MANAGEMENT CONTROL

AirTex Aviation

DIM3VA
Angel Manalo, Steven Pango,
Alla Tsyren, Mohamed Zarti
Introduction
AirTex Aviation, one of the eight fixed-base operations at San Miguel Airport, was recently
purchased by Frank Edwards and Ted Richards. Their new dream is to ‘turn around’ a failing
business into a big player in the industry. Their targets include: a growth rate of 20% per
year in first 5 years; a steady cash flow in the company; and efficiency in operational
processes and accounting administration. Frank and Ted’s strategy, in turn, is to restructure
the organization through decentralization coupled with establishment of a new control
system.

The critical success factors for AirTex in our opinion include cost efficiency, cashflow
stability, operational efficiency and leadership. Their corresponding KPI’s and controls will
be discussed further in this report.

AirTex performance before the takeover

Prior to the takeover, the company conducted activities through 6 informal departments:
Fuel line activity, Service and parts, Flight training, Avionics, Aircraft sales and Accounting.
The company was mainly managed by the only accountant Sarah Arthur, who was
responsible for all the bills, checks, receivables and payables. Her accounting system and
accounting statements made AirTex a floundering enterprise on the verge of bankruptcy.

In relation to the financial situation, the company was not doing so great. AirTex had a loss
of $500,000 on sales of $10 million in fiscal year 1989, and this left the company with
negative net worth. The company’s accumulated debts (Ex. Short-term bank notes payable
of $300,000) and unpaid receivables left them with short cash flows and this resulted in an
end to their relationship with the aircraft dealer Piper Aircraft, the company was not able to
hold the agreed number of inventories in its stock, thus Piper Aircraft lost interest.

Evidence of management control problems were also existent. First was lack of direction.
According to the case, “the department managers knew nothing about the profitability of
their operations”. It was the same case with the accounts receivables of their respective
departments. Obviously, the previous top management of AirTex failed to inform its
employees i.e. departmental managers as to how well/bad they are doing, or even how they
can direct their contributions to the fulfillment of organisational objectives. Sarah, being the
central repository of all information, did not share this to everyone else and it led to its
managers’ demise. Without being able to evaluate their performance, they were also
consequently not able to take corrective actions and/or make adequate plans for
improvement. Hence, motivational problems resulted as well.

The second issue was personal limitations. Lack of skills was eminent in the case of Will
Leonard, the manager of the fuel line activity, who had only a high school diploma and no
theory of management; and the one and only accountant in the organisation, Sarah Arthur,
who “had no accounting training of any kind.” This was already a recipe for poor
performance.

1
Overall, the company was not performing well and education, motivation, direction and an
effective control system were all missing prior to the takeover.

The need for new control system at the time of the takeover. The
main issue at short notice
At the time of the takeover, AirTex was already facing a cash crisis; there were bills to be
paid totaling $510,000 but there was only $515,000 in the bank. They definitely need a new
control system in order to establish a stable cash flow.

Furthermore, the company’s existing management control system was formal but very
limited. As already mentioned in the previous section, the system was a single person -
Sarah Arthur - who had complete autonomy over the company’s information and kept this
information private.

The first challenge then for Frank and Ted to decentralise the system. Once the MCS is
spread to the departments with clear objectives, the second challenge is to find what
controls fit the company. Tightness in the MCS builds the opportunity that employees will
act and produce results as indicated by what the organization wishes. I will concentrate on
tightness by action control and result control since they are the most applicable to this case.
Result control can be made more tightly by characterizing wanted outcomes accurately,
estimating results adequately, and by giving the correct motivating forces. Action controls
can be implemented more tightly by utilizing physical or regulatory conduct requirements,
continuous pre-action reviews, and by making staff responsible for their actions.

Elements of Frank and Ted’s control system

After Ted and Frank’s takeover, AirTex was changed radically. Some relevant control
systems that were put into use were:

• Profit centres with responsible managers

• Decentralization (Managers had more freedom in managing their respective
departments)
• Accounts receivable managed by department managers and they were charged
for an aging factor of their receivables
• The administration profit centre (Took care of administrative costs and charged
the departments. Also handles loans)
• The Daily Department Report (Forces managers to keep track of their business,
giving them an awareness of their operations)

Presently, to investigate the case. The department managers, in the new decentralized
AirTex, are free to deal with their department activities separately from the top
management. The direct-action control in how the divisions are overseen is informal and
free; they have a couple of requirements, whereas, the resulting control is more tightly.
How the chiefs control their managers is constrained by the duty of for-profit centres. No
2
objectives for the profit focuses are expressed in the case, however, managers get rewards
for the profits made by their profit centre. Since there are no objectives the control can't be
called tight, yet it isn't wasteful since managers are encouraged to expand their profits.

The daily department reports (DDRs) help control indirectly the way how managers do their
work. It is a type of action control that enables the department managers to consistently
monitor how their department is performing. It empowers the managers to get input from
the framework itself about how well they are performing, and the managers learn by doing.
The control is tight, the reports must be delivered on a short-timely basis (i.e. daily), and the
measures indicate the pertinent figures of the departments. There is both result control and
action control blended in this situation. The framework allows managers to create reports,
and by delivering the reports they learn more about their department, the results help
managers monitor their own performance and take the right actions. This is a tight response
control system since it gives quick input and opportunities to address issues early.

AirTex likewise carries out two other different types of action control. The managers
oversee their receivables. This is action accountability control. The directors are in charge of
gathering cash and in the event that they don't they will get less benefit due to the "aging
factor". That control is tight; it is consistent, the managers need to get their cash quick; it
offers discipline for gathering late receivables. Ted believes that understandability and
controllability are high for them. The other type of action control is the administration profit
centre. It is a type of administration to provide a simple method of cost allocation for
department heads, the form aims to take away responsibility for borrowing, paying taxes
and such from managers to one unit that can deal with it better.

Personnel and cultural controls were also utilised in the new control system. Ted took it
upon himself to make his role as a teacher, to educate and train the departmental managers
as much as he can. This is a personnel control which allows him to provide useful
information about what actions and/or results are expected of the managers and how their
assigned tasks can best be performed. This has positive motivational effects and can lead to
a greater sense of professionalism in the workplace. In terms of cultural controls, the tone
at the top i.e. Ted being “the avuncular, emotional leader” is consistent to the culture that
they are trying to enforce in the organisation. Physical arrangements in Ted’s office included
putting up a blackboard, arranging the furniture so that there was a sofa facing the
blackboard and a chair turned towards it as well encouraged a more methodical way of
problem solving in the teams.

The table below summarises the critical success factors, their corresponding performance
indicators and the controls in place.

CSF KPI CONTROL

Cost efficiency Operating Profit Results The establishment of profit
Margin centres
Account receivables Action Cost allocation policy
turnover; through the Administration
Average collection Profit Centre
period

3
Cashflow stability Current ratio; Action Action accountability for
Receivables accounts receivables
turnover and
payables turnover
ratios
Operational Direct costs, number Action Daily Department Report
efficiency of units sold,
operating profit,
cash flow etc.
Leadership Employee turnover; Personnel Educating and training the
Employee managers
satisfaction Cultural Tone at the top
Cultural Physical arrangement

SUGGESTIONS FOR IMPROVEMENTS:

Even though Ted and Frank did a good job in transforming the company, profound prior
knowledge of the aviation industry before the acquisition would have helped them in being
more efficient.

In addition, the Daily Department Report in our opinion is too tight for a control and can
have the potential to result to negative attitudes i.e. lack of motivation, or even
gamesmanship. This framework further requires high indirect and direct costs, including the
need for additional personnel. It is then suggested to have these department reports done
on a weekly basis to be more cost efficient, and still be consistent in terms of the accounting
administration.

Will the system work?

In terms of solving the cash crisis, this new control system put in place by Frank and Ted
coupled with Ted’s efforts to get in good terms with the suppliers and the bank, AirTex’ cash
management will be more stable. The firm would have the ability to pay its current liabilities
(totaling to $500,000) with the new credit management system. In addition, AirTex is in the
way to financial stability and could sell and inventory the requisite number of aircraft to
maintain dealer status.

On the other hand, the case has mentioned resistance to change, specifically in the case of
Roy Douglas (the flight training manager).Negative attitude could arise, especially now with
all the new controls and policies in place.

Nonetheless, the main concept of decentralisation proves a lot more benefits than harm
compared to the centralised decision-making prior to the takeover. Pros and cons of
decentralisation will be explained in the next section.

Overall, we consider the system to be effective.

4
Decentralization: Pros and Cons
Overall, decentralization can lead to a significant change in company’s culture, since it puts
high responsibility on department managers.

Decentralization can have a number of benefits. Firstly, there is operational independence

and increased autonomy for department managers of AirTex in particular. They are now
allowed to make their own decisions regarding the activities and results of their respective
departments. Consequently, this releases burden on the top management and enables
quick and better decision making. Furthermore, with the increased responsibility and
accountability i.e. through the profit centres, managers are more motivated to do the
desired behaviours/actions in order to reach their departmental goals as well as the overall
organisational objectives. The accounting department also now has limited power with the
decentralised decision-making (and with Sarah gone). Decentralization also allows managers
to make mistakes and experiment and therefore lead development of the management
team and company growth. for diversification of products, activities, and markets.

On the other hand, this way of decision-making can also have negative effects. One is the
difficulty to implement standardised processes across the whole organisation. Departmental
managers in this case have different perception of what the best practices are and it would
therefore be challenging to achieve consistency. Another downside is the possibility that
some managers do not have the sufficient skills to be autonomous (i.e. creativity) or want to
have autonomy and instead just stick to the usual standards. There is also the threat of high
costs due to extra administrative burden i.e. the duplication of work and resources.