advantages and disadvantages.

Market-based Transfer Prices Microeconomic theory shows that when divisional managers strive to maximize divisional profits, a market-based transfer price aligns their incentives with owners incentives of maximizing overall corporate profits. The transfer will occur when it is in the best interests of shareholders, and the transfer will be refused by at least one divisional manager when shareholders would prefer for the transfer not to occur. The upstream division is generally indifferent between receiving the market price from an external customer and receiving the same price from an internal customer. Consequently, the determining factor is whether the downstream division is willing to pay the market price. If the downstream division is willing to do so, the implication is that the downstream division can generate incremental profits for the company by purchasing the product from the upstream division and either reselling it or using the product in its own production process. On the other hand, if the downstream division is unwilling to pay the
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market price, the implication is that corporate profits are maximized when the upstream division sells the product on the external market, even if this leaves the downstream division idle. Sometimes, there are cost savings on internal transfers compared with external sales. These savings might arise, for example, because the upstream division can avoid a customer credit check and collection efforts, and the downstream division might avoid inspection procedures in the receiving department. Market-based transfer pricing continues to align managerial incentives with corporate goals, even in the presence of these cost savings, if appropriate adjustments are made to the transfer price (i.e., the market-based transfer price should be reduced by these cost savings). However, many intermediate products do not have readily-available market prices. Examples are shown in the table above: a pharmaceutical company with a drug under patent protection (an effective monopoly); and an appliance company that makes component parts in the Parts Division and transfers those parts to its assembly divisions. Obviously, if there is no market price, a market-based transfer price cannot be used. A disadvantage of a market-based transfer price is that the prices for some commodities can fluctuate widely and quickly. Companies sometimes attempt to protect divisional managers from these large unpredictable price changes.

Cost-based Transfer Prices Cost-based transfer prices can also align managerial incentives with corporate goals, if various factors are properly considered, including the outside market opportunities for both divisions, and possible capacity constraints of the upstream division. First consider the case in which the upstream division sells the intermediate product to external customers as well as to the downstream division. In this situation, capacity constraints are crucial. If the upstream division has excess capacity, a cost-based transfer price using the variable cost of production will align incentives, because the upstream division is indifferent about the transfer, and the downstream division will fully incorporate the companys incremental cost of making the intermediate product in its production and marketing decisions. However, senior management might want to allow the upstream division to mark up the transfer price a little above variable cost, to provide that division positive incentives to engage in the transfer.

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If the upstream division has a capacity constraint, transfers to the downstream division displace external sales. In this case, in order to align incentives, the opportunity cost of these lost sales must be passed on to the downstream division, which is accomplished by setting the transfer price equal to the upstream divisions external market sales price. Next consider the case in which there is no external market for the upstream division. If the upstream division is to be treated as a profit centre, it must be allowed the opportunity to recover its full cost of production plus a reasonable profit. If the downstream division is charged the full cost of production, incentives are aligned because the downstream division will refuse the transfer under only two circumstances: First, if the downstream division can source the intermediate product for a lower cost elsewhere; Second, if the downstream division cannot generate a reasonable profit on the sale of the final product when it pays the upstream divisions full cost of production for the intermediate product. If the downstream division can source the intermediate product for a lower cost elsewhere, to the extent the upstream divisions full cost of production reflects its future long-run average cost, the company should consider eliminating the upstream division. If the downstream division cannot generate a reasonable profit on the sale of the final product when it pays the upstream divisions full cost of production for the intermediate product, the optimal corporate decision might be to close the upstream division and stop production and sale of the final product. However, if either the upstream division or the downstream division manufactures and markets multiple products, the analysis becomes more complex. Also, if the downstream division can source the intermediate product from an external supplier for a price greater than the upstream divisions full cost, but less than full cost plus a reasonable profit margin for the upstream division, suboptimal decisions could result.

Negotiated Transfer Prices Negotiated transfer pricing has the advantage of emulating a free market in which divisional managers buy and sell from each other in a manner that simulates arms-length transactions. However, there is no reason to assume that the outcome of these transfer price negotiations will serve the best interests of the company or shareholders. The transfer price could depend on
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which divisional manager is the better poker player, rather than whether the transfer results in profit-maximizing production and sourcing decisions. Also, if divisional managers fail to reach an agreement on price, even though the transfer is in the best interests of the company, senior management might decide to impose a transfer price. However, senior managements imposition of a transfer price defeats the motivation for using a negotiated transfer price in the first place.

Example The Firebird Pen Company is organized into two divisions. Division 1 manufactures the ink cartridges. Division 2 manufactures the remaining components and assembles the pens. One

ink cartridge system is required to produce one pen. Demand and cost functions are estimated as follows: Demand for Firebird pens: Marginal cost for Division 1: Marginal cost for Division 2: PF = 1,000 0.1 * QF MC1 = 10 + 0.01 * Q1 MC2 = 99.5 + 0.05 * Q2

(Note: MC2 excludes the cost of the ink cartridge purchased from Division 1.) The problem is: (a) How many ink cartridge systems will be demanded by Division 2, and (b) at what level should the transfer price be set? Solution Step 1: Find the firms marginal revenue for each final unit produced. The firms total revenue (TRF) is: TRF = PF*QF = (1,000 0.1 * QF) * QF = 1,000 * QF 0.1 * (QF)2 So the firms marginal revenue is: MRF = dTRF/dQF = 1,000 0.2 * QF Step 2: Find the firms overall MC function. Since exactly one cartridge is required for each pen, the total MC is the sum of the MC for each division: MCF = MC1 + MC2.

Substituting in for MC1 and MC2 gives: MCF = [10 + 0.01 * Q1] + [99.5 + 0.05 * QF] Since Q1 =QF, this simplifies to MCF = 109.5 + 0.06 * QF

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Step 3: Find how many final units is profitmaximizing for the firm overall. This is the quantity where MRF = MCF, or 1,000 0.2 * QF = 109.5 + 0.06 * QF Solving for QF yields: QF = 3,425 pens.

Step 4: Find the right transfer price. We want to induce the upstream division to make Q1 = 3,425 cartridges for the 3,425 pens. We were given that MC1 = 10 + 0.01 * Q1, so plugging in for Q1 we have MC1 = $10 + 0.01 * (3,425) = $44.25 Thus, Division 1 should produce 3,425 cartridges at a transfer price of $44.25 / cartridge.

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Q.12. What is Management Audit, explain its purpose, objectives and Scope of Management Audit. Also define the concept of Efficiency Audit in detail. Ans: Management Audit is analysis and assessment of competencies and capabilities of a company's management in order to evaluate their effectiveness, especially with regard to the strategic objectives and policies of the business. The objective of a management audit is not to appraise individual executive performance, but to evaluate the management team in relation to their competition. The basis of Management Audit is structured interviews and reference checks conducted by external experts to be documented in expert opinions. Management Audits focus on personal attributes and business skills.

Personal attributes can be subdivided into: Ethical values and attitudes Intellectual Capability Charisma

Business skills can be subdivided into: Professional and methodical competencies Leadership behaviour Entrepreneurship

Need for Management Audit Change in Top Management: It is most useful for the Managing Director or CEO joining a new company to get the objective and qualified picture as to the strengths, chances and risks of his management team. Mergers & Acquisitions: The accomplishment of management audits represents the objective as well as credible tool to identify the best qualified managers out of competing management teams. Succession Planning: Both internal and external candidates are audited to choose the best.

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Restructuring / Strategic Alignment: Drastic dynamics in business bring about vital risks and chances the success of the corporation does depend on the performance and potential of the complete executive team.

By using the tool Management Audit risks will be minimized and changes exploited.

Objectives and Scope management audit: Establish the current level of effectiveness Suggest improvements Lay down standards for future performance.

The scope is broad and generally includes all functions of the organization, including objectives and strategy, corporate structure, organizational planning, the budgeting process, human and financial resources management, decision making, research and development, marketing, equipment and operations, and management information systems. This breadth extends to recent, present, and future operations and covers external issues as well as internal concerns. Objectives of the management audit include the development of recommendations and improvements, as well as increased awareness of the credibility and acceptance of the audit's results. The process is more an audit of management, in order to enhance corporate profits and financial stability. The audit follows a logical, step-by-step format, including initial interviews with key managers. A study team uses the interview process to define the scope of the audit, including the areas or functions to be studied. Next, the team requests various forms of documentation, including budgets, planning documents, corporate reports, financial statements, policy and procedure manuals, biographical material, and various other documents. Following this stage, the study team then prepares a schedule and detailed plan of study, all aimed at proceeding to the internal fact finding step. Fact-finding relies once again on interviews, documentation, and personal observation of facilities and organizational work patterns. By the time these steps are completed, the study team develops a thorough understanding of organizational structure and operations. The team generally turns next to an external review, using interviews to determine the opinions and attitudes key people outside the organization have about its operations. Examples of those interviewed are customers, representatives of financial institutions, and employees of federal agencies having contact with the audited organization. These interviews provide the team with
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more objective evaluations, and lead to an analysis of all the information and data now gathered. Organizational performance is profiled, then efficiency and effectiveness are evaluated and compared against industry norms. While many criteria can be measured quantitatively, team members have to use sound judgment and objectivity when evaluating issues that cannot be measured. In turn, the organization's management has to be receptive to the audit process and demonstrate clear acceptance of audit findings. The study team then develops conclusions and recommendations which are communicated to the organization's management. These final two stagesconclusions/recommendations and communicationare essential to the management audit process. The audit is expected to identify corporate strengths and weaknesses, sources of problems, and potential problem areas. Recommendations for correction are presented to top management. The final report comes in the form of an overall plan of action, which includes prioritized recommendations, the specific units and individuals expected to carry out the recommendations, a schedule for action, and expected results. When conducted with thoroughness, objectivity, and timeliness, the management audit becomes a powerful tool for corporate and organizational executives who seek to improve effectiveness and efficiency.

Efficiency Audit Efficiency audit which is aimed at confirming that there is a positive relationship between the level of services provided and the resources used to achieve that level, highlighting examples of unrewarding expenditure. Efficiency audit is carried out with a view to ascertaining whether an establishment pursues optimal values with adequate consideration for economy, efficiency and effectiveness in its quest for resource management. It is also referred to as comprehensive audit or efficiency audit. The techniques for carrying out a efficiency audit can be outlined as follows: Analysis of performance indicators such as financial ratios and unit costs of the establishment, with comparative figures for the previous periods and in respect of similar establishments. A trend analysis should be done, and significant differences highlighted through the trend analysis should be investigated further. This initial analysis is aimed at identifying the areas that need specific attention. Management and systems review for the purpose of investigating the ways in which objectives are established, policies implemented and results monitored. This will enable the efficiency auditors to ascertain how efficiently these processes have been carried out
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without necessarily having to concern themselves with the review of the objectives and policies themselves. Analysis of planning and control processes for the purpose of ascertaining how the establishment has been monitoring performance against the plan, reviewing and reporting its operating results, and how members and officers have been alerted on the need for remedial action whenever required. An example is checking how the Vote Book has been used in controlling planned expenditure. Efficiency assessment which may involve specific investigation into a few activities with high unit cost, or poor performance measures or suspected poor management with a view to ascertaining the reasons for the adverse performance indicators and identifying the appropriate remedial action. Effectiveness review for the purpose of ascertaining whether or not the activities or programmes are achieving the objectives for which they have been undertaken. This usually involves discussions with service managers and committee members on the details of each particular activity especially regarding why the activity is undertaken, why it is done in the way it has been done, what other alternatives have been considered and why such other alternatives have been rejected and how is performance measured. Reporting on the efficiency audit it is very important at this stage to discuss the draft report in detail with the officers (service managers) and committee members before it is finalised and presented.

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Q.13. What is the concept of BSC. Mention about structure, key value drivers, benefits of BSC with diagram. Ans: Definition The Balanced Scorecard (BSC) is a strategic performance management framework that allows organisations to manage and measure the delivery of their strategy. The concept was initially introduced by Robert Kaplan and David Norton in a Harvard Business Review Article in 1992 and has since then been voted one of the most influential business ideas of the past 75 years

Concept of BSC The Balanced Scorecard is a strategic performance management framework that has been designed to help an organisation monitor its performance and manage the execution of its strategy. In a recent world-wide study on management tool usage, the Balanced Scorecard was found to be the sixth most widely used management tool across the globe which also had one of the highest overall satisfaction ratings. In its simplest form the Balanced Scorecard breaks performance monitoring into four interconnected perspectives: Financial, Customer, Internal Processes and Learning & Growth.

Balanced Scorecard Value Drivers The Financial Perspective covers the financial objectives of an organisation and allows managers to track financial success and shareholder value. The Customer Perspective covers the customer objectives such as customer satisfaction, market share goals as well as product and service attributes. The Internal Process Perspective covers internal operational goals and outlines the key processes necessary to deliver the customer objectives. The Learning and Growth Perspective covers the intangible drivers of future success such as human capital, organisational capital and information capital including skills, training, organisational culture, leadership, systems and databases.

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Structure When it was first introduced the Balanced Scorecard perspectives were presented in a four-box model (see Figure above). Early adopters created Balanced Scorecards that were primarily used as improved performance measurement systems and many organisations produced management dashboards to provide a more comprehensive at a glance view of key performance indicators in these four perspectives. However, this four box model has now been superseded by a Strategy Map (see Figure below for the generic template), which is at the heart of modern Balanced Scorecards. A Strategy Map places the four perspectives in relation to each other to show that the objectives support each other. For more information see also our white papers What is a modern Balanced Scorecard and How to create a strategy map

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Benefits of BSC Research has shown that organisations that use a Balanced Scorecard approach tend to outperform organisations without a formal approach to strategic performance management. The key benefits of using a BSC include (see Figure below):

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1. Better Strategic Planning The Balanced Scorecard provides a powerful framework for building and communicating strategy. The business model is visualised in a Strategy Map which forces managers to think about cause-and-effect relationships. The process of creating a Strategy Map ensures that consensus is reached over a set of interrelated strategic objectives. It means that performance outcomes as well as key enablers or drivers of future performance (such as the intangibles) are identified to create a complete picture of the strategy. 2. Improved Strategy Communication & Execution The fact that the strategy with all its interrelated objectives is mapped on one piece of paper allows companies to easily communicate strategy internally and externally. We have known for a long time that a picture is worth a thousand words. This plan on a page facilities the understanding of the strategy and helps to engage staff and external stakeholders in the delivery and review

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of strategy. In the end it is impossible to execute a strategy that is not understood by everybody. 3. Better Management Information The Balanced Scorecard approach forces organisations to design key performance indicators for their various strategic objectives. This ensures that companies are measuring what actually matters. Research shows that companies with a BSC approach tend to report higher quality management information and gain increasing benefits from the way this information is used to guide management and decision making. 4. Improved Performance Reporting companies using a Balanced Scorecard approach tend to produce better performance reports than organisations without such a structured approach to performance management. Increasing needs and requirements for transparency can be met if companies create meaningful management reports and dashboards to communicate performance both internally and externally. 5. Better Strategic Alignment organisations with a Balanced Scorecard are able to better align their organisation with the strategic objectives. In order to execute a plan well, organisations need to ensure that all business and support units are working towards the same goals. Cascading the Balanced Scorecard into those units will help to achieve that and link strategy to operations. 6. Better Organisational Alignment well implemented Balanced Scorecards also help to align organisational processes such as budgeting, risk management and analytics with the strategic priorities. This will help to create a truly strategy focused organisation.

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14. Explain the concept of non-profit organisations; discuss the MCS adopted in such organisations. Ans: Definition & Meaning Non-profit organization (abbreviated as NPO) is neither a legal nor technical definition but generally refers to an organization that uses surplus revenues to achieve its goals rather than to distribute them as profit or dividends. An incorporated organization which exists for educational or charitable reasons, and from which its shareholders or trustees do not benefit financially. Any money earned must be retained by the organization, and used for its own expenses, operations, and programs. Many non-profit organizations also seek tax exempt status, and may also be exempt from local taxes including sales taxes or property taxes. Well-known non-profit organizations include Habitat for Humanity, the Red Cross, and United Way, also called not-forprofit organization.

Nature & Goals Some NPOs may also be a charity or service organization; they may be organized as a not-forprofit corporation or as a trust, a cooperative, or they exist informally. A very similar type of organization termed a supporting organization operates like a foundation, but they are more complicated to administer, hold more favourable tax status and are restricted in the public charities they support.

India NPO In India, NPOs are known commonly as Non-Governmental Organizations (NGOs). They can be registered in four ways: 1. Trust 2. Society 3. Section-25 Company 4. Special Licensing Registration can be done with the Registrar of Companies (RoC). The following laws or Constitutional Articles of the Republic of India are relevant to the NGOs: 1. Articles 19(1)(c) and 30 of the Constitution of India
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2. Income Tax Act, 1961 3. Public Trusts Acts of various states 4. Societies Registration Act, 1860 5. Section 25 of the Indian Companies Act, 1956 6. Foreign Contribution (Regulation) Act, 1976

Problems Faced by NPO Capacity building is an on-going problem experienced by NPOs for a number of reasons. Most rely on external funding (government funds, grants from charitable foundations, direct donations) to maintain their operations and changes in these sources of revenue may influence the reliability or predictability with which the organization can hire and retain staff, sustain facilities, create programs, or maintain tax-exempt status. For example, a university that sells research to for-profit companies may have tax exemption problems. In addition, unreliable funding, long hours and low pay can result in employee retention problems. During 2009, the US government acknowledged this critical need by the inclusion of the Non-profit Capacity Building Program in the Serve America Act. Further efforts to quantify the scope of the sector and propose policy solutions for community benefit were included in the Non-profit Sector and Community Solutions Act, proposed during 2010. Founder's syndrome is an issue organizations face as they grow. Dynamic founders with a strong vision of how to operate the project try to retain control of the organization, even as new employees or volunteers want to expand the project's scope or change policy. Resource mismanagement is a particular problem with NPOs because the employees are not accountable to anybody with a direct stake in the organization. For example, an employee may start a new program without disclosing its complete liabilities. The employee may be rewarded for improving the NPO's reputation, making other employees happy, and attracting new donors. Liabilities promised on the full faith and credit of the organization but not recorded anywhere constitute accounting fraud. But even indirect liabilities negatively affect the financial sustainability of the NPO, and the NPO will have financial problems unless strict controls are instated.

Internet used by todays NPO

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Many NPOs often use the .org or .us (or the CCTLD of their respective country) or .edu top-level domain (TLD) when selecting a domain name to differentiate themselves from more commercial entities which typically use the .com space. In the traditional domain noted in RFC 1591, .org is for "organizations that didn't fit anywhere else" in the naming system, which implies that it is the proper category for non-commercial organizations if they are not governmental, educational, or one of the other types with a specific TLD. It is not designated specifically for charitable organizations or any specific organizational or tax-law status, however; it encompasses anything that is not classifiable as another category. Currently, no restrictions are enforced on registration of .com or .org, so you can find organizations of all sorts in either of these domains, as well as other top-level domains including newer, more specific ones which may apply to particular sorts of organizations such as .museum for museums or .coop for cooperatives. Organizations might also register by the appropriate country code top-level domain for their country MCS Adopted in todays NPO Non-profit organizations are formed by filing bylaws and/or articles of incorporation in the state in which they expect to operate. The act of incorporating creates a legal entity enabling the organization to be treated as a corporation by law and to enter into business dealings, form contracts, and own property as any other individual or for-profit corporation may do. Non-profits can have members but many do not. The non-profit may also be a trust or association of members. The organization may be controlled by its members who elect the Board of Directors, Board of Governors or Board of Trustees. Non-profits may have a delegate structure to allow for the representation of groups or corporations as members. Alternatively, it may be a nonmembership organization and the board of directors may elect its own successors. The two major types of nonprofit organization are membership and board-only. A membership organization elects the board and has regular meetings and power to amend the bylaws. A board-only organization typically has a self-selected board, and a membership whose powers are limited to those delegated to it by the board. A board-only organization's bylaws may even state that the organization does not have any membership, although the organization's literature may refer to its donors as "members. The Model Non-profit Corporation Act imposes many complexities and requirements on membership decision-making. Accordingly, many organizations have formed board-only structures. The National Association of Parliamentarians has generated concerns
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about the implications of this trend for the future of openness, accountability, and understanding of public concerns in non-profit organizations. Specifically, they note that non-profit organizations, unlike business corporations, are not subject to market discipline for products and shareholder discipline of their capital; therefore, without membership control of major decisions such as election of the board, there are few inherent safeguards against abuse. A rebuttal to this might be that as non-profit organizations grow and seek larger donations, the degree of scrutiny increases, including expectations of audited financial statements. Marketing Many of the NGOs have hired full time marketing executives who go on a regular basis and pitch to various clients and also follow up with what is done to the funds of donors. In this way what it does is that it maintains relation with various corporate who then donate on a regular basis. They also approach many schools and with the help of teachers and parents motivate students to donate and here due to higher number of students the total amount collected is huge. Finance While not-for-profit organizations are permitted to generate surplus revenues they must be retained by the organization for its self-preservation, expansion, or plans. NPOs have controlling members or boards. Many have paid staff including management, while others employ unpaid volunteers and even executives who works without compensation (or that work for a token fee, such as Rs1000 per year). Where there is a token fee, in general, it is used to meet legal requirements for establishing a contract between the executive and the organization.

Example of an NPO in India Help Age India Help Age India is secular, not-for-profit organization registered under the Societies' Registration Act of 1860. We were set up in 1978, and since then have been raising resources to protect the rights of India's elderly and provide relief to them through various interventions. We voice the needs of India's 90 million (current estimate) "grey" population, and directly impact the lives of lakhs of elders through our services every year. We advocate with national & local government to bring about policy that is beneficial to the elderly.

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We make society aware of the concerns of the aged and promote better understanding of ageing issues. We help the elderly become aware of their own rights so that they get their due and are able to play an active role in society.

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Q.15. What are service organisations, explain basic characteristics and MCS adopted in such organisations. Ans: Organizations whose economic activity output is not a physical product or construction, is generally consumed at the time it is produced and provides added value in forms (such as convenience, amusement, timeliness, comfort, or health), that are essentially intangible are commonly termed as service organizations. Service organizations have four main characteristics that distinguish them from product companies, namely: Intangibility Different services with goods. If the item is an object, device or object, then the service is a deed, performance, or business. If the goods can be owned, the service can be consumed, but do not possess. While most services can be linked and supported by a physical product like a telephone in the telecommunications, aircraft in air transportation, food in restaurant service, the essence of what customers are buying is the performance by the manufacturer about it. Services are intangible, which can be seen, felt and embraced, heard, or touched before purchase and consumption. Intangible concept of service has two meanings, namely: 1. Something that can be touched and cannot be considered. 2. Something that cannot easily define formulated or understood spiritually. Thus, we cannot evaluate the quality of service before it felt / to burn. When customers buy a service, it uses only, use, or rental services. The client does not necessarily have purchased services. Therefore, to reduce uncertainty, customers will notice the signs or evidence of the quality of these services. They conclude the service quality of the place (place), people (people), equipment (hardware), communications equipment

(communications equipment), the symbols and the prices they observe. Therefore, traders who use service is to manage the evidence and tangibilize the intangible. In this case, marketing services are faced with the challenge of providing physical evidence and a comparison with the abstract submission. Inseparability

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The goods are produced, sold and consumed. As for services on the other hand, are generally sold first, then produced and consumed simultaneously. The interaction between providers and clients is a special feature in the marketing of services. Both parties have an impact on results (come out) services. Relationship with suppliers and customers, the effectiveness of individuals who provide services (personal contact) is important. Thus, the key to success is a service company in the process of recruitment, compensation, training, and pengembangan employees. Variability Services are highly variable because it is the result of non-standardized, meaning that there are many varieties, quality and type, depending on who, when and where services are produced. Buyers of services are very concerned about this high variability and often they ask for other opinions before deciding vote. In this case, the service can perform the three stages of quality control, namely: 1. Investing in the selection and training of staff well. 2. Does standardization process of the implementation of service (process service performance). This can be done by preparing a blue print (blue-print) which describes the services and events in a flowchart of service processes to determine the factors that could cause failures of these services. Monitor customer satisfaction through suggestion and complaint systems, customer surveys and comparison shopping, so that poor service can be detected and corrected. Instant The service is perishable and cannot be saved. Train empty seats, hotel rooms are not occupied, or during certain hours without the patient in the practice of a physician, will / go away, because it can be stored for use at another time. This is not a problem if the application is always easy to prepare the service request before. When demand fluctuates, facing various problems related to idle capacity (when demand is low) and customers are not served by their risk disappointed / switch to another service provider (when demand peaks).

Management Control Systems in Service Organizations

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Despite growing dominance of service sectors in most economies, there has been limited research to systematically examine the design and use of management control systems in service organisations. Modern management systems such as the balanced scorecard place emphasis on administrative and personal control so that the objectives of organisational goals can be communicated and reinforced. An important feature of service firms relevant to the design of management control system is the significant human participation in the production process which presents challenges to researchers when presenting conceptual framework in the design of management control system.

There are three models for implementing MCS in service organizations: 1. Reactive Model The reactive model has in its basic foundation, the general principles of administration stated by Fayol, which emphasizes division of labour, authorities and the management business units; this being the functional structure observed in the organizations who that adopt this model, restricting the autonomies of managers and the independence in the decision-making process. In the reactive model, involvement of colleagues to clear operation backlogs is palliative. When one articulates a supportive action therefore, it is an action that eliminates bottlenecks created by the aforementioned backlogs. 2. Proactive Model The proactive management model seems to be an innovation method however that is not much better. This model prevents problems from occurring by tracking it at the front-end - unlike the reactive model - with the identification of risks, assessment, quantification and subsequent establishment of control strategies to mitigate it. While this would tend to reduce the occurrence of problems, it also requires that all potential problems be identified so that the proactive person could immediately go after them and resolve them. Proactive management models begin with those in the upper reaches of the organization defining control objectives. Their views of the actual business process are from afar. While the board of directors and top management may be able to identify major potential problems external to the business, their lack of involvement in day-today operations limits
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the reality of a successful proactive management model. Unfortunately, because of the distance between the employees on the shop or factory floor of a business and the management at the higher echelon there is a gap in their knowledge about the risks to which the company is exposed. Therefore, in order to be proactive consultants are required to gather necessary information to enhance their decisionmaking process. 3. Coactive Model The word coactive means integration, collaboration and interaction. North south, east-west dichotomy transmits its operational waves to every corner of the establishment. All sides are in the know; this is a compassed management approach. This is a management model that rejects the traditional boss and the hierarchical management structure and instead installs leaders to head different groups in the operating process.Structures in this type of organization should be conducive to interaction between processes, employees, clients, and outside actors. Additionally, it should: 1. Present a distribution of resources that is in alignment with the organizations strategy; 2. With a minimum scale of action propitiate a maximum combination of compatible functions; 3. Hold an operational environment with porous functional boundaries that can permeated; and 4. Enhance the smooth flow of information, such that the natural means of communication amongst colleagues gains confidence.

One of the mechanisms used to maintain integration and plasticity of the organizational structure is the adoption of business units, which is responsible for the vanguard capability and the constructive criticisms to an organization that focalise the common necessities of clients.

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