THE MANAGEMENT CONTROL SYSTEMS (MCS ) In the management parlance , 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

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Types of Control Based on the nature management control system can be Systems. divided into two categories
1.Closed End Management Control System 2.Open End Management Control System.

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1.Closed End Management Control System: Information flows through the activity, the result, the matching of the standard preset, analysis of the variation if any and taking corrective steps to mitigate the mistake. In an organization where there is an annual budget with preset goals and performance parameters, the implementation, collection of performance information, measurement of 4/15/12 variance and thereafter taking corrective action on any negative variance is an example of a

2.Open End Management Control System.

Feedback mechanism is continuous in

every step of the activity and follows a matrix system where several receptors interact with several correctors in the system. A corporate system in which there is a continuous internal audit parallel to the general accounting and budgeting process enables an open and control system as it 4/15/12 provides multiple feedbacks which are

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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. 2.An Assessor a device that determines the significance of what is actually 4/15/12 happening by

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Elements of Control System 3.An effectors a device that alters behavior if the assessor indicates the 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

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Management An organization consist of a group of people who work together to achieve certain common goals. The CEO decides on the overall strategies that will enable the organization to meet its goals. Subject to the approval of the CEO , the various business unit mangers formulate additional strategies that will enable their respective units to further these process The management control process is thegoals by
which managers at all levels ensure that the people they supervise implement their intended strategies.
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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.

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Control

Management control is the process by which managers influence other members of the organization to implement the organizations strategies. It includes Planning (What the organization should do) Coordinating ( several part of the organization) Communicating Evaluating Deciding (what ,if any, action should be taken) Influencing (people to change their 4/15/12 9 behavior) 9

MCS is complex because The standards are not preset Management control is not automatic It requires coordination among individuals Much management control is self-control.

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Organization Structure: specifies the roles , M anagem ent reporting relationships and C o n t r o ls divisions of responsibilities that shapes decision H u m a n R e s o u r O er g a n i z a t i Human resource c O r g a n i z a t i o nO r g a n i z a t i o n on making in an organization M a n en gt e m a Stru ctu re Stru ctu re S t r u c t u r e management: is the selection, training, C u lt u r e evaluation promotion etc of employees to the Culture: refersso as toset of develop belief, attitudes commonthe knowledge and skills required to execute and norms that explicitly or organizational managerial implicitly guidestrategy Management Control: The primary role of actions Management Control is to ensure execution of chosen strategies. It enables the management 4/15/12 11 to have attention to developments both 11
I m p le m e n t a t io n M e c h a n is m s

Strategy Implementation

Task control/ Operational control: Meaning of Task: A pieceofwork that is undertaken or

attempted. A specific pieceofwork required to be done as a duty. It a process or instance of execution of a program. Task Control: It is the process of assuring that specific tasks are carried out effectively and efficiently. Numerically controlled machine tools, process control computers and robots are task control devices.
Task control Management Control

In task control human being may involve or may not involve, if involved the interaction is between a manager and a non-manager Task controls requires a different task control system for each type of tasks In task control focus is on specific task

Human being interaction will be there and interaction is between manager and manager.

In management control system it is basically similar throughout the organizations. Focus is on organization unit.

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Task control relates to specified tasks and for most of these tasks little or no Management control relates to broad type judgment is required as to what is to be of activities and manager decides what is done. to be done within the general constraints 4/15/12 of the strategies

Go al Strategies (Plans to achieve Management goals) Control System (tools for implementation of strategies)

Goal: Goal can be defined as broad

statements of what the organizations wants to achieve in the long run or on a permanent basis. Therefore goals would be fairly timeless statements. Strategy: It is an elaborate and systematic planofaction. It helps an organization to achieve its goals. It describes the general direction in which an organization plans to move to attains its goal. Strategies differ from organization to organization and controls should be tailored to the requirements of specific strategies.

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Goals of a business (organization)

Business may have different goals like: Profitability Maximizing shareholder value: Risk taking
Profitability: In a business, profitability is usually the most important goal. Profitability is expressed in the broadest and most conceptually by an equation R ev e n u E x p n e s e s e R ev e n u e s X =R OI R ev e n u e s In v e s tm e n ts The first ratio is the profit margin percentage and the second ratio is the investment turnover. Investment is the total of debt capital and equity capital.

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Multiple Stakeholders approach of goal setting: Organizations participate in three markets, Capital market, the product market and the factor market. Capital market: A firm raises Product market: The firm funds from Capital market, sells its goods and services and the public stockholders in the product market, and are therefore an important customers form a key constituency. constituency. Factor Market: The firm competes for resources such as human capital and raw materials in the factor market, and the prime constituencies are the companys employees and suppliers and the various communities in which the resources and companys operations are located.

The firm has a responsibility to all these multiple stakeholders and management control system should identify ideally the goals for each of these groups.
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Corporate Strategy
High

Degree of Relatedness

Extent of diversification: Single Industry relates to the number of industries in which the Related diversification Single Industry: company The company operates may be totally committed to U nrelated diversification one industry.
Extent of Diversification High

Low

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Related Diversification: Firms operates in a number of industries and their businesses are connected to each other. Operating Strategies consists of two types of synergies: 1. Ability to share common resources, and 2. Ability to share common core Unrelated Diversification: The firms that competencies.
operate in number of different industries

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Corporate- Level Strategies Type of Single Related Unrelated Corporate Industry firm diversified diversificatio Strategy firm n
Pictorial representation of strategy

Identifying Features

Competes in only one Industry

Sharing of course competecnies

Totally autonomous business in very different markets

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Hol d

Buil d

Harv est
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Div est
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General Electrical Planning Model Invest/Gro Invest/Grow Dominate/ w Selectively Delay strongly (build) /Divest (build) Invest/Gro Earn/Protec Harvest/ w t (Divest) selectively (hold) (build) Earn/Protec Harvest/ Harvest/ t (Divest) (Divest) (hold)

Industr y attracti veness

Average Business Strength

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Build: This mission implies an objective of increased market share, even at the expense of short-term earnings and cash flow Hold: This strategic mission is geared to the protection of the business units market share and competitive position Harvest: This mission has the objective maximizing short-term earnings and cash flow even at the expense of market share. Harvest: This mission indicates a decision to withdraw from the business either through a process of slow liquidation or outright sale.

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Business Unit Competitive Advantage:

Three interrelated questions have to be considered in developing the business units competitive advantage 1. What is the structure of the industry in which the business unit operates? 2. How should the business unit exploit the industrys structure? Michael Porter has described two analytical 3. What will be the business units competitive approaches as aids for developing superior advantage.

competitive advantage. 1.Industry Analysis 2.Value Chain Analysis.

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Industry Structure Analysis

New Entrants

Suppliers

Industry Competitors

Customers

Substitutes

The intensity of rivalry among existing competitors The Bargaining power of customers (integrate backward) The Bargaining Power of Suppliers(No.of 4/15/12 23 suppliers,)
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Value Chain Analysis

Basis for Sup Cost-cum- Differenti Competitive erior Differenti Advantage ation Relativ ation Advantag e Advantag Stuck-ine Low-Cost Differe e Advantag the ntiatio e middle n Infer Infer ior Sup Relative Cost positio erior Position ior n Value Chain for a business Product Manufacturin Marketing Services / Development g and sales Logistics Support Activities: Finance, Human Resources, Information Technology
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Strategy A firm develops its strategies by matching its core competencies with formulation:
industry opportunities.
S te yF u tion tra g orm la Environm ental Analysis
C petitor, C om ustom S er, upplier Regulatory, S ocial /Political

Internal Analysis
Technolog kno w-how, y Manufacturing MarketingKnow -how, , D istribution Know -how, Logistics Know-how

Opportunities and threats Identify Opportunities

S treng ths and Weaknesses Identify core com petencies

Fix internal com petencies with external opportunities

Firms S trateg ies

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Process of designing a Management control system Identify the organizational hierarchy

Understand the process of the business

Establish the linkage between the various stakeholders towards goal congruence

Establish a formal information flow between various departments and subunits of the business

Design the control system Implement the control system

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Tools for Management Control

Strategic Planning Budget Control Valuation Transfer Pricing MCS of Responsibility Centers Management control of Operational Process Production Control Marketing Control Performance Report and Reward system

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