INTODUCTION TO MANAGEMENT CONTROL SYSTEM

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Focus of an Business Enterprise

An Enterprise has to use its resources effectively and efficiently for: Maintaining Competitive edge over competitors. Meeting the growing demands of stakeholders. A Management management in control system assist the

formulating strategies, coordinating the activities of the organization, and

steering those activities toward the achievement of the overall goals and objectives

INTRODUCTION
Role of Management PLAN, ORGANISE, INTEGRATE & INTERRELATE organizational activities to achieve objectives. Control Points - To check whether Organization is on right path They compare desired state with actual state. System - set of interrelated communication structure of gathering and monitoring these control points to achieve organizational objectives

Controls
Control helps in guiding employees in accomplishments of organizational goals But increased control reduces creativity and entrepreneurship Control process at three levels Strategic Management Operational

These levels are not mutually exclusive

Strategic Control
Deals with Domain definition Direction setting Issues that impact organizations long term survival Organizations objectives and implementation & monitoring progress

Controls
Management Control Deals with effective resource utilization State of competitiveness of the unit Translation of corporate goals into business unit objectives Operational Control Concerned with efficiency issues At specific functional / departmental levels Outcomes are tangible and easily measurable Benchmarks are known and well-defined Time horizon is short

CONTROL SYSTEM

Control has elements Detector / Sensor Assessor Effectors A Communication Network System is a prescribed, usually repetitive way of carrying out an activity or set of activities. But MCS are complex and judgmental.

Management Control
MCS is concerned with implementation of strategies and attainment of goals Traditionally CONTROL refers to activities of
Establishing standards of performance Evaluating actual performance Implementing corrective actions

Market environment demands that

Resources are used effectively and efficiently Excel in operation Maintain competitive edge

Management Control has been defined as a process whereby management and other groups are able to initiate & regulate the conduct of activities so that results are in line with the goals and expectations held by these groups

Management Control System

MCS is a set of interrelated communication structure that facilitates the processing of information for the purpose assisting managers in coordinating the parts and attaining the purpose of an organization on a continuous basis MCS is a collection of controls to address following situations Employees are not clear about expectations from them Employees are clear about the expectations but they are not motivated They are clear and motivated but goals are not attained

Need for Management Control

Absence of control systems may lead to huge losses and even to corporate bankruptcy. Concerned with the attainment of goals and implementation of strategies. Help in assuring better quality Help in coping with unanticipated change Helps create faster cycles to market.

Objectives of Management Control

Answer contextual issues that impact success and survival of the organization Detect environmental variables that can significantly affect organization Effective resource allocation Sustaining competitive advantage Transforming corporate goals into business objectives Maintaining transparency and clarity in financial reporting Conformance with relevant regulatory requirements Operational efficiency

Classification of Objectives
Effectiveness and Efficiency of business operations
Effectiveness is perceived when the purpose is accomplished Efficiency is achieving purpose with minimum resources

Reliability of Financial Reporting

Should bring out true and fair picture of all financial transactions These reports should be understandable and relevant

Compliance with applicable regulatory and legal framework

Contextual Factors Influencing Management Control

Nature and Purpose of the Organization Profit or Non-profit organization In Non-profit organization, Donors play important role in setting expectations In Non-profit organization, surplus is utilized for the benefits of the society In Non-profit organization, rewards are intangible

Contextual Factors Influencing Management Control

Organization Structure and Size Centralization/ Decentralization and span of control are important for consideration of MCS Large organizations call for higher degree of decentralization Large organizations tend to have more influence over the environment In large-sized organizations, it is necessary to develop controls such as rules, documentation of the information, creation of specialized role of functions, and a higher degree of decentralization

Contextual Factors Influencing Management Control

Corporate Strategy and Organizational Diversification In terms of their corporate level strategies companies can be classified in three categories. Single Industry Firm operates in one line of business. Uses its core competencies to pursue growth within that industry Unrelated Diversified Firms Operate in business that are not related to one another; connection is purely finance

Contextual Factors Influencing Management Control

Related Diversified Firms Operate in several industries and take benefit of common set of core competencies and share common resources. They grow internally through research and development Related diversified firms depend more on strategic controls while unrelated diversified firms depend more on financial controls to ensure performance

Contextual Factors Influencing Management Control

Competitive Strategy Three generic strategies to gain competitive success are Overall cost leadership, differentiation and focus For overall cost leadership, management control systems are designed to achieve its objective of efficiency For differentiation, management control systems will work toward building value into the product For Focus, management control systems may be used to ensure the right pricing policy for the product offerings

Contextual Factors Influencing Management Control

Managerial Styles Autocratic Democratic Both of these can be Permissive or Directive ( in terms of the way in which work should be carried out Autocratic manager generally takes decisions by himself/herself, and the subordinates have to follow them Democratic manager allows the subordinates to participate in the decision-making process

Contextual Factors Influencing Management Control

Organizational Slack
Occurs when organization under-exploits its environment This results in higher salaries than necessary It acts as cushion against changing Provides resource for innovation and adaptation

Stakeholder Expectations
Necessary for organization to determine goals and objectives & performance measure for each of the stakeholder Based on the relationship and the goals, control is exercised over stakeholders

National culture
Management Control System of any organization is influenced by the national culture of the country. Managers working in multinational corporations should be aware of the culture that is prevalent in the country. Four dimensions on which culture varies across countries are power distance, Uncertainty avoidance, individualism/collectivism and Masculinity/feminity

Types of MCS
Two Broad Areas Formal laid out in writing by management also referred to as bureaucratic controls Entails the delegation of tasks in a structured manner Policies, standard operating procedures (SOPs), budgetary controls, financial reporting, audit, performance measurement systems, and incentive systems are examples of formal controls

Types of MCS
Formal
Classified in three types Input Control include selection, training, resource allocation Process Control applied to behavior or activities rather than end results Output Control performance standards are set and monitored and results are evaluated. Applicable when it is easy to measure the output and there are few elements of uncertainty

Types of MCS Informal Control

Arise out of employees behavior Informal controls are not about to follow any fixed rules and regulations Interpersonal relationships or peer interactions among individuals and groups at various levels are encouraged Co-exist with formal controls in a controlled organization and the effect of the one is not independent of the other.

Types of MCS
Classified in three types
Self Control Can be beneficial if the organizations goals are in congruence with those of individuals Social Control Organization establishes certain standards monitors and takes action when deviations occur Arise out of mutual commitments towards common goals Cultural Controls can be realized social interaction, rituals relating to the organization

Subsystems and components of MCS

Formal Control Process
Formal Planning Process Strategic planning necessary to assist in projects. Helps to decide key objectives and goals & strategies Operations Planning undertakes activities which are short term in nature Formal Reporting Process To assess the progress and decide on next set of actions

Subsystems and components of MCS

Informal Control Process
Formed as a result of interaction between people Helps development of new goals and objectives One mechanism for control on this type is the formation of Ad hoc teams to achieve organizational change objectives and goals Informal communication system develops as people develop work relationships

Impact of IT on Design of Control System

Data can be managed more easily and at a reasonable cost Enables fast co-ordination & decision-making Data can be collected for strategic and operating decisions But technology should be used for making work easier rather than indulging in complex and expensive systems Reduced cost of information processing led to ABC (Activity Based Costing) system These provide accurate cost data for operational & strategic decisions Optical scanning devices help in Inventory Management, Market Research

DESIGNING THE CONTROL PROCESS AND MANAGEMENT CONTROL

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Approaches to MCS
Contingency Approach Cybernetic Approach Management Control Approach

Contingency Approach to MCS

Design & use of control system depends upon organizational setting Universalistic approach suggested that there is one optimal control design for all settings So Contingency approach was proposed which states that appropriateness of different control system depends on the settings of the business Contingency theory focuses on interaction between the organization and its environment

Contingency Theory
Need for Contingency Theory has arisen out of factors like Technology, Organizational Structure and Environment Technology Influences design of control system Helps to use data and resources more effectively Organizational Structure should be capable of coping with high degree of uncertainty Organic structure which are complex, adapts easily to unstable conditions Contingency approach helps in designing of Control System for complex organization structure Environment In order to survive organizations have to adapt to the demands of environment like competition

Contingency Theory
Fisher identified five contingent control variables Uncertainty Technology and Interdependence Industry, firm and unit variables Competitive strategy Mission and observability factors

Cybernetic Approach to MCS

Word Cybernetic is derived from the Greek word Kybernetics meaning Steersman. According to definition by Norbert Weiner who started the term Cybernetics, It is study of the entire field of control & communication theory whether in machine or in animal. It deals with self-regulating principles in a variety of systems

Characteristics of Cybernetic System

Complex structure Mutual interaction Complementary Evolvability System tends to evolve and grow in opportunistic manner rather than being designed and planned in optimal manner. Constructivity System increases in size & complexity on its own through evolution

Cybernetic Paradigm devised by Griesinger

It helps in designing the control process. It helps in capturing following Essential elements of repetitive control process Setting goals and performance measures Measuring achievement Comparing achievement with the set standard Computing the variance resulting from comparison Reporting the variance Identifying the causes of variations Taking the required actions to eliminate the variances in future Follow-up to ensure that the goals are met

Cybernetic Paradigm
Goal-oriented controls reflect cybernetic paradigm. Paradigm begins with the assumption that decisions are made because of interaction between the decisionmaker and the external environment. Manager scans environment & collects data as sensor. Based on data manager builds up certain assumptions about external environment & present performance of the unit. These are termed as Factual Premises. They can be formed on the basis of perception. Factual premises are compared with organizational goals & performance measures (Value Premises). Action is taken to bridge the gap. Alternative courses of action available are Behavior Choice. The best action is implemented. After implementation, get required feedback to determine the effect of action.

Management Control.
Management Control is the process by which managers at all levels influence / ensure that people they supervise implement their intended strategies. The control may be tight or loose Budget is binding constraint in Tight Control Budget is tool for planning in Loose control Management Control Activities involve Planning What the organization should do Coordinating - the activities of several parts of an organization

Management Control
Communicating information Evaluating information Deciding what, if any, action should be taken Influencing people to change their behavior Management Control is not automatic; it requires coordination among individuals. The connection from perceiving the need for action to determining the action required to obtain the desired result may not be clear. Much management control is Self-control i. e. it is not by external regulating device

Control Process
Steps in basic Control Process Determining areas to control
It is expensive to control all areas Employees may resent if all activities are controlled Organizational goals and objectives form the basis for deciding control area

Establish Standards
Often incorporated into goals when they are established Sometimes they are required to be developed Should be set to achieve desired quality & quantity within a specific cost and time frame Helps employees to perform effectively Helps in identifying job difficulties, remove them or take appropriate actions To evolve standards and make them more effective participative approach may be followed

Control Process
Measure Performance Decide how to measure and how frequently to measure Compare performance with standard Reward performance and / or Take corrective action Recognize and acknowledge good or positive performance It helps sustain the performance and encourage further improvement For negative performance Take corrective action Sometimes goals may require modification Clarify duties and responsibilities of sub-ordinates Explain the job in detail Train, recruit or remove inefficient sub-ordinates Implement corrective actions properly

Control Process
Adjusting Standards and Measures when necessary Unrealistic and inappropriate standards in view of dynamic conditions need modification Review standards periodically to meet compliance with future needs Review or change may be required if it calls for more resource consumption compared to the benefits it generates Review may involve Changing organizational objectives Changing technology

Designing MCS
MCS A set of interrelated communication structure Control system should be effective contributor to implementation of strategies Steps in designing MCS Require to know what an organization wants from each employee (Role Demand) Identify Key Areas (KA) for each employee Understand Key Actions to be controlled (Called as Action Control) Role Demand can also be identified through Key Results (KR) KR change according to the prevailing internal & external environment

Choice of Controls
Choice of Controls Personal or Cultural Control First consideration Lesser cost & consequences Useful for small organization Work only when employees have clearly defined roles Understand their goals and performance levels

Choice of Controls
Action Control - Works on standard sets of procedures and policies Advantages are Directly linked to task being performed Direct managerial attention to actions being taken Uniform application in the organization, so aids in coordination Being standardized procedures, key persons leaving the organization does not affect CS These controls are means of attaining efficiency Disadvantages are Useful only for highly routine jobs Do not promote creativity, resulting in more employee turn-over Because of rigidity of rules, difficulty in adapting to changing environment

Choice of Controls
Result Controls They inform employee what is expected & to achieve and what they should do They control behavior of employees and are effective in addressing motivational problems First step is to define the dimensions on which controls have to be set Measure performance based on these dimensions Final step is setting performance targets and providing adequate incentives

Choice of Controls
Result Control Advantages Controls are feasible even when knowledge about desired action is lacking Provide on the job training Motivates employees & make them more committed because of more autonomy Disadvantages Many times effective measure of performance is not possible Bad results are attributed to employees mistakes Tightness of Control Depends on Benefits, Cost & side-effects Limits adaptability leading to difficulty in adjusting to changing environment

Design of MCS
Management Style & Design of MCS The different management styles are External control Internal control Mixed control External control Works on the premise that sub-ordinates can be motivated through rewards This style is authorative and mechanical Goals are set by top management The style establishes that to achieve the goals it is necessary to Set difficult goals so that employees need to stretch Form strict regulations so that employees are not able to manipulate their tasks Embed adequate incentives in performance assessment

External Control
Advantages Motivation because of reward system Because of high level of control no manipulation by sub-ordinates

Disadvantages No commitment to organizational goals Concentration only on one aspect and balance is ignored Only positive outcomes are informed; negative are hidden

Internal Control
Works on the premise that sub-ordinates are motivated and committed to organization if they are involved in decision-making process Style assumes that employees will experience a sense of achievement, recognition & self-esteem if they are involved in decision-making process Important Strategies for implementation Participative Management; more emphasis is on how goals are set, rather than achieving the goals Problems are solve jointly; rather than blaming particular individual Work in positive direction to analyze problem at an early stage Rewards are on overall performance Always look forward for improvement in performance in future

Internal Control
Advantages
Induce high level of commitment & motivation Because of participative management employees are more focused on achieving the targets Encourages accountability towards work Open work atmosphere

Disadvantages
Loose control Information is for problem identification and corrective action but not for performance evaluation Employees who are not willing to participate, may not perform well

Mixed Control
Both Internal & External Controls have their own advantages & disadvantages Mixed Control is evolved balancing both types. The important issues are Congruency between control & managerial style Analyzing the climate, structure & reward system of the organization they determine employee behavior Reliability of job performance measure particularly important for External control system Individual differences among sub-ordinates like participative nature

Designing Management Controls

Points to care Establishing controls should be a constructive process Should help enhancing the performance Standards should be challenging but attainable Objectives should be measurable for the purpose of evaluation There should not be too many objectives There should not be too much focus on easily measurable and short term variables Responsibility for results should be with single individual

Designing Management Controls

It is advisable to take samples of the variables to be controlled Acceptable range of variation should be developed for each variable Exceptions to desired results should be reported Severity of the problem should be determined by analyzing the causes of the problem A system of control requires judgment and insight

Control Process Hierarchy

Control Process involves relationship between Superior and subordinates Superior decides on target for subordinates Negotiates the targets to acceptable level Ensure that goals of subordinates and superiors are in congruence with organizations goals Track the performance at periodic interval If performance is unsatisfactory, find reasons Device plan of correction and implement Set targets and course of action for next period

Communication
Information and communication is one of the important component of management control. Communication is not only required to pass on the information but is also necessary for coordination of work, assigning responsibilities etc. Two types of communications internal communication and external communication take place in any organization

Internal Communication
Meetings, serve not only as control activities but also as mechanisms of internal communication Consistency/inconsistency of managements behavior with its formal communications (oral/written) is an important component of internal communication to employees Employees can help in internal communication by spreading the organizations culture Orientation and socialization of and shared values to new as well as existing employees

External Communication
External communication includes communication with the suppliers, customers, external auditors, regulators, etc.

Helpful to the organization in various ways such as customers providing feedback regarding the quality of products and services, and external auditors and regulators providing information regarding the effectiveness of the internal controls of the organization

Report Format
Refers to the layout of the information. Information presented is a function of three factors: Information to be provided Questions to be answered Form of presentation

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Information to Information to be provided in a report consists be of a title and is described by the number and provided types of the variables. Variables can be categorical, ordinal and quantitative. Question to be Question is generally the decision-making answered problem for which information is required. Answer to the question depends on the complexity of the question. Form of presentation Refers to the visual representation of the information. Information can be presented in the text form, tabular form, graphical form or combination of any of two or all three. Presentation also depends on the number of different variables.

Internal Performance Reports

Measures the performance of the organization in a periodic form from time to time. Not disclosed to the public like the corporate annual reports. Used to rectify performance. any deviation from the planned

Helps in exerting control on the performance of the organization on a constant basis.

Types of Internal Performance Reports

Performance appraisal report. Progress reports of the projects. Trend charts of the sales. Variance reports Problem analysis sheets. Financial schedules Inventory status reports Exception reports in sales.

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Corporate Annual Report (CAR)

Key public document prepared by organizations to fulfill corporate reporting requirements. Company informs the public about performance in a particular financial year. its financial

Format of CAR

Format of representation is specific for specific countries. Consists of two sections-first includes non-statutory matters and latter section consists of Financial statements. Contents of the reports are partly Voluntary and Partly mandatory.

Information to be disclosed in CAR

Information Item Information regarding assets, revenue, expenses and profit. Relative Importance Essential

Major elements of cost: Marketing, Salaries, restructuring, asset maintenance

Capitalized interest Capital expenditure (Actual vs. Planned) Major contractual relationships Monetary and Non-monetary risk disclosure All performance measures: financial, Pricing, efficiency, market Discussion on major factors influencing next year

Essential

Very important Very important Very important Very important Very important Intermediate

Business Ethics and Management Control

Ethics is a science of Moral, Moral principles & recognized rules of conduct Philosophers thought Ethics as System of moral principles and methods for applying them Business Ethics concerns itself with what is right and wrong at the workplace

Ethical Behavior in Organization

Ethical Behavior in Organization depends on Ethical Philosophy and Ethical Decision Ideology Individual factors Organizational Factors External Environmental Factors Ethical philosophy Utilitarianism If action does greatest good to greatest number of people, then it is ethical Individual Rights Deals with safeguarding the rights of individual Justice Requires that rules of organization are enforced fairly and impartially

Ethical Behavior in Organization

Ethical Decision Ideology Concerned with how different individuals apply their ethical philosophies to decision making. Can be classified on two dimensions Idealism Belief that behaving ethically ensures positive results Relativism Belief that Moral value depends on circumstances Absolutist High Idealism & Low Relativism Exceptionist Low Idealism & Low Relativism Situationist High Idealism & High Relativism Subjectivist Low Idealism & High Relativism

Ethical Behavior in Organization

Individual Factors Individual's value system Age Ego Organizational Factors Organizational Culture and Structure Performance Measurement System Reward System Position-related factors External Environmental factors Political and Economical Factors Social Factors

Management Control and Ethical Issues

Budgetary slack is an issue applicable across all functions Managing Earnings So that reported financial performance different than what is actual Ethical Issues in Sales
Salesperson is representative of an organization Samples and gift adjustment Higher discounts

Ethical Issues in Operations

Quality Productivity

Ethical Issues in HRM

Lack of Job Security Excessive Scrutiny and Control Discrimination Qualitative measures of performance appraisal

Regulating Ethical Conduct

Code of Ethics gives details about expected behavior Ethics Committee responsible for reporting to top management on the ethical aspects of the organization Ethics training for employees Corporate governance and Ethics Whistle blowing Act of an employee to inform higher authorities or public about conduct of unethical practices

Corporate Culture
Corporate Culture
An important asset of organization Control system should fit in existing culture Can be done by stressing on the values management wants to follow and rewarding the employees for achieving goals based on these values

Total Quality Culture

Due to competition , it is essential to concentrate on customer satisfaction TQM ensures that organization attains required level of efficiency targets as well as satisfy customers TQM emphasizes customer satisfaction and continual improvement in products and services TQM requires empowerment and active involvement of all staff TQM follows cybernetic paradigm in solving problems

Types of Organizational Structure

Functional
People are grouped based on their expertise and skills Vertical hierarchy is stronger Calls for centralization Cannot adapt easily to environmental changes

Divisional Also known as Product Structure or Strategic Business Unit (SBU)

Based on Product range/specific market/geographical location, divisions are formed Higher adaptability to change Higher decentralization and hence quick response Possible negative impact of action of one division on other

Organizational Structure
Organization can be Centralized or Decentralizes Decentralization means delegation of authority to the lowest feasible level of decision-making Growth in size of organization requires Decentralization Centralization pertains to geographic concentration or concentration of specialized activities Centralization restricts the delegation of decision-making authority

Decentralization
Advantages of decentralization Information processing becomes simpler as analysis of trade-offs between cost etc. is done by lower levels of management Closer control & supervision of sub-ordinates Being decision-maker, managers are motivated to perform better Helps in evaluation of performance of various units Managers get right environment and autonomy to get trained in making right decisions

Types of Organizational Structure

Matrix Integrates desired features of Functional and Divisional structure Along with hierarchy, there is some form of lateral authority, influence or communication Employee reports to two supervisors simultaneously Managers share the resources Promotes interaction between functions and so useful where such interactions are necessary or desirable Lot of time is consumed in conflict resolution Matrix organization has advantage of motivation and coordination

Types of Organizational Structure

Horizontal Emphasis is on teams which direct themselves Team members are multi-skilled Employee empowerment and customer-centric approach are main characteristics Adapts easily to changing environment Employee requires great deal of training Functional specialty is hampered Hybrid also called as flexible or Adaptive structure The organization adapts itself to rapidly changing environment, by fast decision-making and realigning the resources rapidly

Types of Organizational Structure

Factors creating need for Hybrid / Adaptive Organization Environmental uncertainty leads to more informal organizations Environmental complexity may lead to decentralization in focused market segment Environmental diversity leading segmentation; may result into development of business unit Environmental hostility may lead to centralization of decision-making Adaptive organization requires High level of awareness, Skill and Integrity within the work group

Evaluation of Organizational Design

Each design must be evaluated on the basis of efficiency and coordination It should operate with minimum cost per unit of output Matrix organization helps avoid problems in coordination and integration But the incremental cost of matrix organization is more than that of a functional organization There are certain organizational problems in the implementation of matrix structure Difference in orientation between program manager and functional manager Diffuse responsibility Program personnel in temporary assignments