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Chapter 1
Chapter 1
Chapter 1
1Control Systems
The term control is used in management parlance in a cybernetic sense, that is to say,
as a self-regulating mechanism with the following sequence of actions:
1. Planning
2. Execution
3. Comparison of achievement with plan
4. Assessment of deviations, if any
5. Corrective action to bring back performance in conformity with the plan.
Control Object
A control object is the variable of the systems behavior chosen for monitoring and
control. The choice of the control object is the most important consideration in studying
and designing a control system.
Variations in the status of control object i.e., its behavior become the stimuli which
trigger the functioning
Of the control system. Without these variations the system has no reasons for
existence.
Detector
The detector tracks the performance and can be visualised as a scanning system and it
feeds on information.
In fact the detector is another name for Management Information System(MIS).
Comparator/Assessor
The output of the scanning system constitutes the energizing input of the comparator.
Its function is to compare deviation of the control object from the pre-determined
standard or norm the deviation become input to the activating system.
Effecter
The effecter is a true decision maker. It evaluates alternative course of corrective action
in the light of the significance of the deviations transmitted by the comparator. On the
basis of this comparison, the systems output is classified as being in control. If out of
control it initiates corrective action.
Communication Network
These are devices that transmit information between the detector and the assessor and
between the
assessor and the effecter.
Mr. Stafford Beer has given three principles governing control functions in cybernetic
system.
1. In implicit controllers there is CONTINUOUS AND AUTOMATIC COMPARISON of some
behavioral characteristic of the system against a standard. Further there is
CONTINUOUS AND AUTOMATIC FEEDBACK of corrective action.
2. In implicit controllers control is SYNONYMOUS WITH COMMUNICATION. Control is
achieved
as a result of transmission of information. Thus to be in control is to communicate.
Control and
communication are two sides of the same coin.
3. In implicit controllers, variables are brought back into control IN THE ACT OF AND BY
THE ACT of going out of control.
Example:
The cybernetic paradigm of the control process can be diagrammatically represented as
under the term cybernetics is derived from the Greek word “Kybernetes” which means
‘steersman’. A steersman is a person who directs a ship and corrects deviations from
planned course of action as they occur.
System
A system is a set of objects together with their relationships between the objects and
between their attributes related to each other and to their environment. ‘So as to form a
whole’
Schoderbek, Schoderbek, & Kefalas
Objects: Objects are elements of a system. There are three kinds of objects Inputs
Processes & Outputs Behavior Repertoire
Elements of a System
Relationships
Relationships are the bonds that link the objects together. They can be one of the three
following
Categories.
Symbiotic Relationship is one in which the connected systems cannot function alone.
The symbiotic relationship between a parasite and a plant is unipolar, to the extent that
the parasite cannot live without the plant – parasitic symbiosis. However the Symbiosis
Relationship between the production & sales subsystem is bipolar – no production, no
sales – no sales, no production – Mutualistic Symbiosis.
Attributes
Attributes are properties of both Objects and Relationships. They are of 2 kinds
Defining characteristic – Eg. Load capacity of truck, speed, fuel, etc,.
Accompanying characteristic – Eg. The amount of pollution created by the engine of the
truck
Environment: Each system has factors that are external to it, relevant to it and are
uncontrollable. Such factors are called Environment.
Whole
Whole is more than an aggregate of parts. The whole is an independent framework in
which parts play a distinctive role.
Thus Maciareillo and Kirby include both Control of strategy and Control of operations in
the
Definition of M.C.S. A good management control framework, implemented properly, will
enhance organizational adaptability, accelerate productivity and enhance
competitiveness.
The formal and informal systems along with the fi ve components of each are explained
further.
This system does produce results, but it may demotivate employees who like to have
more freedom in the works environment. Further it may thwart the innovative spirit. The
intense competition amongst employee may even create a tense atmosphere in the
organization which may not be conducive to long term growth.
However in case the employee are very subservient and not enterprising, this style may
suit such
organization.
The classic illustration of this external style was the one practiced by Harold Geneen of
ITT in U.S. with a highly centralized tight central system. He personally made detailed
evaluations of the performance of business units instead of monitoring the overall
performance only, leaving the details to the unit managers.
Internal Style: The internal style is participative in nature and employees are given
the freedom to offer suggestions, come out with innovations and take part in the
decision making process. There is thus
Jack Welch the legendary CEO of General Electric was an autocratic leader in his early
career, inviting the nickname of “Newtron Jack”. From 1990s he transformed his style
into one of involving people in decision-making and making use of the brain of every
worker. His ambitions goal was to remove the “boss element” for G.E and to make it a
boundary less organization.
Jeff Immelt who succeeded Jack Welch in 2001 is adored by everyone in G.E. for being a
friendly likeable leader, with a proven track record.
Toyota is well-known for its philosophy of encouraging employees to come out with
suggestions for
improvement and rewarding them.
Mixed Style This is a composite of both the above styles, blending the advantages of
each, without their drawbacks. Human nature being what it is, proper functioning of any
organization requires suitable checks and balances. A control style based exclusively on
intrinsic motivation seems to be naïve. A rigid authoritarian style, cast in a rule-bound
framework, may be a noose round the organization Murugappa group is a good example
of this modifi ed style of management. While the Board lays down the major policies
and broad guidelines the professional divisional managers are given total freedom to
attain the organizations goals.
Management Culture
Culture consists of shared values, beliefs and norms of organization which grew over
time based upon the assumptions of what it takes to be successful. While management
style is associated with individual managers, corporate culture is pervasive and is an
organizational concept.
Culture facilitates cooperation & communication within the organization; however, if the
beliefs are not consistent with the needs of business, dysfunctional consequences may
follow.
A shared belief also ensures greater commitment of the employee to the organization.
BSNL’s complacent culture in a monopolized environment had to undergo a radical shift
to a market oriented approach when the telecom sector was de-regulated.
Organization Structure
A firms’ strategy has a major influence on its structure. The type of structure in turn infl
uences the design of the organization’s management control system. Organization
structure can be grouped into three general categories.
1. Functional Structure
2. Divisional Structure
3. Matrix Structure
Functional Structure
In this structure, each manager is responsible for a specified function as Finance or
Marketing. The
diagrammatic representation of this structure is as follows
Divisional Structure
In this structure each of the decentralized division operates as a complete business unit
in itself, like a semi-independent part of the company. The diagrammatic representation
of this structure is as follows:
Matrix Structure
Matrix Organisation Structure combines the coordination and control of the
decentralized structure with the technical excellence economies of scale of the
functional structures to reap the benefi ts of both. While managing complex programs
as in large high-technology programs, complex products and services and multinational
business, organization face several coordination problems. A matrix avoids such
problems as the total responsibility for achieving the goals and objective of the program
lies with Program Manager but must share resources from the various functional heads.
The functional managers assigned to the projects are administratively reporting to the
Project Manager but functionally to the Function Head.
The distinguishing feature of the matrix structure is thus the dual dimensions of
management embodied in it.
The outputs produced by the organization may be identified in the rows of the matrix
while functional inputs utilized by each project may be identified in the columns of the
matrix. The total outputs of the
functions are found in the last column of the matrix.
Though the Project Manager assumes full responsibility for delivery of a product which
meets performance specifications he does not have direct authority over the functional
organization that actually performs the work. The functional personnel thus operate
under the knowledge-based authority of the function and the resource-based authority
of the Project Manager. This may create a friction in the course of the work but it is up
to the Project Manager to use it as a creative friction to further the goals of the
program.
b) The matrix organization structure is suitable for projects which are not large enough
to warrant a
fully decentralized set-up, with all functional managers under each project.
Decentralization may
result in loss of scale economics, by way of duplication of functional services for several
projects.
(i) Advantages
1. Ensures better coordination and control of the decentralized structure along with
achieving
technical excellence and economies of scale of the functional organization.
2. Fosters creativity and multiple sources of diversity
3. Broader middle-management exposure to strategic issues of the business
4. Acts as a good training ground for future leaders.
(ii) Disadvantages
1. Dual accountability as explained above, which may create confusion
2. Necessitates tremendous horizontal and vertical coordination
3. Difference in orientation between Program and Functional personnel. The functional
person may
aim for high technical performance not warranted by project requirement
4. Diffuse responsibility As responsibility is distributed between program and functional
personnel
becomes diffi cult to administer system of accountability, leading to potential conflict
5. Program personnel may have a sense of insecurity as soon as a project is completed
and this may lower their morale
6. The design of the reward structure for program and functional personnel is a ticklish
issue which
should be worked out in a fair and transparent manner to satisfy all.
1.2.4 Rewards
Rewards are a major motivational tool to secure the participation of individuals to
achieve organizational goals. They are also an important source of communication and
feedback. They communicate just what the firm values and just how valued an
individual is to the firm. The feedback or rewards may be positive, seeking to reinforce
and encourage certain behaviors or negative, seeking to alter behaviour to a more
desirable pattern.
Reward system should blend the interest of individuals with that of the institution to
ensure goal
congruence. The system should be transparent and be perceived as fair.
An effective reward system requires
• Establishment of goals
• Performance measurements, financial and non-financial
• Rewards criteria
Apart from the foregoing factors, the reward system must be designed differently for
the different levels of management. The compensation plan of Nucor Corporation, USA,
serves as a good illustration.
Compensation
Nucor provided employees with a performance-related compensation system. All
employees were covered under one of four compensation plans, each featuring
incentives for meeting specifi c goals and targets.
Iverson gave an example of how this plan worked: “In the steel mills, there are nine
bonus groups:
three in melting and casting, three in rolling, and three in fi nishing and shipping. Take
melting and
casting, for example. We start with a base of 12 tons of good billets per hour: Above
that, the people
in the group get a 4 percent bonus for every ton per hour. So if they have a week in
which they run,
say, 32 tons per hour – and that would be low – that’s an 80 percent bonus. Take the
regular pay, the overtime pay, everything, multiply it by an additional 80 percent – and
we give them that check along with their regular check the next week.
Every plant operated as a stand-alone business unit. All the plants had the same
performance target: a return of 25 percent or better on the assets employed within that
plant. In recent years, bonuses averaged 82 percent of base salary.
3. Senior Officers Incentive Plan
The designation “senior officers” included all corporate executives and plant general
managers Nucor senior officers did not have employment contracts, nor did they
participate in any profit sharing, pension, or retirement plans, their base salaries were
lower than those received by executives in comparable companies. Senior officers had
only one incentive compensation system, based on Nucor’s return on stockholder’s
equity above certain minimum earnings. A portion of pretax earnings was placed into a
pool that was divided among the officers. If Nucor did well, the
Officer’s bonuses, in the form of stock (about 60 percent) and cash (about 40 percent),
could amount to several times their base salaries. If Nucor did poorly, an officer’s
compensation was only base salary and, therefore, significantly below the average pay
for this level of responsibility.
During a slack period in the 1980s, Iverson was named the Fortune 500 CEO with the
lowest
compensation. He saw this as an honor. “When I walked through a plant during that
period of time
when we had to cut back to a four-day work week, or even three-and-a-half days. I
never heard an
employee who complained,” he said. “His pay may have been cut 25 percent, but he
knew that his
department head was cut even more and that the officers were cut, percentage wise,
even more than that. I call it our ‘share-the-pain’ program…. I think in 1980 I earned $
430,000. In 1982, I earned $ 108,000. Management should take the biggest drop in pay
because they have the most responsibility.
Style / Staff / Skills are the soft elements corresponding to Managerial style,
Coordination and Rewards. The super-ordinate goals represent the culture of the
organization.
Structure
1.2.6 Robert Anthony & Vijay Govindarajan’s view of Management Control:
The learned authors have defined Management Control as “the process by which
managers
Influence other members of the organization to implement the organization strategies.”
It will be observed that the elements given within the Implementation Mechanism box
corresponds
broadly to the elements in the M.S.S.M. model.
1.3.1 We have already seen the impact of managerial style on behavior – refer 1,2,1
1.3.2 We impact of control system on human behavior is best illustrated with the help
of examining one type of control, say, budgetary control
b) Fixing targets
Sales production and other targets that are fixed should be challenging but attainable
so as to bring
out the best efforts of individuals. If targets are so high, as to be unattainable, it may be
demotivate
employees: in some cases it may also lead to manipulation of data to ensure conformity
with budget.
However such manipulations will have adverse effects in the long run. A common
practice is far sales manager to dump stocks on their dealers at the year end to meet
sales targets, perhaps giving unduly long credit.
c) Evaluation of performance
The evaluation of performance should be done in a constructive manner and not in
vindictive style.
While variances may be thrown up by the system, the causative factors may not be
known readily.
Hence it is necessary to analyze the reasons for variance and ensure proper
accountability.
1.3.4 Rewards
Rewards are powerful motivational tools. However if the reward is perceived to be unfair
or not
transparent, it may have a demoralizing effect.
The history of companies like Worldcom, Enron, Tyco etc have shown how CEO’S
actuated by greed, manipulated and artificially boosted profits and share prices by
resorting to dubious accounting practices to maximize their individual earnings, which
ultimately led to the collapse of the companies.