NATURE OF

MANAGEMENT
CONTROL SYSTEM
THE MANAGEMENT CONTROL
SYSTEMS (MCS)
 In the Management language , control traditionally
refers to the activities of establishing Standards of
Performance, Evaluating actual Performance against
these standards, and Implementing corrective actions
to accomplish Organizational Objectives
world-Class Companies

 Consider the world-class companies such as 3M

corporation, Dell Computers, Wal-Mart, South
west Airlines.
 Their long term success is not just because they
have developed good strategies, but more
importantly, they have designed systems and
processes that energize their employees to execute
those strategies effectively
THE ELEMENTS OF MCS

Elements of MCS include

 Strategic Planning,

 Budgeting,

 Resource Allocation

 Performance measurement

 Evaluation & rewards

 Responsibility & transfer pricing

 THE NATURE OF MCS

 The central focus of MCS is Business Strategy

Implementation.
 MCS provides knowledge , insight, and analytical

skills related to how a corporation’s senior

executive design and implement the on going
management systems that are used to plan &
control the firms performance
BASIC CONCEPTS
ELEMENTS OF CONTROL PROCESS

Control Assessor: Comparison

Device With standard

g
Detector: Information Effector: Behavior
About what’s happening Alteration, if needed

Entity
being
controlled
Elements of control system
•Every control system has at least four elements
1.Detector or Sensor – A Device that measures
what is actually happening in the process being
controlled. (to measure actual behavior )

2.An Assessor – A Device that determines the

significance of what is actually happening by
comparing it with some standard or expectation
of what should happen. (compare actual with standard)
 Continue . . .
3.An Effectors – A Device that alters behavior if the
assessor indicates the need to do so. (called ‘feedback’,
it alters behavior if assessor indicates need to do so)

4. A Communications network – A Device that transmit

information between the detector and the assessor and
between the assessor and the effectors.
Examples of CS

1. Thermostat
2. Body Temperature
3. Driver of an automobile
Management
 The management control process is the process by which
managers at all levels ensure that the people they supervise
implement their intended strategies.

 Contrast with Simple Control Processes (Nature of MC):

 The standard is not preset. It involves planning process
 Management control is not automatic
 Management control 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
Systems

 A system is a prescribed and usually repetitious way of carrying

out an activity or a set of activities.
 Systems are characterized more or less rhythmic, coordinated, and
recurring series of steps intended to accomplish a specified
purpose.
 Skills & personality of person involved is more important in
system
• Here, more or less routine decisions are taken for which recurring
series of steps are available
• Management control systems:
 Far More complex & Judgmental
 Rules are not well-defined
 Managers have to use their best judgment to
decide on best course of action
BOUNDARIES OF MANAGEMENT
CONTROL: MANAGEMENT
CONTROL
 Management control is the process by which managers
influence other members of the organization to implement
the organization’s strategies.

 It includes

Planning
Coordinating
Communicating
Evaluating
Deciding
Influencing
 MC is the process by which managers influence other
members of the organization to implement the
organization’s strategies

Activity Nature of End Product

 Strategy formulation  Goals, strategies, policies

 Management control  Implementation of strategies

 Task Control  Efficient and Effective performance

of individual tasks
Concepts of MCS

The MCS builds on concepts from

 Business Strategy,

 Organizational Behavior,

 Human Resource and

 Financial & Managerial Accounting.

 Goal Congruence
 Managers have personal as well as organization goals
 Goal congruence means that, insofar as is feasible, the
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
principle of goal congruence in mind
 Tool for Implementing Strategy
 MCS help managers move an organization toward its strategic objectives
 It focuses primarily on strategy execution
 MCS encompass both financial (‘bottom-line’ of the company) and
nonfinancial (Product quality, Market share, Customer satisfaction )
performance measures
 MCS provide information in developing new strategies (Today’s control
 Tomorrow’s strategy) :
 Interactive control focuses management attention on positive and
negative developments, which signal the need for new strategy formation
 Information of non-financial nature is used to make strategic decisions
Framework for Strategy Implementation
(exhibit 1.3 & 1.4)

 Strategy
 Implementation mechanisms:
 Organization structure
 Management controls
 Human resource management
 Culture
 Performance
Strategy Formulation
• It is the process of deciding on goals of the
organization and the strategies for attaining those goals
• Strategies are important, big plans, showing the
direction in which senior management wanted the
organization to move
• Need for formulating strategies usually arises in
response to a perceived threat or opportunity
• Complete responsibility should never be assigned to a
particular person or organizational unit
Difference between strategy
formulation & Management control
Strategy Formulation Management control
 It is the process of  It is the process of
deciding on new implementing those
strategy strategy
 It is essentially  It is systematic
unsystematic  It uses reliable estimates
 Rough estimation for for analysis
strategic analysis  Management control
 Strategy process process involves all level
involves few people staff in the organization
Task Control
• It is the process of assuring that specified tasks are
carried out effectively and efficiently
• Task control is transaction-oriented
• Many task control activities are scientific i.e. using
management science and OR techniques
• Most of the information in an organisation is task
control information
• Many activities performed by managers in the past
have been automated and are task control activities
 Difference Between Task Control &
Management Control
Task Control Management Control

 Task control system are  It can not tern in to science

scientific  Managers interact with
 Either human beings are other managers
not involved at all or the  It focus on organizational
interaction is between
unit
managers &nonmanagers
 It focus on specified task
 It is concerned with
broadly define activities of
 It Is relates to specified managers
tasks
 SF, MC, and TC
 Least systematic (SF); most systematic (TC); in between
(MC)
 Focuses on long run (SF); short run (TC); in between
(MC)
 Using rough approximations data of the future (SF);
current accurate data (TC); in between (MC)
 Includes planning and control, but the planning process is
much more important (SF); control process is much more
important (TC); equal importance (MC)
 Examples
SF MC TC
Acquired an unrelated Intoduce new product or Coordinate order entry
business brand w/in product line
Enter a new business Expand a plant Schedule production
Add direct mail selling Determining advertising Book TV commercials
budget

Change debt/equity ratio Issue new debt Manage cash flows

Adopt affirmative action Implement minority Maintain personnel
policy recruitment program records
Devise inventory Decide inventory level Reorder an item
speculation policy
Decide magnitude and Control research Run individual research
direction of research organization project
WAL-MART STORES, INC.
 January 2005, WM is the world’s largest retailer, US
$288 billion in sales, the largest private sector
employer, and the market leader (1995: WM sold no
grocery).
 WM’s winning strategy: “SELLING BRANDED
PRODUCTS AT LOW COST.”
 Supply chain and logistic IT is the most powerful
after Pentagon IT
 WM owned 20 aircrafts, satelite communication
network, broadcasted TV
 WM owned 3,700 stores in US and 1,600 stores
outside US
Wal-Mart Stores, Inc. (Continued)

 The number of employees = 1.6 million associates

 Each store is an investment center
 Performance measure: Profit/inventory investment
 Policies: Profit sharing, Incentives bonuses, a
Discount stock purchase plan, promotion from within,
Pay raises based on performance, and an open door
policy
Internet for Management Control
• Instant access
• Costless communication
• Multi-targeted communication
• Ability to display images
• Shifting power and control to the individual
• Facilitates coordination and control
• Availability of large amounts of data
Elements of Management Control
• Judgements required to design & operate optimal
control system involve:
 Understanding relative importance of competing goals
 Developing specific objectives for business units,
Functional areas and Departments
 Determining key variables for an individual’s
Contribution to Strategic goals
 Evaluating actual Performance
 Designing right reward structure