Welcome to Our Presentationon

Management control system in Service organization and Multi-

national organization

Management control system in Service organization

Service Organization:

In general, service organizations refer to those organizations that produce and market intangible services. For several reasons, management control in service industries is somewhat different from management control in manufacturing companies, which produce and market tangible goods.

Features of management control in service organization:Absence of inventory bufferDifficulty in controlling qualityLabor intensiveMulti-unit organizations

Professional service organizations:

Research and development organizations, law firms, accounting firms, health care organizations, engineering firms, architectural firms, consulting firms, advertising agencies, symphony and other arts organizations, and sports organizations are examples of organizations whose products are professional services.Special characteristics:GoalsProfessionalsOutput and input measurementSmall sizemarketing

Management control systems in professional service organizations:

PricingProfit centers and transfer pricingStrategic planning and budgetingControl of operationsPerformance measurement and apprisal

Financial service organizations:

Financial service organizations include commercial bank and thrift institutions, insurance companies, and securities firms. These companies are in business primarily to manage money. some act as intermediaries; that is, they obtain money from depositors and lend it to individuals or companies.

Special characteristics: Monetary assetsTime period for transactionsRisk and rewardTechnology

Healthcare Organizations

Healthcare organizations consist of hospitals, clinics, and similar physicians’ organizations and medical laboratories, among others.Special characteristics : Difficult social problem. Change in mix of providers. Third-party payers. Professionals. Management control process.

Management Control System in Healthcare Organizations

The strategic planning process in hospitals is important because of the shift in the product mix, increase in the quantity and cost of new equipment. The annual budget preparation process is conventional. Huge quantities of information are available for the control of operating activities. Financial performance is analyzed by comparing actual revenues and expenses with budgets.

Non Profit Organizations

A non profit organization is an organization that can not distribute assets or income to, or for the benefit of, its members, officers, or directors. The organizations can compensate its employees, including officers and members for service rendered and for goods supplied. a non profit organization needs to earn a modest profit to provide funds for working capital.

Management Control System of Non Profit Organizations :

Product pricing Many non profit organizations give inadequate attention to their pricing policies. Pricing of services to their full cost is desirable.

Strategic planning and budget preparation In non profit organizations, strategic planning is a more

important and more time consuming process than in the typical business.

Operations and evaluations In most non profit organizations, there is no way of knowing what the optimum operating costs are

Management Control in Multinational Organizations

Management Control Systems In Multinational Organizations

Management control problems and practices in multinational organizations are based on foreign operations and domestic operation. Most of the practices for controlling foreign operations are similar to those for controlling domestic operations. The planning and control processes i.e strategic planning, budget preparation, operating, variance analysis and reporting , performance evaluation and management compensation generally are applicable to multinational organizations. Somehow, the management control tools are to be tailored to the context of a specific situation prevailing in a multinational organization.

Problems of Global Organizations

Cultural differences

Transfer Pricing

Exchange rates

Cultural Differences

One of the important contextual variables that influence management control within a multinational enterprise is cultural differences across countries. By definitions, a multinational organization operates in multiple countries and therefore has to contend with cultural differences as head office coordinates and controls its subsidiaries.

4 Dimensions of Cultural DifferencesPower DistanceIndividualism/CollectivismUncertainty AvoidanceMasculinity/Femininity

Transfer Pricing

Transfer pricing for goods services and technologies represents one of the major difference between management control of domestic and of management control of foreign operations, factors like taxation, government regulations, tariffs, foreign exchange controls, funds accumulation, and joint ventures are considered important in arriving ate the transfer price.Factors of Transfer PricingTaxationGovernment RegulationsTariffsForeign Exchange ControlsFunds AccumulationJoint ventures

Transfer Pricing Methods

Comparable uncontrolled price methodPrice paid in uncontrolled sales or adjustments

Resale price methodtransfer price= applicable resale price-

appropriate markup+/-adjustmentsCost-plus method

cost+ appropriate markup+/-Adjustment

Exchange rates

An exchange rate is the price of one currency in terms of another currency. The cash flows of a multinational enterprise{MNE) are denominated in several currencies, and the value of each currency related to the value of dollar is different at different times. These variations complicate the problem of measuring the performance of subsidiaries and subsidiary managers.

Different Types of Exchange rate exposure

Translation ExposureChanges in assets, earnings & liabilities

Translation ExposureReceivable, payable, debts & interest payment

Economic ExposureOperating or comparative exposure, Changes in

cash flow

Choice of Metric in Performance Evaluation

There are basically three possibilities for choice of metric in setting and tracking budgets:The exchange rates prevailing at the time of budgets are set(the initial exchange rate)The exchange rates projected at the time budgets are set(the projected exchange rate),orThe actual exchange rates prevailing at the time budgets are tracked(“ending” exchange rate).

Management Consideration in Designing Performance Evaluation Systems of MNE

Should Subsidiary manager be held responsible for impact of exchange rates on the bottom line?Should home currency or the local one be used for evaluation. If so, starting rate, projected rate or end rate be used? should different types of impact be distinguished? If so, how?Should these variations be used to evaluate performance of the subsidiary?

Control System Design Issues

Subsidiary managers should not be held responsible for translation effects.Transaction effects are best handled through centralized coordination of the MNE’s overall hedging needs.The subsidiary manager should be held responsible for the dependence effects of exchange rates resulting from economic exposure.Evaluation of the subsidiary as a basis for a decision to locate operations in a country or to relocate operations from a country should reflect the consequences of translation transaction, and economic exposures.