Management control systems jsb 606 part2


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Management Control Systems make management of an organization possible. This set of presentations tells you what they are and how to go about building them. The series is in four parts. If you need to download the presentations mail me at

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Management control systems jsb 606 part2

  1. 1. Management Control Systems Part 2 Debasis Das Exemplar Consultancy
  2. 2. Designing The ControlProcess & Managerial Controls Debasis Das JSB 606 2
  3. 3. Attributes of Systems-1• System – Association of parts related to each other• Managerial Control System – Interrelated communication structures that help managers achieve organization purpose. Sub units linked in a Macrostructure• Autonomy – Local decision making capabilities• Feedback – Positive & negative• Controls/Homeostats(Self-regulating)• Entropy (chaos & uncertainty) – Systems to deteriorate and become chaotic Debasis Das JSB 606 3
  4. 4. Attributes of Systems-2• Control – Through control of key variables, measure values, feedback to reduce chaos & uncertainty• Cause & effect – Measurements and changes• Adaptive – Not all responses could be defined beforehand• Learning – Find and learn to find answers Debasis Das JSB 606 4
  5. 5. Cybernetic Paradigm Of Control Not- understood processes HumanInputs brain Outputs Probabilistic, highly complex Insights from Cybernetics used to design controls and control systems Debasis Das JSB 606 5
  6. 6. Cybernetic Paradigm of Control Process Environment Griesinger 1979 Decision Goals maker Value premises Perception ComparatorFeedback Factual Sensor Behavior premises repertoire Behavior choice Effector Debasis Das JSB 606 6
  7. 7. Essential Elements of Repetitive Control System• Set goals and performance measures• Measure achievement• Compare achievement with goals• Compute variances• Report variances• Determine causes of variance• Take action to eliminate variance• Follow up to ensure goals are met Debasis Das JSB 606 7
  8. 8. Designing Management Controls-1• Establishing controls is a constructive process• Objectives should be measurable• Controls should focus on objectives and key results, limited in number• Controls should establish balance rather than financial alone• Single point responsibility• Compare projected performance to actual performance to derive control actions for the next period Debasis Das JSB 606 8
  9. 9. Designing Management Controls-2• Look for early warning predictors• May be possible and desirable to sample the variable• Establish an acceptable range of variations for variables• Focus on exceptions to desired result and report to the person responsible ASAP• Severity of problem should be confirmed independently monitor and confirm control is working• Develop a discerning view of controls, apply judgment and interpreting results ebasis Das JSB 606 9
  10. 10. Means-Ends Analysis 1 G2 G1 G2 G3 G4 3G11 G12 G13 ………………………………………………………………….. G43 Debasis Das JSB 606 10
  11. 11. Control Process Relating Superior-Subordinate Superior Control System InterconnectionFeedback from superior effector Between Behavior repertoire goals Subordinate Control SystemSuperior goal affects the subordinate goalsSuperior behavior repertoire can influence the subordinate effectorFeedback from the superior enters the subordinate system through the sensor Debasis Das JSB 606 11
  12. 12. Decentralization, LooseCoupling & Organizational Slack Debasis Das JSB 606 12
  13. 13. Need For Decentralization• Decision making capability of humans is limited• Limited to 7 + or minus 2 chunks of information• Decentralizing decision making is a must, establish sub-goals, hold each decision maker to a small part of the organization purpose.• Decision makers must find ways to deal with the complexity Debasis Das JSB 606 13
  14. 14. Loose Coupling• A multiplicity of goals & objectives• A sub-units local set is derived from the means-end chain• MCS must knit the sub-units together to bring unity in diversity• Decentralization means profit, ROI and other corporate goals enter indirectly through the means-end chain indirectly Debasis Das JSB 606 14
  15. 15. Organizational Slack• If a firm is successful in achieving its goals & objectives, there may not be pressure for increasing coupling between goals & objectives of sub-units.• Difference between total payments and necessary payments is the organizational slack. Includes costly support services, extra inventories and extra time to market.• However, acts as cushion against variability, extra resources for innovation and adaptation• Combined overreaching goals, mixed teams can help trim the slack Debasis Das JSB 606 15
  16. 16. Stakeholder Controls• One primary function of executive: take contributions of a stakeholder, convert to inducements sufficient to maintain their co-operation for org goals & objectives. Do it efficiently as competition exists.• Identify stakeholders that are crucial. The ones that affect the org most and the ones the org affects most. Debasis Das JSB 606 16
  17. 17. Communication Structures Supporting the control Process• Formal/informal scanning of the environment of the sub-unit (both internal and external)• Feedback from external scanning, performance measurement from internal accounting• Internal accounting can provide comparison, provide reports• Decision making procedures• Planning processes – Strategic planning – Business planning – Long-range planning (programming) – Operating budget Debasis Das JSB 606 17
  18. 18. Impact of IT on Control Systems• Bringing unity out of diversity – Order entry and inventory management – Speadsheets for what-if scenarios – Performance measurements• Providing inputs to operational & strategic decision making – Decrease in cost of information processing helping activity based costing (ABC) – Improved inventory control makes monitoring of customer demands possible Debasis Das JSB 606 18
  19. 19. Micro, Intermediate, Macro Frameworks-1Environment Griesinger 1979 Decision Goals maker Micro framework Value premises Perception Comparator Factual Sensor Behavior premises repertoire Behavior Debasis Das choice JSB 606 19
  20. 20. Micro, Intermediate, Macro Frameworks-2 ManagementInfrastructure Style & Culture Intermediate Framework Formal Control Process Coordination & Rewards Integration Debasis Das JSB 606 20
  21. 21. Micro, Intermediate, Macro Frameworks-3 Management External SystemsInitial EnvironmentConditions (Uncontrollable) Internal Improvements External Critical ENTITY + Performance + Status Success factors & impediments Measures X Stakeholders Goals & Ideal Strategies Debasis Das JSB 606 21
  22. 22. Key Success Variables in MCS Debasis Das JSB 606 22
  23. 23. Key Variable (Key Budgeting Factors)• Indicators or variables that influence business in a big way• Small change in these factors causes big changes in business• External – Technology, environment, competitive situation• internal – Tasks, strategy Debasis Das JSB 606 23
  24. 24. Interrelations-Internal & External factors Business Internal External Environment Character IndustryStakeholders CharacterObjective of Significant Business Functions CorporateCompetitors Strategy Debasis Das JSB 606 24
  25. 25. Key Variables & Sources• External factors ->nature of business, types of stakeholders, competitors• Internal factors->task, industry character, significant function, strategy• Nature of Business- environment• Stakeholders-nature of stakeholders and risk taking• Competitors-substitutes and complements• Objective- competitive strategy• Industry character- Business environment Debasis Das JSB 606 25
  26. 26. Identification of Key Variables• Identification through input-output analysis (classify variables) – Input – Production – Marketing & selling – Liability management – Asset management Debasis Das JSB 606 26
  27. 27. Input• QTC analysis• Q for quality• Time or time to availability• Cost or cost of the input• Product leadership (including support) depends on the QTC of the raw materials Debasis Das JSB 606 27
  28. 28. Production• Production processes – Quality processes ensure product quality• Technology – Technology for superior product, technology transfer issues, easy and long time support• Cost of production – Infrastructure cost, engineering cost, discretionary cost• Time schedule & delivery – Important in most industries, particularly for perishable goods Debasis Das JSB 606 28
  29. 29. Marketing & Selling• Selling information – Ordering position – Maturity schedule of credit sales• Marketing information – Market share – Ad & promotion expenses Debasis Das JSB 606 29
  30. 30. Liability Management• Cost of borrowing – Operating profit over cost of capital – EAV, economic value added• Nature of capital – Risk is proportional to cost of participation – Budeget needs to take the nature of capital into account Debasis Das JSB 606 30
  31. 31. Asset Management• Higher the turnover the better – fixed – Current• Working capital turnover ratio is important• Total asset turnover ratio Debasis Das JSB 606 31
  32. 32. Key Variable Classification• Environmental variables – Determines scope, diversity, uncertainty associated with business• Strategy variables – Affects long term goals & values• Process variables – Variables affecting interaction between employees and the processes• Structure variables – Centralized and decentralized reporting structure & how they affect processes Debasis Das JSB 606 32
  33. 33. Key Variables-Ensuring Control• Across the board control required• Identify sufficient number of key variables to achieve that• Easy to measure key variables may not be meaningful• Multivariate techniques such as factoring or cluster analysis can lead to key variables Debasis Das JSB 606 33
  34. 34. Key Control Indicators & Control Mechanism• Ability of control mechanism is indicated by efficiency and effectiveness of key variables• Effective Coordination necessary• Businesses with multiple profit and responsibility centers must have key indicators representative of these centers Debasis Das JSB 606 34
  35. 35. Techniques to identify• Traditional techniques – Observation of deviation method – Mean reduction techniques• Modern techniques (statistical methods) – Regression analysis – Factor & cluster analysis Debasis Das JSB 606 35
  36. 36. Limitations of Key Variables Analysis• Absence of consensus among managers• Absence of proper scale of measure, absence of clarity• Dependence on quantitative data and ignoring qualitative information Debasis Das JSB 606 36
  37. 37. Designing MCS Debasis Das JSB 606 37
  38. 38. Introduction• Understand the environment• Understand the hierarchy of control flow• Leads to goal congruence• Users should be able to appreciate & internalize the goals Debasis Das JSB 606 38
  39. 39. Process of Designing• Identify org hierarchy• Understand the process of the business• Establish linkages between stakeholders towards goal congruence• Establish information flow between departments and sub-units• Design the system• Implement the system Debasis Das JSB 606 39
  40. 40. Identifying Hierarchy• Org hierarchy supports the control system• Depends on org structure• Often a standard is available in industry, study that• There may be a need for changing the hierarchy Debasis Das JSB 606 40
  41. 41. Understanding Business Process• Centralized – Decisions follow top down, operational data flow bottom up• Decentralized• Substantial decision making power at sub-unit – Operational data and information flow, either way• Matrix – Top down, bottom up and across op data and decision flow Debasis Das JSB 606 41
  42. 42. Establishing Linkages toward goal congruence• General goals – Profit, profitability, wealth creation• Specific goals – Specific to business• Keep stakeholders informed• Establishing goals – Establish general purpose – Establish specific modalities – Identify exact goals to deliver above two• Enabling congruence – Task & job description Debasis Das JSB 606 42
  43. 43. Formal Info System Flow• Proper information flow essential between subunits – Designing information system • Requirement study, Analysis, design & develop the info system, test and implement – Form design (info report) • Understanding the purpose, compressing data to fit, delivering the form, enabling tabulation facility Debasis Das JSB 606 43
  44. 44. Designing the Control System• Open end control system – The control system loop is such that info flow between subsystems, particularly assessor and feedback systems• Closed end control system – Correction in one direction – No interaction between feed back system and assessor system independently Debasis Das JSB 606 44
  45. 45. Open End Control ControlInput System Assessor device/System Feedback device/system Debasis Das JSB 606 45
  46. 46. Closed End Control ControlInput System Assessor device/System Feedback device/system Debasis Das JSB 606 46
  47. 47. Implementation Techniques• Sharp Cut-off• Parallel run• Phased implementation Debasis Das JSB 606 47
  48. 48. Implementation ProcessDevelop Build UseControl Control Control system System System Is it Yes Implement Adequate Control ? system Debasis Das JSB 606 48
  49. 49. Organizing, Strategy & Control Debasis Das JSB 606 49
  50. 50. Introduction• Control system helps goal congruence• System should help implement strategy Debasis Das JSB 606 50
  51. 51. Goals & Objectives-Boundary Constraints• Goal & Objectives are the boundary conditions• Goals & objectives may change• These reflect short term as well as long- term needs. Design needs to take into account both.• Goals & objectives may translate into conflicts. Design must take care these do not cause problems Debasis Das JSB 606 51
  52. 52. Strategy-Pathway• Strategies-processes through which internal/external environment changes are dealt with• Strategy-broken down into tasks. Operational strategies make them realizable.• Strategy is the blueprint used to design the control system• System corrects itself through multiple feedback mechanisms. Debasis Das JSB 606 52
  53. 53. Strategy Evaluation• Criteria to evaluate strategy – Internal consistency – External and environmental consistency – Applicability in view of resources available – Risks associated – Time frame of implementation and result orientation – usefulness Debasis Das JSB 606 53
  54. 54. Behavioral Aspects• Perception• Attitudes & beliefs• Motivation• Goal congruence• Sub unit conflict and resolution• Managerial styles• Resistance to change• Entrapment• Compromising & sacrificing• Socio-cultural influences Debasis Das JSB 606 54
  55. 55. Perception• Interaction by personnel and managers with the control system generates a perception of the system• Seriousness of management is gauged from this perception Debasis Das JSB 606 55
  56. 56. Attitudes & Beliefs• Attitudes and beliefs of managers and employees are the result of the culture and background they come from• These attitudes and beliefs serve as reference and benchmark for the system in the long run Debasis Das JSB 606 56
  57. 57. Motivation• Motivation of managers decide the drive to use the system• Motivation comes from two sources – Personal factors (Maslow) – Power centric needs – People seek positive affirmation of performance• Control system must have positive reinforcement built-in to succeed Debasis Das JSB 606 57
  58. 58. Goal Congruence• Individuals work towards their own goals• Organization needs to fulfill its own• To ensure the two synergize, strong motivation and clear roadmaps are needed• Success of the control system hinges on how close these two could be brought Debasis Das JSB 606 58
  59. 59. Sub unit Conflict & Resolution• Sub units may have conflicting goals• Competition for resources exist• Cannibalization by sub units may happen• Transfer pricing and ERP solutions mitigates the problems• Coordination committees can help Debasis Das JSB 606 59
  60. 60. Managerial Styles• Style can range from autocratic to participative/democratic• An effective blend is used in practice.• The business determines what blend is to be used Debasis Das JSB 606 60
  61. 61. Force Field Analysis• According to Kurt Lewin two forces create conflicts in an individual• Facilitating force enable an individual• Inhibiting force opposes the facilitating force• These conflicts need to be resolved by review meetings at sub unit levels Debasis Das JSB 606 61
  62. 62. Resistance to Change• A large organization does not like to change• It is apprehensive of change• Control system designer needs to be aware of this and minimize the same Debasis Das JSB 606 62
  63. 63. Entrapment• Being trapped due to own decision• Sometimes bad decisions taken is not reversed as it will show the manager took a bad decision• Multiple feedback mechanism enables the system/organization to weigh good and bad side and take a balanced view Debasis Das JSB 606 63
  64. 64. Compromising & Sacrificing• Sometimes compromising decisions (most satisfying) are taken due to pressure groups. These decisions may not be the most effective• Sometimes a sacrificing attitude is necessary to change the course of business or to develop a business Debasis Das JSB 606 64
  65. 65. Socio-Cultural Influences• Social and cultural influences the workers grew up with influences the attitude to work• These influences affect the way a control system works Debasis Das JSB 606 65
  66. 66. Joint Goals through Responsibility Centers• Set up goals jointly by management and workers• Management by objective (MBO)• Set up business centers that are responsibility of individual managers Debasis Das JSB 606 66
  67. 67. Responsibility Centers• Revenue centers – Where revenues are generated• Expense centers – Difficult to assess monetary value of output, costs of inputs available• Profit centers – Input and output value can be assessed, maximize profit• Investment centers – Assets are created, control on input and output available Debasis Das JSB 606 67
  68. 68. Cost Patterns• Discretionary costs – Management related costs, discretion of management, 40 to 60 percent of cost of business• Engineered costs – About 30%, input, output relationships can be measured (profit centers)• Infrastructure costs – Costs that have concrete outcome in the long term Debasis Das JSB 606 68
  69. 69. Costs Across Value ChainR&D Design Production Marketing Discretionary Costs Infrastructure costs Engineered Costs Debasis Das JSB 606 69
  70. 70. Benchmarking• Checking against other businesses for implementing best practices• Compare processes• Could be one time or a continuous process Debasis Das JSB 606 70
  71. 71. Advantages of Benchmarking• Better understanding of wants (expectations) of customers• Better economic planning of purposes• Increase in productivity• Better current practices and search for change• Better competitiveness Debasis Das JSB 606 71
  72. 72. Collaborative Benchmarking• Identify problem areas• Identify other industries that have similar processes• Identify organizations that are leaders• Survey companies for measures & practices• Visit “best practices” companies, identify leading edge practices• Implement new and improved business practices Debasis Das JSB 606 72
  73. 73. Cost of Benchmarking• Visit costs• Time costs• Benchmarking database costs Debasis Das JSB 606 73
  74. 74. Organizational Infrastructure, Organizational Design and Control Systems Debasis Das JSB 606 74
  75. 75. Centralization vs. Decentralization• Depends on size of organization and span of control• Decentralized organization works better in terms of goal congruence• A manager operates better in decentralized form as it provides continuous learning & improvement Debasis Das JSB 606 75
  76. 76. Control Factors in Organizational Design• Three factors that decide organizational design are – Coordination • Centralized organization is best in terms of coordination, in decentralized organization functional managers handle the extra cost and bottlenecks, Matrix organization functional managers collaborate to develop coordination – Cost Effectiveness • Multiple channels in decentralized system increases efficiency, centralized system costs increase due to rework, making decisions repeatedly. Matrix works best in keeping costs optimal. Flat organization, motivation, coordination – Communication • Decentralized: bottom up, loaded with market reality but devoid of strategy. Centralized: top down, devoid of market reality, Matrix: most effective Debasis Das JSB 606 76
  77. 77. Adaptive Control & Adaptive Organization• Environmental uncertainty• Environmental complexity• Environmental diversity• Environmental Hostility Debasis Das JSB 606 77
  78. 78. Characteristics of Adaptive Organization• Implicit Control System• Training & Development• Integrity of individual & Organization• Global standards Debasis Das JSB 606 78
  79. 79. Divisional Autonomy• Flexibility, creativity and innovation in operation and execution• Degree & dimension of the autonomy is decided by style of management & processes used• Involvement of functional managers, trust and confidence Debasis Das JSB 606 79
  80. 80. Responsibility Centers & Performance Measures• Measure efficiency and effectiveness – Efficiency is like measuring productivity – Effectiveness measure is measuring against targets, goals• Measuring efficiency by ROI• Establishing an inter-profit center Relationship Debasis Das JSB 606 80
  81. 81. Approaches to MCS Debasis Das JSB 606 81
  82. 82. Theory of Contingency, Theory of Universalism• Technology• Organizational structure• Environment Debasis Das JSB 606 82
  83. 83. Strategy & Control Systems• Without strategic plans• With strategic plans Debasis Das JSB 606 83
  84. 84. Business w/o Strategic Plans Option a Option b Budget The Business Option c Option d Debasis Das JSB 606 84
  85. 85. Business with Strategic Plan Option a A Budget Option b Of Plan The B Business Option c Option c Debasis Das JSB 606 85
  86. 86. Strategy & Control Vision Reward& Mission Deviation/Strategy Plan Budget measurement Feedback to the system Debasis Das JSB 606 86
  87. 87. Corporate strategy & Diversification• Single Business Firm• Related diversification• Unrelated diversification Debasis Das JSB 606 87
  88. 88. Response of Control System to Corporate Strategy• Response of control system will depend on diversification sought – Unrelated: higher decentralization & training – Related: competency to be controlled, control deviation in production process & prompt delivery Debasis Das JSB 606 88
  89. 89. Strategies Available for Business Unit• Deciding market opportunities, deciding competence level, understanding internal & external strengths• Understanding that competitive strength of one business unit to another will vary, allocate resources separately• Level of attractiveness in which the business unit exists Debasis Das JSB 606 89
  90. 90. Strategic Choices• Build – Potential exists, increase market share• Hold – High market share, Hold market share, even when just breaking even• Divest – Low market share & growth• Harvest – Maximum short run earning, make the most of it Debasis Das JSB 606 90
  91. 91. Five Forces Theory & Competitive advantage• Course of control action depends – Intensity of rivalry between competitors – Bargaining power of customers – Bargaining power of suppliers – Threat from substitutes – Threat of new entrants Debasis Das JSB 606 91