Management ControlSystems

Part 1

Debasis DasExemplar Consultancy

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Syllabus-1

1. Introduction to MCS2. Design of Control Process &

Management Controls3. Key success variables and measures

of performance4. Design, Style and Culture of Control

Systems 5. Organization structures for adaptive

control

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Syllabus-2

6. Autonomy, Responsibility and Performance measurement

7. Tools for Management Control 8. Management Control in Multinational

Corporations9. Management Control in Service

Organizations10.Management Control in Projects11.Management Audit

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Recommended Books

1. Maciariello, J.A. & Kirby, C.J.: Management Control Systems: Using Adaptive Systems to Attain Control, PHI

2. Anthony, R.N. & Govindarajan, Vijay, J.: Management Control Systems, McGraw Hill

3. Management Control Systems, Text and Cases, Dutta, Abhijit, Jaico Publishers

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Introduction

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Purposeof

Management Control Systems

Purp

ose

Goals

Obje

ctives

Management

SteersOrganization

Departments/units

Unity of diverse activity

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Domainof

Management Control System

• Different views– Anthony, Dearden & Govindrajan: “the process by which

managers influence other members of the organization to implement the organizations strategy” (strategic planning, management control, task control are independent but interrelated processes of planning & control)

– William Newman: “control is one of the basic phases of managing, along with planning, organizing and leading” ( control function of management)

– ***Macieriello , Kirby: control of strategy and control of operations and include aspects of planning, organizing and leading functions of management.

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Coverage

• Domain of control as defined by Macieriello , Kirby • Borrow concepts from the other two approaches• Leads to a management framework that

– Enhances organizational adaptability• Accelerates productivity • Improves quality

– Resolves inadequacies in current control systems• Coaxing organizations to optimal performance• Enhances competitiveness

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Organizational Context of

MCS

Reference: Chester Bernard, Functions of the Executive

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Organizations

• Sub units• Effectiveness & efficiency• Internal & External Stakeholders

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Organization

Sub-unit

Sub-unit

Sub-unitSub-unit

Sub-unit

Sub-unit

Sub-unit Sub-unit Sub-unit

Sub-unit

Sub-unit

Sub-unit

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Sub-units

• Perform portions of the organization purpose

• Grouped by specialization, division of labor

Challenges

– Efficient coordination (transaction costs, keeping it

minimal)

– Managing excessive transaction costs

– Autonomy needed for specialized sub-units

– given objectives as part of the overall objectives

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Effectiveness & Efficiency

• Effective–Meets overall purpose– Fulfills a genuine need of society

• Efficient–Minimum waste of resources– competitive ROI on stakeholders’

investments– Competitive wages for the worker– Satisfaction for customers

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Internal & ExternalStakeholders

• Organizations are open systems and includes internal & external resources

• Make situations– Buy resources in the external market – Control systems must coordinate the external

exchanges, internal activities

• Buy situations– Control systems must integrate efforts of

external stakeholders and the external activities

• Must quickly adapt to the market changes

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Executive Functions

• Essential managerial functions

– Securing essential efforts

– Provide system for organizational

communication

– Formulating and defining purpose

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Securing Essential Efforts

• Motivate participation & performance– Recruit the right people– Inducements that are equivalent or

better– Encourage contributions from

participants that generate income– Participants include customers,

employees, executives, owners, distributors, suppliers

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Provide System forOrganizational communication

• Design & refine formal organization or the organization chart (define the sub-units & the structure)

• Define purposes, proper sequence of steps to be maintained

• Define management positions and fill them

• Relevant communications are the communications that coordinate the activities of the organization

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Provide System forOrganizational communication

• Formal organization– Relatively permanent systems of communications

for a common purpose

• Informal organization– Not part of the org chart– “aggregate of personal contacts and interactions

and the groupings of people. …though common or joint purposes are excluded by definition, common or joint results of important character nevertheless come from such organizations”

– Develops by design and spontaneously– Helps personalize the organization

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Establish purpose, goals and Objectives

• Job for the entire management team• Delegate responsibilities to sub-units• Overall purposes (ends) are

redefined in terms of sub-purposes(means) of sub-units

• Each sub-unit purpose becomes the means to the purpose of the higher unit

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Organizational Survival & Control Systems-1

• Conditions for survival– Sufficient inducements to attract essential contributions

form stakeholders• Capital from investors• Labor from employees• Material resources form suppliers• Product purchases from customers

– Inducements are effective if stakeholders prefer them to those offered by comparable competing organizations

– Internal production processes need to convert contributions into sufficient inducements that sustains stakeholder participation & cooperation and achieve organizational purpose

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Organizational Survival & Control Systems-2

• On-going survival requires– Management must process and act upon information

in all the stakeholder markets as efficiently as other entities in the same market

– Managerial controls that monitor the inducement-contribution balance for each stakeholder

– Decision processes agile enough to react to changes– Control systems must facilitate innovation,

adaptation and change– Ability to convert contributions of main stakeholders

to meet current needs and have resources left over for continuing innovation processes to meet competitive challenges

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Assumptions about HumanDrive

• Rationality: basically rational, able to reason, make plans and control behavior

• Creativity: basic instinct to be creative• Mastery: desire to control, innate desire

to be “in control”• Morality: usual strong moral instincts,

may not always dominate behavior• Community: strong desire for human

association

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Adaptive Control SystemsTwo Sets of Mutually Supportive

System

From the perspective of Control System Designer

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Control System Designer

• May be a – System analyst– A controller– A manager

• People who are most concerned with the design & operation of a control system. Usually are the people who are responsible for it.

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Control System Characteristics

• Effectiveness is strongly related to the leadership characteristics of the management

• Control systems function within the dynamics of the organizations

• Actions taken in MCS influence people, control in organization is accomplished by people through people

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Mutually Supportive Systems

• Formal/informal systems help an organization to be steered towards its purpose by bringing unity of diverse efforts of the sub-units and individuals

• These are two distinct yet interrelated (often indistinguishable) sub divisions

• Considered adaptive when they are internally consistent, consistent with one another and designed to permit learning

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The Formal Systems

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Formal System CharacteristicsMutually Supportive Management System Model (MSSM)

• Focuses on needs of customers & markets

• Consistent with informal system• Mutually supportive of the formal &

informal• Each subsystem must support

managing short term concerns as well as innovations necessary for the long-term survival

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Formal Control Systems

InfrastructureManagement

Style & Culture

Coordination & Integration

Rewards

Formal Control Process

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Management Style &

Culture

• Prevailing Style

– External/internal/mixed

• Principal values

– Norms & beliefs

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Infrastructure

• Organization Structure– Strategy– Operations

• Patterns of autonomy• Measurement methods– Responsibility centers– Transfer pricing

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Rewards

• Individual & groups

• Short term & long term

• Promotion policy

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Coordination & Integration

• Standing committees

– Strategy

– Operations

• Formal conferences

• Involvement techniques

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Formal Control Process

• Strategic planning– Capital budgeting

• Operations planning– Cost accounting– Budgeting

• Reporting systems– Strategy/project management– Operations/variance analysis

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The Informal System

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Informal System Characteristics

• Aggregate of personal contacts and interactions and the associated groupings of people

• Activities of members outside the formal control process when dealing with non-routine decision making 9realignment of goals or seeking new information to increase understanding of a problem area)

• Supplements formal system, increases adaptability

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Informal Control Systems

InfrastructureManagement

Style & Culture

Coordination & Integration

Informal Rewards

Informal Control Process

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Management Style &

Culture

• Prevailing Style

– External/internal/mixed

• Principal values

– Norms & beliefs

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Infrastructure

• Personal

• Networks

– Expertise oriented

– Minimal structure

• Emergent roles

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Informal Rewards

• Recognition

• Status oriented

• Intrinsic

– Performance oriented

– Stature oriented

• Personal contact

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Coordination & Integration

• Based upon trust

• Simple/direct/personal

• Telephone conversations

• Personal memos

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Informal Control Process

• Search/alternative generation

– Ad-hoc as needed

• Uncertainty coping

• Rationalization/dialog

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Control Systems ActionsFormal system If action refer to

Infrastructure Chartering or appointing

Establishing management support

Setting a direction or mission

Style & culture Training in beliefs, values, or social dynamics

Planning & Control process

Establishing procedures

Clarifying procedures

Documenting procedures

Developing measurement metrics

Reporting/providing feedback

Reward system Giving a merit increase

Coordinating mechanisms

Establishing communications among organizational units

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Control Systems ActionsInformal system If actions refer to

Emergent roles Becoming the expert

Assuming new responsibilities

Style & culture Training in values, beliefs or social dynamics

Planning & control Searching and gathering information

Investigating & brain-storming

Discussing developments regarding problems

Reward system Showing appreciation

Giving thanks, recognizing accomplishments

Coordinating mechanisms

Members checking with others in other units

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The Subsystem & Components of Control

Systems

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Style & Culture

• Methods of “doing things”• Style of top management• Decides how to implement control

systems• Ranges from highly dictatorial to

highly participative• Systems need to fit the style &

culture

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What is Corporate Culture?

• Consists of shared values, common perceptions, common decision making premises

• Develops over time• Strength of the culture depends on

the number of key premises shared, how extensively, and how deep commitments to these premises are

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Corporate Cultureas

Coordination and Control Mechanism

• Facilitates control by– Internalizing in individuals key decision

premises and decisions– Developing a sense of group loyalty– Reducing dissonance and friction–Most effective system as long as the

values are the right values– “self control” through acceptance of

common values is the best method of control

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Effectiveness ofCorporate Culture as a Control

mechanism• Corporate culture must be consistent

with the environment and widely accepted

• Sub-units may develop its own sub-culture due to differences in specializations, perspectives, etc.

• Spreading a uniform corporate identity is essential

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Managerial Indoctrination and Skill Training

• Formal indoctrination & training helps instill the common attitudes & skills

• Indoctrination involves socializing members to values, policies, procedures of the organization

• Skill development methods to perform tasks in the organization

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Formal Control Process in planning and reporting dimensions

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Formal Planning Process

• Strategic and operational aspects• Budget, formal planning& control,

reporting has these two components• Infrastructure, rewards and

communication systems must cater to both

• Cost accounting systems provide crucial measurements for both strategic and operational planning processes

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Formal Reporting Process

• Progress is measured against the plans

• Monthly/quarterly/year to date reports on both strategic and operational plans are made to measure variances

• Strategic plans are measured by treating each strategic thrust as a project and looking at its progress

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Integrated Planning & Reporting Process

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Integration of Strategic & Operational

• Fair amount of integration exist between the two

• Need for strategic thrust arise out of operational needs

• Strategic projects are funded out of operations

• Strategic plans & programs impact operations and need be monitored for this impact continually

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Infrastructure

• Formal control system infrastructure consists of– Organizational structure– Patterns of autonomy

• Infrastructure must cater for both the strategic and the operational

• Common organization for strategic planning is to organize strategic business units (SBU)

• Then, organize profit centers

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Rewards

• Inducements needed to motivate individuals to contribute more

• These need to have components that are comparable in the environment and meets individual needs

• Materialistic and non materialistic• Rewards cannot exceed the value

added by individual, obviously

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Individual Rewards

• Strategic, operations, individual and group are the four reward dimensions

• Individual rewards include– Compensation– Linked to performance– Short term as well as long term– Comparable to what the market offers

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Group Rewards

• Most effective is tied to organization’s performance

• Short as well as long term• ESOP for example, could be linked to

the organization meeting specified earnings per share target each year for a number of years from now

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Coordination and Integration Mechanism

• Specific communication schemes are needed – Coordination– Resource allocation decision making– Conflict resolution– Building identification with organizational

purpose– Developing commitment and trust in the

organization

• Timely and accurate flow of information

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Committees

• Two committees with overlapping

memberships for resource allocation

• Manage conflict resolution( short and

long term needs) in resource

allocation

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Strategy Committee

• Top officers and managers, top level

staff are members

• Monitor strategy periodically, as

needed by market developments

• Decide actions, resources, all aspects

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The Operating Management Committee

• Same composition as the strategy

committee

• Looks at operational issues

• Conflicts between strategic and

operational resources

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Formal Conferences

• Periodic conference of managers down to profit center level

• Formalize planning process• Improve communications• Keep organization together• Public commitment by managers on

next year’s targets

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Informal Organization Structure & Emergent Roles

• Difficult to define “soft structure”, hard to define, but exists in all organizations

• Person to person contacts, networks, ad hoc teams, available expert resources

• Help increase adaptability of organization

• Temporary grouping s can form for coping with uncertainties

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Informal Control Processes

• An adaptive system needs to – Exact information from environment– Form and adopt goals– Select and emit goal-directed behavior– Learn to adapt

• In a situation when fast environmental changes are happening it is the informal system that usually takes over

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Informal Recognition & Rewards

• Informal rewards contribute significantly to organization success

• Stature oriented• Respect being shown for capability of

an individual to operate in t5he informal set up

• Formal rewards should be appropriate

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Informal Coordinating Mechanisms

• Communication/coordination develops as people develop working relationships

• Communications are less guarded, more effective

• Necessary for effective adaptive control

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Interaction Between Formal & Informal Systems

• In stable environments the formal system dominates

• At times of changes the informal system dominates

• Formal and informal overlap• Management must ensure each

system as well as both systems are supportable

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Adaptive Controls & Individual Actions

• By observing actions and identifying where they come out from, the designer can asses if the system is formal or informal

• What needs to be done to increase adaptability