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 ddas15847@gmail.com

1. Management Control
Systems
Part 2
Debasis Das
Exemplar Consultancy

2. Designing The Control
Process & Managerial
Controls
Debasis Das JSB 606 2

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
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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
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5. Cybernetic Paradigm
Of Control
Not-
understood
processes
Human
Inputs brain
Outputs
Probabilistic, highly complex
Insights from Cybernetics used to design controls and control systems
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6. Cybernetic Paradigm
of
Control Process
Environment Griesinger 1979
Decision Goals
maker
Value
premises
Perception Comparator
Feedback
Factual
Sensor Behavior
premises
repertoire
Behavior
choice
Effector
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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
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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
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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
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10. Means-Ends Analysis
1
G
2 G1 G2 G3 G4
3
G11 G12 G13 ………………………………………………………………….. G43
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11. Control Process Relating
Superior-Subordinate
Superior Control System
Interconnection
Feedback from superior effector Between
Behavior repertoire goals
Subordinate Control System
Superior goal affects the subordinate goals
Superior behavior repertoire can influence the subordinate effector
Feedback from the superior enters the subordinate system through the sensor
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12. Decentralization, Loose
Coupling & Organizational
Slack
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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
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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
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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
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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.
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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
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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
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19. Micro, Intermediate, Macro
Frameworks-1
Environment Griesinger 1979
Decision Goals
maker
Micro framework
Value
premises
Perception Comparator
Factual
Sensor Behavior
premises
repertoire
Behavior
Debasis Das choice
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20. Micro, Intermediate, Macro
Frameworks-2
Management
Infrastructure
Style & Culture
Intermediate Framework
Formal Control Process
Coordination &
Rewards
Integration
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21. Micro, Intermediate, Macro
Frameworks-3
Management
External Systems
Initial Environment
Conditions (Uncontrollable) Internal Improvements
External
Critical
ENTITY + Performance + Status
Success factors
& impediments Measures
X
Stakeholders
Goals & Ideal
Strategies
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22. Key Success Variables in
MCS
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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
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24. Interrelations-Internal &
External factors
Business Internal
External
Environment Character
Industry
Stakeholders
Character
Objective of Significant
Business Functions
Corporate
Competitors
Strategy
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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
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26. Identification of Key
Variables
• Identification through input-output
analysis (classify variables)
– Input
– Production
– Marketing & selling
– Liability management
– Asset management
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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
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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
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29. Marketing & Selling
• Selling information
– Ordering position
– Maturity schedule of credit sales
• Marketing information
– Market share
– Ad & promotion expenses
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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
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31. Asset Management
• Higher the turnover the better
– fixed
– Current
• Working capital turnover ratio is
important
• Total asset turnover ratio
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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
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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
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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
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35. Techniques to identify
• Traditional techniques
– Observation of deviation method
– Mean reduction techniques
• Modern techniques (statistical
methods)
– Regression analysis
– Factor & cluster analysis
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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
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37. Designing MCS
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38. Introduction
• Understand the environment
• Understand the hierarchy of control
flow
• Leads to goal congruence
• Users should be able to appreciate &
internalize the goals
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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
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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
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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
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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
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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
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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
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45. Open End Control
Control
Input System Assessor
device/System
Feedback device/system
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46. Closed End Control
Control
Input System Assessor
device/System
Feedback device/system
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47. Implementation Techniques
• Sharp Cut-off
• Parallel run
• Phased implementation
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48. Implementation Process
Develop Build Use
Control Control Control
system System System
Is it Yes Implement
Adequate Control
? system
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49. Organizing, Strategy
&
Control
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50. Introduction
• Control system helps goal congruence
• System should help implement strategy
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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69. Costs Across Value Chain
R&D Design Production Marketing
Discretionary Costs
Infrastructure costs
Engineered Costs
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70. Benchmarking
• Checking against other businesses for
implementing best practices
• Compare processes
• Could be one time or a continuous
process
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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
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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
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73. Cost of Benchmarking
• Visit costs
• Time costs
• Benchmarking database costs
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74. Organizational Infrastructure,
Organizational Design and
Control Systems
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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
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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
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77. Adaptive Control & Adaptive
Organization
• Environmental uncertainty
• Environmental complexity
• Environmental diversity
• Environmental Hostility
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78. Characteristics of Adaptive
Organization
• Implicit Control System
• Training & Development
• Integrity of individual & Organization
• Global standards
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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
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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
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81. Approaches to MCS
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82. Theory of Contingency,
Theory of Universalism
• Technology
• Organizational structure
• Environment
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83. Strategy & Control Systems
• Without strategic plans
• With strategic plans
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84. Business w/o Strategic Plans
Option a
Option b Budget
The
Business
Option c
Option d
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85. Business with Strategic Plan
Option a
A Budget
Option b Of
Plan
The
B Business
Option c
Option c
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86. Strategy & Control
Vision Reward
& Mission
Deviation/
Strategy Plan Budget
measurement
Feedback to the system
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87. Corporate strategy &
Diversification
• Single Business Firm
• Related diversification
• Unrelated diversification
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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
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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
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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
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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
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