Management control systems jsb 606 part1


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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 part1

  1. 1. Management Control Systems Part 1 Debasis Das Exemplar Consultancy
  2. 2. Syllabus-11. Introduction to MCS2. Design of Control Process & Management Controls3. Key success variables and measures of performance4. Design, Style and Culture of Control Systems5. Organization structures for adaptive control Debasis Das JSB 606 2
  3. 3. Syllabus-26. Autonomy, Responsibility and Performance measurement7. Tools for Management Control8. Management Control in Multinational Corporations9. Management Control in Service Organizations10.Management Control in Projects11.Management Audit Debasis Das JSB 606 3
  4. 4. Recommended Books1. Maciariello, J.A. & Kirby, C.J.: Management Control Systems: Using Adaptive Systems to Attain Control, PHI2. Anthony, R.N. & Govindarajan, Vijay, J.: Management Control Systems, McGraw Hill3. Management Control Systems, Text and Cases, Dutta, Abhijit, Jaico Publishers Debasis Das JSB 606 4
  5. 5. IntroductionDebasis Das JSB 606 5
  6. 6. Purpose of Management Control SystemsUnity of diverse activity Management Steers Organization Departments/units Objectives Purpose Goals Debasis Das JSB 606 6
  7. 7. Domain of Management Control System• Different views – Anthony, Dearden & Govindrajan: “the process by which managers influence other members of the organization to implement the organizations strategy” (strategic planning, management control, task control are independent but interrelated processes of planning & control) – William Newman: “control is one of the basic phases of managing, along with planning, organizing and leading” ( control function of management) – ***Macieriello , Kirby: control of strategy and control of operations and include aspects of planning, organizing and leading functions of management. Debasis Das JSB 606 7
  8. 8. Coverage• Domain of control as defined by Macieriello , Kirby• Borrow concepts from the other two approaches• Leads to a management framework that – Enhances organizational adaptability • Accelerates productivity • Improves quality – Resolves inadequacies in current control systems • Coaxing organizations to optimal performance • Enhances competitiveness Debasis Das JSB 606 8
  9. 9. Organizational Context of MCS Reference: Chester Bernard, Functions of the Executive Debasis Das JSB 606 9
  10. 10. Organizations• Sub units• Effectiveness & efficiency• Internal & External Stakeholders Debasis Das JSB 606 10
  11. 11. Organization Sub-unit Sub-unit Sub-unitSub-unit Sub-unit Sub-unit Sub-unit Sub-unit Sub-unit Sub-unit Sub-unit Sub-unit Debasis Das JSB 606 11
  12. 12. Sub-units• Perform portions of the organization purpose• Grouped by specialization, division of laborChallenges – Efficient coordination (transaction costs, keeping it minimal) – Managing excessive transaction costs – Autonomy needed for specialized sub-units – given objectives as part of the overall objectives Debasis Das JSB 606 12
  13. 13. Effectiveness & Efficiency• Effective – Meets overall purpose – Fulfills a genuine need of society• Efficient – Minimum waste of resources – competitive ROI on stakeholders’ investments – Competitive wages for the worker – Satisfaction for customers Debasis Das JSB 606 13
  14. 14. Internal & External Stakeholders• Organizations are open systems and includes internal & external resources• Make situations – Buy resources in the external market – Control systems must coordinate the external exchanges, internal activities• Buy situations – Control systems must integrate efforts of external stakeholders and the external activities• Must quickly adapt to the market changes Debasis Das JSB 606 14
  15. 15. Executive Functions• Essential managerial functions – Securing essential efforts – Provide system for organizational communication – Formulating and defining purpose Debasis Das JSB 606 15
  16. 16. Securing Essential Efforts• Motivate participation & performance – Recruit the right people – Inducements that are equivalent or better – Encourage contributions from participants that generate income – Participants include customers, employees, executives, owner s, distributors, suppliers Debasis Das JSB 606 16
  17. 17. Provide System for Organizational communication• Design & refine formal organization or the organization chart (define the sub-units & the structure)• Define purposes, proper sequence of steps to be maintained• Define management positions and fill them• Relevant communications are the communications that coordinate the activities of the organization Debasis Das JSB 606 17
  18. 18. Provide System for Organizational communication• Formal organization – Relatively permanent systems of communications for a common purpose• Informal organization – Not part of the org chart – “aggregate of personal contacts and interactions and the groupings of people. …though common or joint purposes are excluded by definition, common or joint results of important character nevertheless come from such organizations” – Develops by design and spontaneously – Helps personalize the organization Debasis Das JSB 606 18
  19. 19. Establish purpose, goals and Objectives• Job for the entire management team• Delegate responsibilities to sub-units• Overall purposes (ends) are redefined in terms of sub-purposes(means) of sub-units• Each sub-unit purpose becomes the means to the purpose of the higher unit Debasis Das JSB 606 19
  20. 20. Organizational Survival & Control Systems-1• Conditions for survival – Sufficient inducements to attract essential contributions form stakeholders • Capital from investors • Labor from employees • Material resources form suppliers • Product purchases from customers – Inducements are effective if stakeholders prefer them to those offered by comparable competing organizations – Internal production processes need to convert contributions into sufficient inducements that sustains stakeholder participation & cooperation and achieve organizational purpose Debasis Das JSB 606 20
  21. 21. Organizational Survival & Control Systems-2• On-going survival requires – Management must process and act upon information in all the stakeholder markets as efficiently as other entities in the same market – Managerial controls that monitor the inducement- contribution balance for each stakeholder – Decision processes agile enough to react to changes – Control systems must facilitate innovation, adaptation and change – Ability to convert contributions of main stakeholders to meet current needs and have resources left over for continuing innovation processes to meet competitive challenges Debasis Das JSB 606 21
  22. 22. Assumptions about Human Drive• Rationality: basically rational, able to reason, make plans and control behavior• Creativity: basic instinct to be creative• Mastery: desire to control, innate desire to be “in control”• Morality: usual strong moral instincts, may not always dominate behavior• Community: strong desire for human association Debasis Das JSB 606 22
  23. 23. Adaptive Control SystemsTwo Sets of Mutually Supportive System From the perspective of Control System Designer Debasis Das JSB 606 23
  24. 24. Control System Designer• May be a – System analyst – A controller – A manager• People who are most concerned with the design & operation of a control system. Usually are the people who are responsible for it. Debasis Das JSB 606 24
  25. 25. Control System Characteristics• Effectiveness is strongly related to the leadership characteristics of the management• Control systems function within the dynamics of the organizations• Actions taken in MCS influence people, control in organization is accomplished by people through people Debasis Das JSB 606 25
  26. 26. Mutually Supportive Systems• Formal/informal systems help an organization to be steered towards its purpose by bringing unity of diverse efforts of the sub-units and individuals• These are two distinct yet interrelated (often indistinguishable) sub divisions• Considered adaptive when they are internally consistent, consistent with one another and designed to permit learning Debasis Das JSB 606 26
  27. 27. The Formal Systems Debasis Das JSB 606 27
  28. 28. Formal System Characteristics Mutually Supportive Management System Model (MSSM)• Focuses on needs of customers & markets• Consistent with informal system• Mutually supportive of the formal & informal• Each subsystem must support managing short term concerns as well as innovations necessary for the long- term survival Debasis Das JSB 606 28
  29. 29. Formal Control Systems ManagementInfrastructure Style & Culture Formal Control Process Coordination & Rewards Integration Debasis Das JSB 606 29
  30. 30. Management Style & Culture• Prevailing Style – External/internal/mixed• Principal values – Norms & beliefs Debasis Das JSB 606 30
  31. 31. Infrastructure• Organization Structure – Strategy – Operations• Patterns of autonomy• Measurement methods – Responsibility centers – Transfer pricing Debasis Das JSB 606 31
  32. 32. Rewards• Individual & groups• Short term & long term• Promotion policy Debasis Das JSB 606 32
  33. 33. Coordination & Integration• Standing committees – Strategy – Operations• Formal conferences• Involvement techniques Debasis Das JSB 606 33
  34. 34. Formal Control Process• Strategic planning – Capital budgeting• Operations planning – Cost accounting – Budgeting• Reporting systems – Strategy/project management – Operations/variance analysis Debasis Das JSB 606 34
  35. 35. The Informal System Debasis Das JSB 606 35
  36. 36. Informal System Characteristics• Aggregate of personal contacts and interactions and the associated groupings of people• Activities of members outside the formal control process when dealing with non- routine decision making 9realignment of goals or seeking new information to increase understanding of a problem area)• Supplements formal system, increases adaptability Debasis Das JSB 606 36
  37. 37. Informal Control Systems Management Infrastructure Style & Culture Informal Control Process Coordination &Informal Rewards Integration Debasis Das JSB 606 37
  38. 38. Management Style & Culture• Prevailing Style – External/internal/mixed• Principal values – Norms & beliefs Debasis Das JSB 606 38
  39. 39. Infrastructure• Personal• Networks – Expertise oriented – Minimal structure• Emergent roles Debasis Das JSB 606 39
  40. 40. Informal Rewards• Recognition• Status oriented• Intrinsic – Performance oriented – Stature oriented• Personal contact Debasis Das JSB 606 40
  41. 41. Coordination & Integration• Based upon trust• Simple/direct/personal• Telephone conversations• Personal memos Debasis Das JSB 606 41
  42. 42. Informal Control Process• Search/alternative generation – Ad-hoc as needed• Uncertainty coping• Rationalization/dialog Debasis Das JSB 606 42
  43. 43. Control Systems ActionsFormal system If action refer toInfrastructure Chartering or appointing Establishing management support Setting a direction or missionStyle & culture Training in beliefs, values, or social dynamicsPlanning & Control Establishing proceduresprocess Clarifying procedures Documenting procedures Developing measurement metrics Reporting/providing feedbackReward system Giving a merit increaseCoordinating Establishing communications among organizationalmechanisms units Debasis Das JSB 606 43
  44. 44. Control Systems ActionsInformal system If actions refer toEmergent roles Becoming the expert Assuming new responsibilitiesStyle & culture Training in values, beliefs or social dynamicsPlanning & control Searching and gathering information Investigating & brain-storming Discussing developments regarding problemsReward system Showing appreciation Giving thanks, recognizing accomplishmentsCoordinating Members checking with others in other unitsmechanisms Debasis Das JSB 606 44
  45. 45. The Subsystem &Components of Control Systems Debasis Das JSB 606 45
  46. 46. Style & Culture• Methods of “doing things”• Style of top management• Decides how to implement control systems• Ranges from highly dictatorial to highly participative• Systems need to fit the style & culture Debasis Das JSB 606 46
  47. 47. What is Corporate Culture?• Consists of shared values, common perceptions, common decision making premises• Develops over time• Strength of the culture depends on the number of key premises shared, how extensively, and how deep commitments to these premises are Debasis Das JSB 606 47
  48. 48. Corporate Culture as Coordination and Control Mechanism• Facilitates control by – Internalizing in individuals key decision premises and decisions – Developing a sense of group loyalty – Reducing dissonance and friction – Most effective system as long as the values are the right values – “self control” through acceptance of common values is the best method of control Debasis Das JSB 606 48
  49. 49. Effectiveness of Corporate Culture as a Control mechanism• Corporate culture must be consistent with the environment and widely accepted• Sub-units may develop its own sub- culture due to differences in specializations, perspectives, etc.• Spreading a uniform corporate identity is essential Debasis Das JSB 606 49
  50. 50. Managerial Indoctrination and Skill Training• Formal indoctrination & training helps instill the common attitudes & skills• Indoctrination involves socializing members to values, policies, procedures of the organization• Skill development methods to perform tasks in the organization Debasis Das JSB 606 50
  51. 51. Formal Control Process in planning and reporting dimensions Debasis Das JSB 606 51
  52. 52. Formal Planning Process• Strategic and operational aspects• Budget, formal planning& control, reporting has these two components• Infrastructure, rewards and communication systems must cater to both• Cost accounting systems provide crucial measurements for both strategic and operational planning processes Debasis Das JSB 606 52
  53. 53. Formal Reporting Process• Progress is measured against the plans• Monthly/quarterly/year to date reports on both strategic and operational plans are made to measure variances• Strategic plans are measured by treating each strategic thrust as a project and looking at its progress Debasis Das JSB 606 53
  54. 54. Integrated Planning & Reporting Process Debasis Das JSB 606 54
  55. 55. Integration of Strategic & Operational• Fair amount of integration exist between the two• Need for strategic thrust arise out of operational needs• Strategic projects are funded out of operations• Strategic plans & programs impact operations and need be monitored for this impact continually Debasis Das JSB 606 55
  56. 56. Infrastructure• Formal control system infrastructure consists of – Organizational structure – Patterns of autonomy• Infrastructure must cater for both the strategic and the operational• Common organization for strategic planning is to organize strategic business units (SBU)• Then, organize profit centers Debasis Das JSB 606 56
  57. 57. Rewards• Inducements needed to motivate individuals to contribute more• These need to have components that are comparable in the environment and meets individual needs• Materialistic and non materialistic• Rewards cannot exceed the value added by individual, obviously Debasis Das JSB 606 57
  58. 58. Individual Rewards• Strategic, operations, individual and group are the four reward dimensions• Individual rewards include – Compensation – Linked to performance – Short term as well as long term – Comparable to what the market offers Debasis Das JSB 606 58
  59. 59. Group Rewards• Most effective is tied to organization’s performance• Short as well as long term• ESOP for example, could be linked to the organization meeting specified earnings per share target each year for a number of years from now Debasis Das JSB 606 59
  60. 60. Coordination and Integration Mechanism• Specific communication schemes are needed – Coordination – Resource allocation decision making – Conflict resolution – Building identification with organizational purpose – Developing commitment and trust in the organization• Timely and accurate flow of information Debasis Das JSB 606 60
  61. 61. Committees• Two committees with overlapping memberships for resource allocation• Manage conflict resolution( short and long term needs) in resource allocation Debasis Das JSB 606 61
  62. 62. Strategy Committee• Top officers and managers, top level staff are members• Monitor strategy periodically, as needed by market developments• Decide actions, resources, all aspects Debasis Das JSB 606 62
  63. 63. The Operating Management Committee• Same composition as the strategy committee• Looks at operational issues• Conflicts between strategic and operational resources Debasis Das JSB 606 63
  64. 64. Formal Conferences• Periodic conference of managers down to profit center level• Formalize planning process• Improve communications• Keep organization together• Public commitment by managers on next year’s targets Debasis Das JSB 606 64
  65. 65. Informal Organization Structure & Emergent Roles• Difficult to define “soft structure”, hard to define, but exists in all organizations• Person to person contacts, networks, ad hoc teams, available expert resources• Help increase adaptability of organization• Temporary grouping s can form for coping with uncertainties Debasis Das JSB 606 65
  66. 66. Informal Control Processes• An adaptive system needs to – Exact information from environment – Form and adopt goals – Select and emit goal-directed behavior – Learn to adapt• In a situation when fast environmental changes are happening it is the informal system that usually takes over Debasis Das JSB 606 66
  67. 67. Informal Recognition & Rewards• Informal rewards contribute significantly to organization success• Stature oriented• Respect being shown for capability of an individual to operate in t5he informal set up• Formal rewards should be appropriate Debasis Das JSB 606 67
  68. 68. Informal Coordinating Mechanisms• Communication/coordination develops as people develop working relationships• Communications are less guarded, more effective• Necessary for effective adaptive control Debasis Das JSB 606 68
  69. 69. Interaction Between Formal & Informal Systems• In stable environments the formal system dominates• At times of changes the informal system dominates• Formal and informal overlap• Management must ensure each system as well as both systems are supportable Debasis Das JSB 606 69
  70. 70. Adaptive Controls & Individual Actions• By observing actions and identifying where they come out from, the designer can asses if the system is formal or informal• What needs to be done to increase adaptability Debasis Das JSB 606 70