Management Control Systems

(Designing the Control Process and MC)

Prof N Sambandam
IBS Mumbai
Hiranandani, Mumbai 400 076

Designing the Control Process and Managerial Controls

Contents: 1. Introduction 2. Schools of thoughts in control a) Contingency approach b) Cybernetic approach c) Management control process approach 3. Designing management controls 4. The control process hierarchy 5. Communication and reporting structures in the control systems

Introduction

Natural biological & physical systems are self regulating and hold their variables with in prescribed limits automatically. But organizations are contrived social system. MCS is a set of interrelated communication structure that facilitate the processing of information for the purpose of assisting managers in coordinating the parts and attaining the purpose of an organization on a continuous basis. If MCS is designed properly, there will be snowball effect. If improperly designed, there will be downward spiral. Understanding statics and dynamics of control process is essential to the design and redesign of control systems. Attributes of Systems: macrostructure, autonomy, feedback, entropy (chaos & uncertainty).

Schools of thoughts in control

1. Contingency approach, 2. Cybernetic approach, 3) management control process approach. If we discover inputs that lead to desirable outputs, then we can formulate the principles of control systems? Design individual controls and design complete control systems based on cybernetic paradim.

Schools of thoughts in control (cont..)

Cybernetic paradigm of the control process:

Decision maker

Environment

Goals
Value Premises

Feedback

Preparation
Sensor

Comparator Factual Premises

Behaviour choice
Effector Behavioral Repertoire

Cybernetic paradigm of the control process (cont..)

Environment: External/Internal that causes changes. Feedback: To see the effect of solution implemented. Sensor: It is a mechanism of collection of data. Effector: Implementation of solution. Decision Maker: based on 1) past experience, 2) organizational goals, 3) personal expectations. Preparation: It is the process of extracting information from data. Goals: are the results of past learning of performance Value Premises: It is the difference between Decision makers desire and beliefs. Comparator: It is a comparison process between beliefs and goals Behavior Choice: If gap is identified, then corrective action to follow. Behavioral Repertoire: Collection of alternatives.

Designing management controls

There are 12 subtleties considered while designing effective performance measures. Refer page nos. 44 & 45 in M & K for these 12 subtleties.

The control process hierarchy

Organization is more than one responsibility center. Control process, therefore, must include superior-subordinate. Relationship between a superior and subordinate is termed to be a means-end chain (or relationship) The goals or ends of the superior are communicated to the subordinate, who in turn devices means that are appropriate to achieve those ends. These means in turn become ends for the subordinate, which in turn become the basis for more detailed means for the next level supervision.

The control process hierarchy (cont..)

Illustration:

Means-End Analysis
G

Level Superior 1

Superior 2

G1

G2

G3

G4

Superior 3

Overall Goals (G) or end of the organization becomes the basis for goals at the next level (G1, G2, G3, G4). The Goals or ends at the second level serve as ends for that level as well as the basis for developing means for the third level. These means in turn become ends or goals for level 3, and so on.

Communication and reporting structures in the control systems

The control systems design is concerned with designing an information processing system that allows the control process to function effectively. Elements of information system: 1. Formal or informal process that scans the environment facing an organizational subunit. (Environmental scanning). This process provides data for formulating Goals, plans, and decisions. 2. Organization requires a planning process wherein goals, objectives, and performance measures are set. 3. Feedback comes to the responsibility center from external sources through an environmental scanning process and from internal sources from a performance measurement system.

Communication and reporting structures in the control systems

4. Internal accounting system measures and compare the performance and provides reports (it serves as both a sensor and a comparator). 5. Decision-making procedures of an organization subunit may include SOP for meeting recurring problems and cost-benefit procedure for comparing alternatives. 6. Planning process: 1) Strategic Planning (for competitive advantage), 2) business Planning (for resource allocation), 3) Long range Planning or Programming (for forecasting), 4) Operating budgeting (for upcoming periods operating profit plans).