mcs- unit i

7/28/2019 MCS- Unit I

1/145

Dr.P.Madhusoodanan Pillai

S3 MBA

Management Control Systems

Unit 1

1

7/28/2019 MCS- Unit I

2/145

MCS- University Syllabi

Unit ICharacteristics of Management Control System - Evolution of

control systems in an organization - Relating system toorganizational objectives - Strategic Planning, Management

Control and Operational Control - Goal Congruence -

Cybernetic Paradigm of Grissinger - Functions of the

Controller

2

7/28/2019 MCS- Unit I

3/145

Management Control System- MCS

MCS is the process of evaluating, monitoring

and controlling the various sub-units of the

organization, so that, there is effective andefficient allocation and utilization of resources

in achieving the predetermined goals

7/28/2019 MCS- Unit I

4/145

Meaning of Management Control

Management control is a systematic effort to set performance

standards with planning objectives to design information feedbackwith these pre determined standards and to measure their

significance and to take any action required to assure that all

corporate resources are being used in the most effective and

efficient way possible in achieving corporate objectives- Mockler

Management control involves extensive measurement and it is

therefore related to and requires contributions from accounting

especially management accounting. Second, it involves resourceallocation decisions and is therefore related to and requires

contribution from economics especially managerial economics.

Third, it involves communication, and motivation which means it

is related to and must draw contributions from social psychology

especially organizational behavior

7/28/2019 MCS- Unit I

5/145

Definition of Management Control Systems A management control system (MCS) is a system which gathers and uses

information to evaluate the performance of different organizational resources like

human, physical, financial and also the organization as a whole considering theorganizational strategies. Finally, MCS influences the behavior of organizational

resources to implement organizational strategies. MCS might be formal or informal.

Robert N. Anthony (2007) defined Management Control as the process by which

managers influence other members of the organization to implement the

organizations strategies. Management control systems are tools to aidmanagement for steering an organization toward its strategic objectives and

competitive advantage. Management controls are only one of the tools which

managers use in implementing desired strategies. However strategies get

implemented through management controls, organizational structure, human

resources management and culture.

[Anthony & Young (1999) showed management control system as a black box. The

term black box is used to describe an operation whose exact nature cannot be

observed. MCS involves the behavior of managers and these behaviors cannot be

expressed by equations. Anthony & Young (1999) showed that management

accounting has three major subdivisions: full cost accounting, differential

accounting and management control or responsibility accounting.

7/28/2019 MCS- Unit I

6/145

According to Horngren et al. (2005), management control

system is an integrated technique for collecting and using

information to motivate employee behavior and to evaluate

performance. Chenhall (2003) mentioned that the terms Management

Accounting (MA), Management Accounting Systems (MAS),

management control systems (MCS), and organizational

controls (OC) are sometimes used interchangeably. In this case,MA refers to a collection of practices such as budgeting or

product costing. But MAS refers to the systematic use of MA to

achieve some goal and MCS is a broader term that

encompasses MAS and also includes other controls such as

personal or clan controls. Finally OC is sometimes used to refer

to controls built into activities and processes such as statistical

quality control, just-in-time management.

7/28/2019 MCS- Unit I

7/145

According to Simons (1995), Management Control

Systems are the formal, information-based routines

and procedures managers use to maintain or alter

patterns in organizational activities.

Management controls, in the broadest sense, include

the plan of organization, methods and procedures

adopted by management to ensure that its goals aremet. Management controls include processes for

planning, organizing, directing, and controlling

program operations. A subset of management

controls are the internal controls used to assure thatthere is prevention or timely detection of

unauthorized acquisition, use, or disposition of the

entity's assets.

7/28/2019 MCS- Unit I

8/145

Characteristics of Control System inOrganization

Involvement of people Information about the actual state of the

organization is compiled by people.

It is compared by people. With the desired state decided by people.

For significant difference, a course of action isrecommended by people

Action taken by people

7/28/2019 MCS- Unit I

9/145

The management decides the desired state orstandards against which performance is

compared. It decides what the organization plans to

achieve in a given time framework which isknown as Planning Process.

Actual Performance is compared to PlannedPerformance in control, so planning andcontrolling are interlinked and are known as

P&C systems

7/28/2019 MCS- Unit I

10/145

Information Systems for Managerial Control and Decision Making

Corporate

DatabasesInformation for decision

Making

Information for control

MIS

DSS

EIS

Feedback

Control Systems

Mgt Control Systems

Balanced Scorecard

7/28/2019 MCS- Unit I

11/145

Objectives of MCS

Relationship with organizational goals

Identification of critical processes that affect goals

Identify key success factors

Identify responsibilities

Accountability

Financial Vs non financial performance

Improvement of collective decision making

7/28/2019 MCS- Unit I

12/145

Why Management Control system fail??

Most control systems are past action oriented

Precision Leave little margin for error

Controls do not change with missions, strategies,objectives and plan

Behavioral and human side of the control systemoverlooked

Standards are not modified as per the situation at hand

Importance of speedy and reliable feedback

7/28/2019 MCS- Unit I

13/145


Actual

Performance

MeasurePerformance

Comparison

Desired

performance

Deviations

Reason

For

Deviation

Corrective

Actions

Feedback Loop

7/28/2019 MCS- Unit I

14/145

Feedback Loop of Management Control

Desired

Performance Actual

Performance

Measurement

Performance

Analysis

Deviations

Identification

Of deviations

Comparison

Against

Standards

Corrective

Action Implementation

Of correction

7/28/2019 MCS- Unit I

15/145

Cont..

Management Control helps in..

1. Coping with uncertainty

2. Detecting irregularities3. Identifying opportunities

4. Handling complex situations

5. Minimizing costs

7/28/2019 MCS- Unit I

16/145

Basic Concepts

Elements of a control system consists of:

1. A detector

2. An assessor

3. An effector4. A communication network

16

7/28/2019 MCS- Unit I

17/145

1. A detector or sensor is a device that measurewhat is actually happening in the process being

controlled.2. An assessor is a device that determines thesignificance of what is actually happening bycomparing it with some standards or expectationsof what shouldhappen.

3. An effector (feedback) is a device that altersbehavior if the assessor indicates the need to doso.

4. A communications network consist of devicesthat transmit information between the detectorand the assessor and between the assessor andthe effector.

17

7/28/2019 MCS- Unit I

18/145

Example: You are driving a car

Detectors= Your eyes

Assessor= Your brain

Effector= Your foot

Communication network= Your nervessystem

18

7/28/2019 MCS- Unit I

19/145

Your eyes (detectors) measure actual speed byobserving the speedometer.

Your brain (assessor) compares actual speed withdesired speed (standard: the highest speed is 80km/hour) to detect a deviation from standard.

Your brain (assessor) directs your foot (effector) toease up the accelerator if actual speed (90km/hour) is faster than the standard speed (80km/hour), press down the accelerator if the actualspeed (70 km/hour) is slower than standard speed(80 km/hour).

And, your nerves (communication network) formthe communication system that transmitsinformation from eyes (detectors) to brain(assessor) and brain (assessor) to foot (effector).

19

7/28/2019 MCS- Unit I

20/145

Boundaries of Management Control

Strategy formulation is the process of deciding on

the goals of the organization and the strategies

for attaining these goals.

Management control (Anthony and Govindarajan,

2004): is the process by which managers influenceother members of organization to implement the

organizations strategies.

Task control is the process of ensuring that

specified tasks are carried out effectively andefficiently.

20

7/28/2019 MCS- Unit I

21/145

Distinctions between strategy formulation and

management control:

21

Characteristics Strategy Formulation ControlManagement

System design Unsystematic, Strategic

decision may be made

any time

Rhythmic,

predetermined

proceduresNature of

information

Tailored-made to faced

problems, more external

and predictive, less

accurate

Integrated, more

internal and

historical, more

accurateCommunication

of information

Simple Difficult

Involved people Top management and

staffs

Top management and

line managers

7/28/2019 MCS- Unit I

22/145

Distinctions between strategy formulation

and management control:

22

Characteristics Strategy Formulation Control

Management

Number of

involved people

Few people Many people

Mental activity Creative and analytic Administrative and

persuasive

Discipline Economics Social psychology

Time horizon Tend to long-term Tend to short-term

End products Goals, strategies Strategy

implementation

7/28/2019 MCS- Unit I

23/145

Distinctions between management and task

controls:

23

Characteristics Control Management Task Control

Focus of

activity

The whole of operation Individual task or

transaction

Nature of

information

Integrated, many financial

data

Tailored-made to

individual task, morenon-financial data

Involved people Management Supervisor or none

Mental activity Administrative and

persuasive

Follow direction or

none

End products Strategy implementation Tasks are carried out

effectively and

efficiently

7/28/2019 MCS- Unit I

24/145

Distinctions between management and task

controls:

24

Characteristics Control Management Task Control

Mental activity Administrative and

persuasive

Follow direction or

none

Discipline Social psychology Economics, physics

Time horizon Weekly, monthly,

annually

Daily

Type of cost Discretionary costs Engineered costs

7/28/2019 MCS- Unit I

25/145

Examples of decisions in planning and control

function:

25

Strategy

Formulation

Management

Control

Task Control

Enter a new business Expand a plant Schedule production

Change debt to

equity ratio

Issue new debt Manage cash flows

Add direct mail

selling

Determine

advertising budget

Book TV

commercials

Decide magnitude

and direction of

research

Control of research

organization

Run individual

research project

Acquire an unrelated

business

Introduce new

product or brand

within product line

Coordinate order

entry

7/28/2019 MCS- Unit I

26/145

Functions of MCS

1. Planning activities of an organization

2. Coordinating activities of an organization

3. Communication information to differentlevels of the hierarchical structure

4. Evaluating information and deciding the

actions to be taken

5. Influencing people to change their

behavior.

7/28/2019 MCS- Unit I

27/145

Effectiveness of Contemporary

Control Systems

1. Focus on constantly changing information thathas potential strategic importance.

2. The information is important enough to demandfrequent and regular attention from all levels ofthe organization.

3. The data and information generated are bestinterpreted and discussed in face-to-facemeetings.

4. The control system is a key catalyst for anongoing debate about underlying data,assumptions, and action plans.

7/28/2019 MCS- Unit I

28/145

Behavioral Control

Behavioral control is focused on

implementationdoing things right

Three key control levers

Culture

Rewards

Boundaries

7/28/2019 MCS- Unit I

29/145

Reasons for an increased emphasis on

culture and rewards

1. The competitive

environment is

increasingly

complex andunpredictable,

demanding both

flexibility and quick

response to itschallenges.

2. The implicit long-

term contract

between the

organization and itskey employees has

been eroded.

7/28/2019 MCS- Unit I

30/145

Building a Strong and Effective

Culture Organizational culture

a system of shared values and beliefs that

shape a companys people, organizational

structures, and control systems to producebehavioral norms.

7/28/2019 MCS- Unit I

31/145

Building a Strong and Effective

Culture Culture sets implicit boundaries (unwritten

standards of acceptable behavior)

Dress

Ethical matters

The way an organization conducts its

business

7/28/2019 MCS- Unit I

32/145

Example: Wal-Mart

A lot of Wal-Mart's success was attributed to the

strong and pervasive culture at the company,

which was developed and nurtured by founder

Sam Walton. In over four decades of operation, Wal-Mart

managed to retain most of the elements of

culture it had when it first started out, as well as

the entrepreneurial spirit which often drivesstartup companies to success.
http://walmartstores.com/AboutUs/295.aspx

7/28/2019 MCS- Unit I

33/145

Sustaining an Effective Culture

Effective culture

must be

Cultivated

Encouraged

Fertilized

Maintaining an

effective culture

Storytelling

Rallies or pep

talks by top

executives

7/28/2019 MCS- Unit I

34/145

Motivating with Rewards and

Incentives Rewards and incentive systems

Powerful means of influencing an

organizations culture

Focuses efforts on high-priority tasks

Motivates individual and collective task

performance

Can be an effective motivator and controlmechanism

7/28/2019 MCS- Unit I

35/145

Motivating with Rewards and

Incentives Potential downside

Subcultures may arise in different business

units with multiple reward systems

May reflect differences among functionalareas, products, services and divisions

7/28/2019 MCS- Unit I

36/145

Characteristics of Effective Reward and

Evaluation Systems

7/28/2019 MCS- Unit I

37/145

Setting Boundaries and

Constraints Focus efforts on strategic priorities

Provide short-term objectives and action

plans

Specific and measurable

Specific time horizon for attainment

Achievable, but challenging

7/28/2019 MCS- Unit I

38/145

Setting Boundaries and Constraints

Improve operational efficiency and

effectiveness

Minimize improper and unethical conduct

7/28/2019 MCS- Unit I

39/145

Question

Effective boundaries and constraints:

A.Tend to inhibit efficiency and effectiveness

B.Distract employees who are trying to focus

on organizational priorities

C.Minimize improper and unethical conduct

D.Tend to limit organizational growth

O i i l C l

7/28/2019 MCS- Unit I

40/145

Organizational Control:

Alternative Approaches

E l i f B d i

7/28/2019 MCS- Unit I

41/145

Evolving from Boundaries

to Rewards and Culture System ofrewards and incentives coupled

with a strong culture

Hire the right people

Training plays a key role

Managerial role models are vital

Reward systems clearly aligned with

organizational goals and objectives

7/28/2019 MCS- Unit I

42/145

Role of Corporate Governance

Corporate governance

the relationship among various participants in

determining the direction and performance of

corporations. primary participants are the shareholders, the

management, and the board of directors.

7/28/2019 MCS- Unit I

43/145

The Modern Corporation

Corporation

A mechanism created

to allow different

parties to contribute

capital, expertise, and

labor for the maximum

benefit of each party.

7/28/2019 MCS- Unit I

44/145

Agency Theory

Deals with the relationship between

Principals who are owners of the firm

(stockholders)

Agents who are the people paid byprincipals to perform a job on their behalf

(management)

7/28/2019 MCS- Unit I

45/145

Agency Theory: Two Problems

1. The conflicting

goals of principals

and agents, along

with the difficulty ofprincipals to monitor

the agents, and

2. The different

attitudes and

preferences towards

risk of principals andagents.

7/28/2019 MCS- Unit I

46/145

Governance Mechanisms

Board of directors

a group that has a fiduciary duty to ensure

that the company is run consistently with the

long-term interests of the owners, orshareholders, of a corporation and that acts

as an intermediary between the shareholders

and management.

7/28/2019 MCS- Unit I

47/145

The New Rules for Directors

7/28/2019 MCS- Unit I

48/145

Governance Mechanisms

Shareholder activism

actions by large shareholders, both

institutions and individuals, to protect their

interests when they feel that managerialactions diverge from shareholder value

maximization.

7/28/2019 MCS- Unit I

49/145

TIAA-CREFs Principles on the Role of

Stock in Executive Compensation

E t l G

7/28/2019 MCS- Unit I

50/145

External Governance

Control Mechanisms

External governance control

mechanisms

methods that ensure that managerial actions

lead to shareholder value maximization anddo not harm other stakeholder groups and

that are outside the control of the corporate

governance system.

E t l G

7/28/2019 MCS- Unit I

51/145

External Governance

Control Mechanisms

Market for corporate control

Auditors

Banks and analysts

Regulatory bodies

Media and public activists

7/28/2019 MCS- Unit I

52/145

Sarbanes-Oxley Act

Auditors

Barred from certain types of non-audit work

Not allowed to destroy records for five years

Lead partners auditing a firm should be

changed at least every five years

7/28/2019 MCS- Unit I

53/145

Sarbanes-Oxley Act

CEOs and CFOs

Must fully reveal off-balance sheet finances

Vouch for the accuracy of information

revealed

Executives

Must promptly reveal the sale of shares in

firms they manageAre not allowed to sell shares when other

employees cannot

7/28/2019 MCS- Unit I

54/145

THE PURPOSE OF MANAGEMENT CONTROL SYSTEMS

The purpose of a management control system is to

assist management in the coordination of the parts of

an organization and the steering of those parts toward

the achievement of its overall purposes, goals and

objectives. A control system is designed to bring unityout of the diverse activities of an organization as it

seeks to fulfill its overall purpose.

7/28/2019 MCS- Unit I

55/145

The Organizational Context of Managerial Control

Systems

Organizations:

a. Subunits

b. Effectiveness and Efficiency

Effectiveness relates to the social purpose of the organization,whereas efficiency relates to the personal motives of the stakeholders

of the organization.

c. Internal and External Stakeholders

d. Executive Functions

i) Securing essential efforts: inducing participation of stakeholdersinto the organization.

ii) Provide the system of organizational communication.

a) Formal and informal organization

7/28/2019 MCS- Unit I

56/145

e. Organizational Survival and Control Systems

The organization must provide inducements that are sufficient to

attract the essential contributions from stakeholders, such as capital

from investors, labor from employees, materials resources from

suppliers, and product purchases from customers.

The real bottom line of the firm is to be able to convert the

contributions of the principal stakeholders into potential inducements

efficiently enough to meet present stakeholder requirements and

also to provide sufficient resources to continue the innovation

process so that the competitive challenges of the future will be met.

f. Assumptions about Human Behavior

Control systems are designed to favorably influence human behavior

as organizations pursue their goals and objectives.Five assumptions about human drives are:

1. Basic rationality. Human beings are basically rational

and as such are able to reason, make plans, and control

behavior.

CONTD

7/28/2019 MCS- Unit I

57/145

2. Creativity. A basic human instinct is the desire to be creative.

3. Mastery. Humans desire to manage; therefore, the desire to be

incontrol is innate.

4. Morality. Human beings have strong moral instincts, although

these instincts may not always dominate behavior.

5. Community. Human beings have strong needs and desires for

human associations.

Elements of a Control System

7/28/2019 MCS- Unit I

58/145

Elements of a Control System

DetectorMeasuring device

SELECTORComparing device

EFFECTORCorrecting device

COMMUNICATION NETWORKTransmitting device

Nature of MCS

Activity Nature of end product

Strategy Formulations

Management Control

Task Control

Goals, Strategies, Policies

Implementation of strategies

Effective Performance

Interdependence & Relationships

Important feature of MCS

7/28/2019 MCS- Unit I

59/145

Important feature of MCS

Nature of decision

Decisions are systematic & rhythmic

Strategy implementation tool

Behaviour considerations

Characteristics of a good MCS

Future oriented

Clear objective

Minimum Control losses

Input Control Selection, recruitment, training, strategic plan etc.

Process Control Inventory Control, Budgetary Control etc.

Output Control Setting standards, monitoring, evaluating

Formal Control Process

7/28/2019 MCS- Unit I

60/145

Formal Control Process

Infrastructure

Organisation Structure

Operations

Patterns of autonomy

Management Methods

Management, Style & Culture

Style

Principles &

Values

Formal Control Process Strategic planning

Capital budgeting

Operation planning

management Accounting

Budgeting Reporting Systems

Project Management

Variance Analysis

Rewards

Coordination &

Integration

7/28/2019 MCS- Unit I

61/145

Informal Control Systems

INFRASTRUCTURE

Personal contacts Networks

Expertise oriented

Minimal structure

Emergent roles

INFORMAL CONTROL PROCESS

Search/alternative generation

Ad hoc as needed

Uncertainty coping

Rationalization/dialogue

INFORMAL REWARDS

Recognition

Status oriented

Intrinsic

Performance oriented

Stature oriented

Personal contact

COORDINATION &INTEGRATION

Based upon trust

Simple/direct/personal

Telephone conversations

Personal memos

MANAGEMENT STYLE &CULTURE

Prevailing style External/Internal/mixed

Principal values

Norms and beliefs

Formal Control SystemsGeneral Electric under Welch

7/28/2019 MCS- Unit I

62/145

General Electric under Welch

INFRASTRUCTURE

Very Decentralized

Eliminated Sectors

Wider Span of Control

Role of Staff Reduced

Strong Inter SBU Relations

Drastic Reductions in Personnel

Flattened Organization

FORMAL CONTROL PROCESS Goals: #1 or #2 in Each SBU

Simplified Strategic Planning Systems

Global Orientation

Strong Financial Systems

Work Simplifications Procedures

Improved Quality and Speed of Information

REWARDS

Candid Perf. Evaluations

Drastic Increase in use of Stock Options

Risk Taking Encouraged

COORDINATION & INTEGRATION

Strong Corporate ExecutiveCouncil

SBU Executive and Operating

Councils Strong Training Programs

STYLE & CULTURE

Hands on/Strategic operators

More Informal

Speed in Adaptation

Loyalty-Performance Based

Hard Headed/Soft Hearted

Focus on the Truth

Informal Control SystemsGeneral Electric under Welch

7/28/2019 MCS- Unit I

63/145

General Electric under WelchINFRASTRUCTURE

Non Bureaucratic Behaviour in Relationships

Boundaryless Organization

Inside Outside

Cross Functional Teams

Blur Distinctions between Management andEmployees


Emphasis on Creating Vision & Providing Leaderships

Frank Assessment of Operations & Strategy

Speed and Agility in Decision Making

Best Practices Shared Among SBUs

INFORMAL REWARDS

Team Achievement

Pride in Accomplishment

Recognition Programs

Pride of Accomplishment

Winning

INFORMAL COORDINATION & INTEGRATION

Candor is Emphasized

Realism is Valued

Constructive Conflict is Emphasized

Problem Identification Encouraged

Teamwork is Endorsed

STYLE & CULTURE

Hands on/Strategic operators

More Informal

Speed in Adaptation

Loyalty-Performance Based

Hard Headed/Soft Hearted

Focus on the Truth

7/28/2019 MCS- Unit I

64/145

Strategic

Planning

Strategic

Control

TacticalPlanning

TacticalControl

Operational

Control

Operational

Planning

Framework for planning and control:

7/28/2019 MCS- Unit I

65/145

Framework for planning and control:

Anthony and Deardens framework

Consistent with the three levels of management and three levels of decision-making, the total planning and control system could be subdivided into three

categories.

(i) Strategic planning (ii) Management control (iii) Operational control

Corporate management Institutional level Strategic planning

Divisional management Managerial level Corporate management

Operating management Technical level Operational control

7/28/2019 MCS- Unit I

66/145

The Cybernetic Paradigm

The cybernetic paradigm allows us to capture the essential

elements of the repetitive control process:

1. Set goals and performance measures.

2. Measure achievement.

3. Compare achievement with goals.

4. Compute the variances as the result of the preceding

comparison.

5. Report the variances.

6. Determine cause (s) of the variances.

7. Take action to eliminate the variances.

8. Follow up to ensure that goals are met.

The Cybernetic Paradigm of the Control Process

7/28/2019 MCS- Unit I

67/145

BehaviorChoice

Perception

Goals

Feedback

Environment

Effector

Decision Maker

FactualPremisesComparator

ValuePremises

BehavioralRepertoire

The Cybernetic Paradigm .

7/28/2019 MCS- Unit I

68/145

The Cybernetic Paradigm .

ASSUMPTIONS

Decisions are explained as the result of the interaction between the

manager / decision maker and the environment.

The manager constructs from these data certain beliefs concerning

performance and the state of the external environment. These beliefs are

referred to as factual premises.

Factual premises are formed by passing these data through a cognitiveprocess referred to as perception.

Goals are themselves a result of past learning concerning performance and

accomplishments and represent the desired state for the manager.

When a difference is determined to exist between what decision makersdesire (that is, value premises) and their beliefs about the environment (that is,factual premises), they are motivated to seek to close the gap.

The comparator represents the comparison process that takes betweenperformance measures and performance information.

7/28/2019 MCS- Unit I

69/145

The Cybernetic Paradigm

When a performance gap exists, decision makers are motivated to searchfor courses of action that will move them closer to their goals. This choice isreferred to as behavioural choice and is made by evoking from experiences alimited set of alternatives that have been successful in solving similar problems

in the past.

The content of the set of alternatives evoked from the decision makers

behavioural repertoire is itself a function of goals, past experience, and thedecision makers perception as to the state of the environment.

Decisions require implementation. The effector, a manager, activates thedecision, thus serving as a change agent.

Control is brought about by action taken by the manager, who next seeks to

determine the effects of the action. This new information is referred to as

feedback.

KEY SUCCESS VARIABLES AS

7/28/2019 MCS- Unit I

70/145

KEY SUCCESS VARIABLES AS

CONTROL INDICATORS

Concept of Key Variables:

A key variable is a significant indicator of business activity. Any

change in its value is expected to have an impact on the

performance of the organization.

Key variables require examination and in-depth

evaluation. At the stage of in-depth evaluation, the

manager has to make a subjective judgement as towhether each factor identified is important in explaining

the success or failure of attaining management goals.

Contd.

They must be measurably, either directly or via a

7/28/2019 MCS- Unit I

71/145

surrogate or substitute.

Key variables are volatile; they can change rapidly for

reasons often beyond the control of the manager. Changes in key variables are not easily predictable. The

choice of key variables requires the manager to make a

subjective judgement.

Management action is required when a significant

change occurs in any key variable. The manager should

select as many key variables as required to run the

business, possibly two or three, but no more than six.

Predictable variables are of little use as key variables.

Obviously, if an event can be predicted with a degree of

certainty, then appropriate management action can

easily be taken.

SOURCE OF KEY SUCCESS

7/28/2019 MCS- Unit I

72/145

SOURCE OF KEY SUCCESS

VARIABLES

1. Industry Characteristics

2. Competitive Strategy

3. Environmental Forces

4. Significant Problems

5. Functional Issues

Key variables come from five sources. They are:

Input Variables:

7/28/2019 MCS- Unit I

73/145

p

Raw material availability

Raw material quality Raw material costs

Production Variables:

Capacity utilization

Losses

Quality control

Maintenance

Costs

Delivery

Marketing Variables:

7/28/2019 MCS- Unit I

74/145

g

Order book position

Market share Institutional sales

Asset Management Variables:

Asset turnover

Working capital turnover

PERFORMANCE BUDGETING

7/28/2019 MCS- Unit I

75/145


Important Features:

a) That object-wise or function wise budgeting is almost always

likely to cut across departmental boundaries. In planning and

budgeting for such programs inter departmental cross walks

are indispensable.

b) Budgeting should start with the main output areas, or end-resultpoints. Objective-wise budgets should flow in the second sage

from such budgets.

c) Physical accomplishment should be budgeted for and

comparisons with actual achievements made.

d) A constant search for meaningful, measurable assessment criteria,even for apparently non-quantifiable areas, should be made.

e) The underlying logic of PB is fairly universal. It can, therefore, be

easily adapted to help budgeting and review.


7/28/2019 MCS- Unit I

76/145


BASIC STEPS:

a) Establishing a meaningful program & activity

classification.

b) Bringing the system of Accounting & Financialmanagement in accord with this classification; and

c) Evolving suitable norms, yardsticks, work units of

performance and unit costs, wherever possible

under each program and activity for their reporting

and evaluation.

Understanding Risk Management

7/28/2019 MCS- Unit I

77/145

g g

No universally accepted definition of risk exists. Risk is commonly

used to refer to insured items, to causes of loss and to the chance of

loss. Statisticians and economist associate risk with variability A

situation is risky if a range of outcomes exists and the actual outcome

is not known in advance, - Harold Skipper.

Risk management guides us over a vast range of decision-making,

from allocating wealth to safeguarding public health, from aging war

to planning a family, from paying insurance premiums to wearing a

seat belt, from planting corn to marketing cornflakes,Bernstein.

7/28/2019 MCS- Unit I

78/145

Enterprise Risk Management (ERM)

Addresses some fundamental questions:

What are the various risks faced by the company?

What is the magnitude of each of these risks?

What is the frequency of each of these risks?

What is the relationship between the different risks?

How can the risks be managed to maximise shareholders wealth?

7/28/2019 MCS- Unit I

79/145

Strategic Cost Management

Strategic Cost Management combines threestrategic management themes. The threethemes are:

Value Chain Analysis

Cost Driver Analysis

Strategic Positioning Analysis

Value chain analysis is a strategic analysis tool that

7/28/2019 MCS- Unit I

80/145

Value chain analysis is a strategic analysis tool thatcan be used to identify areas in which value can beenhanced for customers or costs can be reduced.

Value chain analysis thus helps a firm gain competitiveadvantage.

The value chain of a company is the linked set ofvalue-creating activities, all the way from basic rawmaterial sources for component suppliers through to

the ultimate end product delivered into the finalconsumers hands.

Value chain analysis consists of three steps:

Step 1: Identifying value chain activities

Step 2: Identifying the cost driver(s) at each value activity

Step 3: Developing a competitive advantage by reducing

cost or adding value.

7/28/2019 MCS- Unit I

81/145

Cost driver analysis is used to quantify the cost

of poor quality and determining the root causes

of poor quality or high costs.

Structural Cost Drivers

7/28/2019 MCS- Unit I

82/145

Cost Driver Implications Controlling structural cost

drivers

Scale Take decisions concerninginvestments in manufacturing, R&D

and marketing

Develop Scale economies tocontrol costs

Scope Decide on the degree of vertical

integration needed

Enhance vertical integration;

otherwise outsource

Experience Identify the repetitive tasks Enhance employee learning and

experience

Complexity Decide about product line and

number of products

Find sharing opportunities with

other business units in the

enterprise

Technology Take decisions pertaining to

technologies to be used at every

stage of value chain

Optimize the use of technology

between value chain activities

E ti l C t D i

7/28/2019 MCS- Unit I

83/145

Executional Cost Drivers

Commitment of workforce to continuous

improvement

Managements attitudes towards quality

Cycle time for getting new products to market

Firms utilization of existing capacity

Proper design of internal business processes

Managements ability to work efficiently with

suppliers and/or customers to reduce costs.

7/28/2019 MCS- Unit I

84/145

Strategic Positioning Analysis

A firm can choose to compete in the market either

on the basis of cost or differentiation.

7/28/2019 MCS- Unit I

85/145

Managerial Styles and the Design ofControl SystemsManagerial Style is important to the design of

control systems because:

1. Control systems influence the behavior of those

controlled in that the controlee focuses his or herenergies on the maters thatcount because this is

the manner in which performance is evaluated.

2. The precise manner in which the control system

influences behavior depends on how the systemsare used by managers.

3. Managers differ in their use of control systems; that

is, they have different styles of control.

1 The external control style

7/28/2019 MCS- Unit I

86/145

1. The external control style

2. The internal control style

3. The mixed control style

Under the external style the decision-making mechanism is

maintained by top executives after data are gathered at lower

levels in the organization.

The internal style is more participative and attempts to

capitalize upon the internal needs and motivations of the

subordinate, such as the need for accomplishment, mastery,

socialization, power, and self-esteem in an attempt to build

internal commitment for organizational goals.

7/28/2019 MCS- Unit I

87/145

Decentralization versus Centralization

The very fact that conditions exist which create the need for a

decentralized organization structure indicates that the

complex organization will not make decisions through a

central decision-making process but rather through a diffuse

one.

Organization units are not normally part of a given

corporation unless they share some common characteristics

with other organization units. These characteristics includewhat Porter calls tangible or intangible interrelationships.

O i ti l d t li ti f fit d i t t

7/28/2019 MCS- Unit I

88/145

Organizational decentralization of profit and investment

responsibility has significant benefits. It allows closer control and

supervision within the division than does centralization. It

facilitates information processing, since it permits analysis of

trade-offs among cost, revenue, and investment at lower levels of

management closer to the impact of the decision. It produces

greater managerial motivation as general managers of divisions

run their own business, given only broad constraints in terms of

company goals, objectives, strategies, and policies.

Adaptive Organization

Informal Control for Adaptive Organization

7/28/2019 MCS- Unit I

89/145

Informal Control for Adaptive OrganizationINFRASTRUCTURE

Expert emergent roles for local

cultures and markets Acceptance of temporary

assignments


Verbal informal actions

Use of multidisciplinary teamsfor problem solving

REWARDS

Based on peer recognition ofthe adaptive values of theorganization

COORDINATING & INTEGRATION

Use of personal travel formanagers to become familiarwith worldwide conditions

MANAGEMENT SYLE & CULTURE

Global operating perspective

Opportunistic action oriented

Change oriented

Lifelong learning

Agility in new assignments

Formal Control for Adaptive Organization

INFRASTRUCTURE MANAGEMENT SYLE & CULTURE

7/28/2019 MCS- Unit I

90/145

INFRASTRUCTURE

Organization structure

Easily formed and dissolved

Use of adhoc Teams

Widespread use of outsourcing

Widespread use of teams

FORMAL CONTROL PROCESS

Clear company vision

Integrated information systems

Rapid response times for information flows

Accurate worldwide reporting

Simple and rapid authorization procedures

REWARDS

Emphasize ability to achieve

excellence in uncertain

environments

COORDINATING & INTEGRATION

Use of management rotation on aglobal basis

Use of multidisciplinary teams for

accomplishing specific objectives

MANAGEMENT SYLE & CULTURE

Global operating perspective

Opportunistic action oriented

Change oriented

Lifelong learning

Agility in new assignments

AUDITING

7/28/2019 MCS- Unit I

91/145

AUDITING

Audit is the activity of examination andverification of records and other evidence by

an individual or a body of persons so as to

confirm whether these records and evidencepresent a true and fair picture of whatever

they are supposed to reflect.

Audits are most commonly used in theaccounting and finance functions

Categories of Audits

7/28/2019 MCS- Unit I

92/145

Categories of Audits

Audit category Brief description

Financial

statement audit

Gives an opinion on the accuracy of the financial

statements

Ensures compliance with the relevant accounting

standards and reporting framework

Internal audit An independent appraisal function established withinan organization to examine and evaluate its activitiesas a service to the organization

Need not be limited to books of accounts and related

records

Fraud auditing andforensic audit

Deters, detects, investigates, and reports fraud

Forensic: related to the legal system, especiallyissues of evidence

Operational audit Audits operational aspects of the enterpriseQuality audit, R&D audit, etc

Audit category Brief description

7/28/2019 MCS- Unit I

93/145

Information systems

audit

Audit of computer systems

Checks whether the computer system safeguards

assets, maintains data integrity, and contributes to

organizational effectiveness and efficiency

Management audit Audit of the management, as a tool for evaluation andcontrol of organizational performance

Examines the conditions and provides a diagnosis of

deficiencies with recommendations for correcting them

Social audit Audit of the enterprise's reported performance in meetinits declared social , community, or environmental

objectives

Environmental audit Environmental compliance audit: a checking mechanismEnvironmental management audit: an evaluation

mechanism

The Auditing process

7/28/2019 MCS- Unit I

94/145

The Auditing process

Staffing the audit team Creating an audit project plan

Laying the ground work

Conducting the audit

Analyzing audit results Sharing audit results

Writing audit reports

Dealing with resistance to auditrecommendations

Building an ongoing audit program

7/28/2019 MCS- Unit I

95/145

MANAGEMENT AUDIT

An examination of the conditions and a diagnosis of

deficiencies with recommendations for correcting them.

According to John C Burton, in a management audit, the

auditor will see whether management is getting information

relevant to the decisions and actions which it must take. This

will require a much more intensive analysis of informationneeds and the efficiency of the existing system in meeting them.

7/28/2019 MCS- Unit I

96/145

Objective of a Management Audit

to critically analyze and evaluate management

performance.

Apart from this, it is conducted to detect and

overcome existing managerial deficiencies and

resulting operational problems.

Benefits of Management Audits

7/28/2019 MCS- Unit I

97/145

Benefits of Management Audits

Management auditing is proactive, it provides anearly-warning signal of managerial problems and

related operational difficulties.

A source of information is assisting the organization toaccomplish the desired objectives.

Objectively evaluate organizational plans, structure,

and the directions that management gives in the formof strategies and management processes in planning,

organizing, directing and controlling the organizational

resources.

Types of Management Audit

7/28/2019 MCS- Unit I

98/145

Types of Management Audit

Complete management audit

Compliance management audit

Program management audit

Functional management audit

Efficiency audit

Propriety Audit

Management audit can be categorized into six types:

Internal Auditors

7/28/2019 MCS- Unit I

99/145

Internal Auditors ... The internal audit function operates in staff capacity and

reports high in the organization, at least to the controlleror financial vice-president.

Financial audits

External auditors / GAAP

Compliance audits External / internal auditors;

Compliance with laws and rules / administrative policies.

Performance audits

External / internal auditors / consultants;

Evaluation of the performance of the company, its

management,

a department, or a specific activity (+ make

recommendations).

A dit t b fit

7/28/2019 MCS- Unit I

100/145

Auditstwo benefits

The audit report adds credibility to the

information provided to user groups;

Anticipationof the audit increases the

motivation

of the individuals involved to act in alegal, ethical way and in the best

interest of the company and its owners.

Social Audit

7/28/2019 MCS- Unit I

101/145

Social Audit

The inadequate reflection of the social performance of theorganization has given rise to the concept of social accounting

and social auditing.

Definition of Social Audit

7/28/2019 MCS- Unit I

102/145

Definition of Social Audit

Blake, Fredrick and Myers in their book Social Auditingdefine social audit as systematic attempt to identify, analyze,

measure, evaluate and monitor the effect of an organizations

operations on society.

Features of Social Audit

7/28/2019 MCS- Unit I

103/145

Features of Social Audit

Social audits adhere to the specified norms. Thesenorms may pertain to the governments standards of

social performance, standards established by the

organization and norms set by outside agencies.

The aim of conducting a social audit is to influence

the policies, objectives and actions of the concerned

organization to improve its social performance.

Social audit is conducted by professionals who have

knowledge about the social area being audited.

Service Organizations

7/28/2019 MCS- Unit I

104/145

Service Organizations

Characteristics

Absence of Inventory Buffer

Difficulty in Controlling Quality

Labour Intensive

Multi-Unit Organizations

7/28/2019 MCS- Unit I

105/145


Pricing

Profit Centers and Transfer Pricing

Strategic Planning and Budgeting

Control of Operations

Performance Measurement and Appraisal

7/28/2019 MCS- Unit I

106/145

Nonprofit Organizations

Special Characteristics

Absence of the Profit Measure

Contributed Capital

Fund Accounting

Governance

7/28/2019 MCS- Unit I

107/145


Product Pricing

Strategic Planning and Budget Preparation

Operation and Evaluation

What Is Cybernetics?

7/28/2019 MCS- Unit I

108/145

What Is Cybernetics?

Cybernetics began as the science ofcommunication and control in the animal,machine, and society; i.e. special types ofsystems.

It operates on two levels: study of anobserved system & study of the peoplestudying a system.

Originated from R & D process in thedevelopment of the atomic bomb- appliedscientific theory & principles in real-world

setting

What Are the Main Points?

7/28/2019 MCS- Unit I

109/145

What Are the Main Points?

Theoretical-sciences of complexity--including AI, neuralnetworks, dynamical systems, chaos, and complexadaptive systems.

Practical-Many of the concepts used by systemscientists come from the closely related approach ofcybernetics: information, control, feedback,communication.

There was also a return from the machine to the livingorganism, which accelerated progress in neurology,

perception, the mechanisms of vision In the sixties MITsaw the extension of cybernetics and system theory toindustry, society, and ecology.

Who Were the Main People?

7/28/2019 MCS- Unit I

110/145

Who Were the Main People?

Three men can be regarded as thepioneers of great breakthroughs (in

cybernetics):

the mathematician Norbert Weiner, whodied in 1964,

the neurophysiologist Warren McCulloch,

who died in 1969; Jay Forrester, professor at the Sloan

School of Management at MIT.

How It relates to IDD

7/28/2019 MCS- Unit I

111/145

How It relates to IDD

The fundamental concepts of cybernetics haveproven to be enormously powerful in a variety of

disciplines: computer science, management,

biology, sociology, thermodynamics, etc.

Cybernetics and Systems Science combine the

abstraction of philosophy and mathematics with

the concreteness of dealing with the theory and

modeling of "real world" evolving systems.

How It Relates to IDD

7/28/2019 MCS- Unit I

112/145

(Continued)

Although there are many exceptions,researchers in cybernetics and systems science

tend to be trained in a traditional specialty (like

biology, management, or psychology) and then

come to apply themselves to problems in other

areas, perhaps a single other area. Thus their

exposure to cybernetics and systems science

concepts and theory tends to be somewhat adhocand specific to the two or three fields they

apply themselves to.

Specific Ways Cybernetics

7/28/2019 MCS- Unit I

113/145

Incorporated Into Dick & Carey

Dick & Carey shows evidence of an

underlying system and approach to

instruction. Dick & Careys modelhighlights the principle that is applicable to

solve any kind of problem. The approach

can be broken apart and each partexamined. Also, it has a linear structure.

Dick & Carey Continued

7/28/2019 MCS- Unit I

114/145

Dick & Carey Continued

If we would uncover those general laws,we would be able to analyze and solve

problems in any domain, pertaining to any

type of system. Following D & C all stepsare incorporated.

Five Websites

7/28/2019 MCS- Unit I

115/145

Five Websites

1.pespmc1.vub.ac.be/CYBSYSTH.html

2. link.springer.de/link/service/journals/0042

3. cyvision.if.sc.usp.br

4. www.evolutionaryethics.com

5. www.xmission.com/~cyberman

Associated Books

7/28/2019 MCS- Unit I

116/145

Associated Books

How we became posthuman : virtualbodies in cybernetics, literature, andinformatics / N. Katherine Hayles.

The computer and the brain / John vonNeumann ; with a foreword by Paul M.Churchland and Patricia S. Churchland.

The foundations ofcybernetics / F. H.

George.

Associated Books

7/28/2019 MCS- Unit I

117/145

Associated Books

The soft machine : cybernetic fiction /David Porush.

How colleges work : the cybernetics of

academic organization and leadership /Robert Birnbaum

Something New

7/28/2019 MCS- Unit I

118/145

Something New

Cybernetics should be understood as a key toolor cognitive methodology for the observer who

would know himself and his world.

Understanding Cybernetics is similar to finding

ways of navigating between the many islands of

discourse that explore relations between

disciplines in the sciences and humanities.

Controlling as a Management

F ti

7/28/2019 MCS- Unit I

119/145

Function

ControllingA process of monitoring performance and

taking action to ensure desired results.

It sees to it that the right things happen, in theright ways, and at the right time.


F ti

7/28/2019 MCS- Unit I

120/145

Function

Controlling Done well, it ensures that the overall

directions of individuals and groups areconsistent with short and long range plans.

It helps ensure that objectives andaccomplishments are consistent with oneanother throughout an organization.


F ti

7/28/2019 MCS- Unit I

121/145

Function

Controlling It helps maintain compliance with essential

organizational rules and policies.

The Cybernetic Control System

7/28/2019 MCS- Unit I

122/145

One that is self-contained in its performancemonitoring and correction capabilities.

(thermostat)

The control process practiced in organizations

is not cybernetic, but it does follow similar

principles.

The Control Process

7/28/2019 MCS- Unit I

123/145

The Control Process

Establish objectives and standards.

Measure actual performance.

Compare results with objectives and

standards.

Take necessary action.

Establish Objectives and

St d d

7/28/2019 MCS- Unit I

124/145

Standards

The control process begins with planning

and the establishment of performance

objectives.

Performance objectives are defined and

the standards for measuring them are set.

Establish Objectives and

St d d

7/28/2019 MCS- Unit I

125/145

Standards

There are two types of standards:

Output Standards - measures performanceresults in terms of quantity, quality, cost, or

time.

Input Standards - measures work efforts that

go into a performance task.

Measuring Actual Performance

7/28/2019 MCS- Unit I

126/145

g

Measurements must be accurate

enough to spot deviations or variances

between what really occurs and what is

most desired.

Without measurement, effective control

is not possible.

Comparing Results with

Obj ti d St d d

7/28/2019 MCS- Unit I

127/145

Objectives and Standards

The comparison of actual performance with

desired performance establishes the need for

action.

Ways of making such comparisons include:

Historical / Relative / Engineering

Benchmarking

Taking Corrective Action

7/28/2019 MCS- Unit I

128/145


Taking any action necessary to correct or

improve things.

Management-by-Exception focuses

managerial attention on substantial

differences between actual and desired

performance.


7/28/2019 MCS- Unit I

129/145

g

Management-by Exception can save themanagers time, energy, and otherresources, and concentrates efforts on

areas showing the greatest need. There are two types of exceptions:

Problems - below standard

Opportunities - above standard

Effective Controls

7/28/2019 MCS- Unit I

130/145

The Best Controls in Organizations are:

1.Strategic and results oriented

2.Understandable

3.Encourage self-control

Effective Controls

7/28/2019 MCS- Unit I

131/145

The Best Controls in Organizations are:

1. Timely and exception oriented

2. Positive in nature

3. Fair and objective

4. Flexible

Types of Control

7/28/2019 MCS- Unit I

132/145

yp

PreliminarySometimes called the feedforwardcontrols, they are accomplished beforea work activity begins.

They make sure that proper directions

are set and that the right resources are

available to accomplish them.

Types of Control

7/28/2019 MCS- Unit I

133/145

yp

ConcurrentFocus on what happens during the work

process. Sometimes called steering

controls, they monitor ongoing operationsand activities to make sure that things are

being done correctly.

Types of Control

7/28/2019 MCS- Unit I

134/145

yp

Postaction

Sometimes called feedback controls,

they take place after an action iscompleted. They focus on end results,

as opposed to inputs and activities.

Types of Controls

7/28/2019 MCS- Unit I

135/145

yp

Managers have two broad options withrespect to control.

They can rely on people to exercise self-

control (internal) over their own behavior. Alternatively, managers can take direct

action (external) to control the behavior of

others.

Types of Control

7/28/2019 MCS- Unit I

136/145

yp

Internal Controls

Allows motivated individuals to exercise

self-control in fulfilling job expectations.

The potential for self-control is enhanced when

capable people have clear performance

objectives and proper resource support.

Types of Control

7/28/2019 MCS- Unit I

137/145

yp

External ControlsIt occurs through personal supervision and the

use of formal administrative systems. Performance appraisal systems,

compensation and benefit systems,

employee discipline systems, and

management-by-objectives.

Organizational Control Systems

7/28/2019 MCS- Unit I

138/145

g y

Management Processes Strategy and objectives

Policies and procedures

Selection and training

Performance appraisal Job design and work structures

Performance modeling, norms, andorganization culture


7/28/2019 MCS- Unit I

139/145

Compensation and BenefitsAttract talented people and retain them.

Motivate people to exert maximum effortin their work.

Recognize the value of theirperformance contributions.


7/28/2019 MCS- Unit I

140/145

Employee Discipline Discipline is defined as influencing behavior

through reprimand.

Progressive Discipline ties reprimand to theseverity and frequency of the employeesinfractions.

Positive Discipline tries to involve peoplemore positively and directly in making

decisions to improve their behavior.

The Hot Stove Rule

7/28/2019 MCS- Unit I

141/145

Immediate Focus on activity

not personality

Consistent

Informative Occur in a

supportive setting

Support realistic

rules

To be Effective Discipline Should be:


7/28/2019 MCS- Unit I

142/145

Information and FinancialActivity-based costing - the true cost of all

products and services.

Economic value added - examine the valueadded by all activities.

Understand the implication of key financialmeasures of (ratios) organizational

performance

Operations Management and

Control

7/28/2019 MCS- Unit I

143/145

Control

Purchasing Economic Order Quantity

automatic reorder points

Just-In-Time Scheduling


Control

7/28/2019 MCS- Unit I

144/145

Control

Project Management Program Evaluation and Review

Technique (PERT) - Identifies and controlsthe many separate events in complex

projects.


Control

7/28/2019 MCS- Unit I

145/145

Control

Statistical Quality Control Based on the establishment of upper and

lower control limits, that can be graphicallyand statistically monitored to ensure that

products meet standards.

mcs- unit i

Documents