Management Control Systems

Chapter 1
The Nature of Management Control System
Management Control System

 Management control is a must in any organization that practices

decentralization.
 MCS must fit the firm’s strategy.
 Strategy is first developed through a formal and rational process
and dictates the design of management process (happened if the
environmental changes are predictable)
 Strategy emerge through experimentation, which are influenced
by the firm’s management system (happened in a rapidly
changing environment)
Basic Concepts

Control
An organization must be controlled to ensure that its strategic
intentions are achieved.

Elements of a control system

 A detector or sensor  what is happening?
 An assessor  how significant?
 An effector  feedback to alter behavior
 A communications network  transmit information
Management

 An organization consist of a group of people who work together to

achieve certain common goals  PROFIT
 Organizations are led by a hierarchy of managers, that is determined
by the complexity of the organization
 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 Simpler Control Processes

 The standard is not preset

 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
System

 A system is prescribed and usually repetitious way of carrying out

an activity or a set of activities.
 Systems are characterized by a more or less rhythmic coordinated,
and recurring series of steps intended to accomplish a specified
purpose.
 But it is very difficult to describe the appropriate actions for
managers encountering situations not contemplated in the formal
system. These depend to:
- skills and personalities of the people involved,
- their relationships with one another, and
- the environment within which a particular problem arises.
Boundaries of Management Control

Management Control
The process by which managers influence other members of the
organization to implement the organization’s strategies.

 Management Control Activities

 Goal Congruence
 Tool for Implementing Strategy
 Financial and Nonfinancial Emphasis
 Aid in Develoting New Strategies
Management Control Activites

Management Control Activites:

 Planning
 Coordinating
 Communicating
 Evaluating
 Deciding
 Influencing
Goal Congruence

 Goal congruence implies that individual goals and organizational

goals are consistent

 Agency Theory implies the opposite

Tool for Implementing Strategy

 Management control focuses primarily on strategy execution

 Strategies are also implemented through:
• The organization’s structure,
• Management of human resources, and
• Organization culture
Financial and Nonfinancial Emphasis

 Management control systems encompass both financial and

nonfinancial performance measures.
 Financial dimension  net income, return on equity
 Nonfinancial dimension  product quality, market share, customer
satisfaction, on-time delivery, and employee morale.
Aid in Developing New Strategies

 Management control information, can also provide the basis for

considering new strategies.
 Interactives control calls management’s attention to developments,
both negative and positive, that indicate the need for new strategic
initiatives.
Strategy Formulation

 Strategy formulation is the process of deciding on the goals of the

organization and the strategies for attaining these goals.
 Goals : the board overall aims of an organization
 Objectives : specific steps to accomplish the goals within a given
time frame
Strategy Formulation

 Goals are timeless (exist until they are changed)

 Strategies are big plans, important plans
 The need for formulating strategies usually arises in response to a
perceived thread or opportunity, from anywhere in an organization
and at any time.
 Complete responsibility for strategy formulation should never be
assigned to a particular person or organizational unit.
Distinctions between Strategy Formulation and
Management Control
Strategy formulation Management control
the process of deciding on new strategies the process of implementing those
strategies
essentially unsystematic involves a series of steps that occur in a
predictable sequence
involved relatively few people involves managers and their staffs at all
levels in the organization
Task Control

 Task control is the process of ensuring that specified tasks are

carried out effectively and efficiently.
 Task control is transaction oriented.
 Many task control activities are scientific
 Most of the information in an organization is task control
information
 Many of an organization’s central activities are task control systems
Distinctions between Task Control and
Management Control
Task Control Management Control
Scientific Can never be reduced to a science
No interaction between managers Managers interact with other managers
Focus on specific tasks performed by Focus on the organizational units
units
Related to specified tasks with little or no Concern with decision within the general
judgment to perform constraints of strategies
 Examples of Decisions in Planning and Control
Functions
Strategy Formulation Management Control Task Control
Acquire an unrelated Introduce new product Coordinate order entry
business
Enter a new business Expand a plant Schedule production
Change Debt Equity ratio Issue new debt Manage Cash Flows
Devise inventory speculation Decide inventory policy Reorder an item
policy
Decide magnitude and Control research Run individual research
direction of research organization project
Impact of the Internet on Management Control

 Internet provides instant access, multi-targeted communication, costless

communication, ability to display images, shifting power and control to the
individual.
 Internet has changed the rules in business to individual consumer sector and
business to business commerce.
 Management control systems involve information, and organizations require an
infrastructure to process that information.
 Internet provide infrastructure
 Manager can collect huge amount of data, store, analyze, and send it
 Internet facilitate coordination and control through effective processing of
information
Impact of the Internet on Management Control
 Internet cannot substitute for the fundamental processes that are involved in
management control.
 Management control is essentially a social an behavioral process and thus
cannot be fully automated:
 Understanding the relative importance of various goals
 Aligning individual goals to organization goals
 Develop specific objectives of business units
 Communicating strategy and performance objectives
 Determining individual’s contribution to strategic goals
 Evaluating actual performance relative to standard
 Conducting productive performance review meetings
 Designing the right reward structure
 Influencing individuals to change their behavior
Case 1-3

XEROX CORPORATION
(page 34-41)

Question:
1. Outline the management control system at Xerox. What are the key elements that make the
system work?
2. What recent trends at Xerox do you see influencing the management control process?
3. In your opinion, how important are organizational culture and individual personalities in
the Xerox control process?