Management Control Systems

Session 1

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

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

Basic concepts Control

Control Device
Assessor (comparison with standard)

Detector (information about what is happening)

Effector (behavior alteration, if needed)

Entity being controlled

Basic concepts Management

Led by hierarchy of managers The complexity of the organization determines the number of layers All managers other than the CEO are both supervisors and subordinates

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

Basic concepts Systems

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

What is management control systems

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

What is MCS an effective system should include

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

Management control boundaries

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

Management control boundaries

Strategy formulation
Goals, Strategies and policies

Management control

Implementation of strategies

(operational & financial) Task control

Efficient and effective performance of individual tasks

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

Strategy formulation involves

Framing a mission and objectives Analysis of internal environment Analysis of external environment GAP analysis Framing alternative strategies Choice of strategy

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

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

Task control Operational

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

Task control Financial

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

Distinction between Strategy/ Management/ task

Strategy formulation
Deciding on new strategies Unsystematic Analysis involves few people
Management control

Task control Consists of seeing that rules are followed Is a science There limited interaction between manager and subordinate Focus is on specific tasks

Implementing of strategies Systematic This involves managers and staff at all levels Focus is on organization units

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

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

Role of strategies in business

Minimize risks Decision making To achieve objectives Facilitate organizing Control Motivation Optimum use of resources

Strategies/ Policies
Strategy
Major courses of action or plans which help in achievement of organizational goals Rule for decision making Cannot be delegated downward This is concerned with uncertainties, risks etc. It is a specific statement. Can be written in explicit terms

Policy
Statements or guidelines for decision making It is a contingent decision Guidelines for decisions which can be delegated downwards It is an overall guide that governs and controls the managerial action It is a general statement which can be expressed or implied

Strategies/ tactics
Strategy
Major plans that are to be undertaken and allocated the resources to achieve these plans Developed at top management For a long period of time Higher uncertainty in case of strategy formulation and implementation Important for the entire organisation Affected by the personal values of the person involved in the strategy formulation process.

tactics
Means by which previously determined plans are executed Employed at lower levels of management to implement the plans Framed for a short period of time Fewer elements of uncertainty and risks They are concerned with specific part of the organization May be free from personal values of those who take tactical decisions.

Types of strategy
Corporate level Business level

Corporate level strategy

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

Corporate level strategy

High Single industry

Degree of relatedness

Related diversification

Unrelated diversification Low High

Extend of diversification

Corporate level strategy

details Features Single industry
Only one industry

Related diversification
Sharing of core competencies/ resources across businesses P&G J&J

Unrelated diversification
Totally autonomous business in very different markets GE

examples

Macdonals

Corporate level strategy

Stability Growth Retrenchment Combination

Business level strategy

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

Planning models used

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

BCG

Analyze your portfolio using BCG

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

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

GE planning model

Business unit competitive advantage

What is the structure of the industry in which the business unit operates How should the business unit exploit the industry structure What will be the basis of the business unit competitive advantage Use the Porters five forces model

Five force model

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

Impact of MCS on Organizational Behavior

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

The managers jobs

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

The organizational Hierarchies

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

Employees

Importance of goal congruence

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

Factors affecting goal congruence

Formal
Rules Manuals System safeguards Task control systems Physical controls

Informal
Work ethic Work culture Management style Perception and communication Informal organization Co-operation and conflict

Types of organization
Functional Business Matrix Network

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

Features of Functional Organization

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

Merits of Functional Organization

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

Demerits of Functional Organization

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

Business unit

Features of a business unit

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

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

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

Formal control process

Goals & strategies

Rules

Other information Reward

Strategic planning
Revise

Budgeting

Responsibility centre performance

Report actual versus plan

measurement

Was performance satisfactory

Revise

Corrective action

Feedback communication

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

Business unit controller

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

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

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

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

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