Introduction to Management Control Systems, Basic Concepts, Boundaries of management Control – How different from Strategy Formulation, Goal Congruence & informal factors that affect it, The Formal Control System , Functions of the Controller
2. What is MCS ?
• Process by which management influences other members of the
organization to implement organization’s strategies effectively and
efficiently
• Exercises control over inputs and on the processes to get the
desired output
• A firm is divided in to sub units and each sub unit is responsible for
the desired output-
1. Output should be quantified
2. The process should be well defined and understood
3. Basic Concepts
Management
• Getting things done through the people
• Organization is artificial person
• Needs people to run and shape its destiny
• Those people are leaders known as ‘Management’
• Normally headed by CEO or known as MD or Chairman
Control
• Means making events confirm to plans
• Also essentially means identification of variances, their causes and corrective actions
• Compare actual results with budget data
• Take corrective actions in case of variances
• Make the changes in budget if required
System
• Prescribed manner to carry out repetitive activities
• Modern organizations operate in different environment
• More complex, more products, more players, more changing technologies
• A well designed reporting system should exist
4. Activities & Characteristics in MCS
Activities involved -
1.Planning
2.Coordinating
- What an organization should do during a given period of time
- Plans and activities of various units and sub units
3.Communicating - Information processed between the units and sub units
4.Evaluating
5.Deciding
6.Influencing
- Information received
- Action to be taken as corrective measure
- People to change their behavior
Characteristics of Effective MCS -
•Strategic Plan – Should exist and communicated to the subordinates who are responsible
for their execution
•Profit Plan - There should be profit plan or budget prepared by an organization
•Motivation - Employee motivation
•Effective Management Information System - To control activities of an organization
Where does it start ? Management control process begins after the formulation of the
organization’s goals and strategies
5. Understanding Strategies
What is Strategy -
•Determination of basic long term goals and objectives of organization
•Adoption of course of action
•Allocation of resources necessary for carrying out these goals
Role of Strategies in Business -
•Minimize risk – Require alternative strategy for contingencies
•Decision Making - Provide necessary guidance and direction (e.g. – bank’s internal policy)
•Achieve objectives - Direction and guidance to achieve growth, profitability, stability
•Facilitate Organizing – Resources required and broad targets to be achieved over period of time
•Control - Helps to control various functions
Organization can compare actual performance with targets
In case of deviations necessary action can be taken
•Motivation - Employees are motivated to put in their best performance in order to achieve desired
objectives
•Optimum use of resources - Available resources used to the maximum extent if strategies
are to be followed
6. Strategy formulation and Policies
Strategy Formulation -
1.Framing mission and objectives - Mission states the philosophy and purpose of organization
2.Analysis of Internal environment - Manpower, machineries, methods, money, procedures
and other resources
3.Analysis of External environment –Govt. policies, competition, types of customers,
technological development etc.
4.Gap analysis - Comparing present with desired future performance level
5.Framing alternative strategies
6.Choice of strategy - Select appropriate from the alternative strategies
Policies and Strategies -
•Policies are guidelines for decision making , can be delegated downwards in organization
•Effective for decision making to subordinates. Policy is concerned with course of action.
•It can be expressed or sometimes implied
•Strategies are plans that helps in achievement of organizational goals and objectives
•Cannot be delegated as it requires last minute executive decisions
•Strategies are concerned with uncertainties, competitive situations and risks for future date
•It is a specific statement which must be in writing in explicit terms
7. Strategy and Tactics
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Tactics are used to implement strategies
May be called sub-strategy
Firms adopt tactics to face competition
Can be done through introduction of new and cost effective products, advertising, sales
promotion
Strategies are plans Tactics are means to achieve those plans
Strategies are developed at top level Tactics are developed at lower levels
Strategy is framed for long time Tactics is for a short period
High uncertainty in strategy formulation
Strategies decide future of the organization
Fewer elements of uncertainty and risks
as decisions taken within framework of strategy
Tactics are concerned with specific part of
organization
Strategies are affected by personal values
of person involved in formulation process, Tactics may be free from personal values
Strategies are plans Tactics are means to achieve those plans
Strategies are developed at top level Tactics are developed at lower levels
Strategy is framed for long time Tactics is for a short period
High uncertainty in strategy formulation Fewer elements of uncertainty and risks
as decisions taken within framework of strategy
Strategies decide future of the organization Tactics are concerned with specific part of
organization
Strategies are affected by personal values
of person involved in formulation process
Tactics may be free from personal values
8. Perspective of MCS
•Management control system lies between strategy formulation and operational control
•MCS has boundaries namely strategy formulation, operational control and financial control
•Out of these strategy formulation has been found to be least systematic
•Operational control most systematic
•Whereas Management control falling in between
•The strategy formulation focuses on the long run, operational control on short term operating activities
and management control lies in between.
•Strategy formulation is based on the rough approximations of the future, operational control makes
the use of current accurate data and management control lies in between.
•Each activity involves planning and control but there is a degree of variation. Planning is much more
important in strategy formulation, both planning and control processes are of equal importance in
management control. However the control process is much more important in operational control.
9. Strategy planning and Management control
Perspective of MCS
Characteristics Strategic Planning Management Control
Focus of plans On one aspect at a time On entire organization
Complexities Many variables, hence more complex Less complex
Structure Unstructured and irregular Definite pattern, set procedures
Nature of Information More external and unpredicted and
less accurate
Internal, historical and more
accurate
Communication of Information Relatively simple Relatively difficult
Purpose of Estimates Show expected results lead to desired results
Persons involved Top management Line and top management
No. of persons Small Large
Planning and Control Planning dominant but some control Emphasis on both planning and
control
Time Horizon Tends to be long Tends to be short
End result Policies and procedures Action within policies laid
Appraisal of job Extremely difficult Less difficult
10. Operational Control and Management control
Perspective of MCS
Characteristics Operational Control Management Control
Focus of plans Single task or transaction On entire organization
Nature of information Tailor made to operation,
specific,realtime,often non-financial
Integrated, more internal, more
accurate
Persons involved Supervisors Line and top management
Mental activity Follow directives or none as in case
of machines
Administrative , persuasive
Time horizon Day to Day Tends to be short
Type of cost Engineered- existence of Objective
standard against Which actuals can
be Compared makes control easier
Discretionary-control is more
difficult due to subjective
consideration
11. Corporate Strategy
Means the determination of the business in which firm competes and
allocates resources among the business unit
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Define the business in which the firm intends to participate
Allocation of resources to those businesses.
Analysis of Strategy gives rise for below decisions -
1. The type of business to enter
2. Business to be emphasized
3. Business to be retained
4. Business to divert
Category of Firms -
1. Single industry firm e.g. tea company
2. Diversified firms :- operates in no. of industries and there exists a common set of core
competencies which benefit business units. e.g.- Hindustan Unilever Ltd.
3. Unrelated diversified firms
12. Corporate Strategy Alternatives
Strategic alternatives revolves around the issue of whether or not to
pursue the existing business line to improve the efficiency of the firm
1.Stability Strategy
2.Growth strategy
I. To ensure survival in the long run
II. To achieve economies of large scale
III. To build corporate image
IV. To survive during tough times like recession
V. To encourage innovativeness on the part of the management
3.Retrenchment Strategy
I. Certain products becomes less profitable
II. Firm may like to concentrate on its core products
III. Products become absolute
IV. Due to recession
4.Combination strategy
13. Business Units
Business Unit Strategies –
•Business unit strategies are those which deal with the creation and sustenance of competitive
advantage in each of the industries in which a firm is engaged.
•It is the manner in which a business unit should compete in the industry to which it belongs in order
to accomplish its mission.
•It involves taking offensive and defensive actions to create a defendable position in an industry, to
cope successfully with competitive forces.
•The top level management of diversified firms deploys resources from one business unit to other
business unit in order to finance their growth.
14. Business Units
Strategic Business Unit (SBU) –
•Created for multi product or multi-geographical area companies
•To manage effectively each of the products or group of products
Important Aspects of SBU –
Independent Management - Each SBU is managed like a separate company
Strategy - Each SBU formulates for itself a clearly defined strategy
However SBU strategy should be aligned with overall strategy of the organization
Resources - Each SBU has allocated resources in the form of physical, human and financial
depending upon its activities and contributions made by it to the organization
Intra competition - Each SBU competes with the other SBU in the same organization
15. Advantages of SBUs
Advantages of SBU –
1.Effective Management
2.Proper recognition
3.Employee motivation
4.Higher efficiency
5.Better customer service
6.Facilitates innovation
7.Improvement of corporate image
16. Boundaries
• Boundaries of Management Control Goals -
• Strategies are the plans to achieve organizational goals.
• MCS are tools to implement strategies.
• Goals of a corporation are determined by the CEO.
• The management control fits between strategy formulation and
task control in several aspects. Strategy formulation is least
systematic of the three, task control most systematic and
management control lies in between.
17. Boundaries of MCS
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• Strategy formulation focuses on the long run, task control focuses on short run activities and
management control lies in between.
Strategy formulation uses rough approximates of future, task control uses current accurate
data and management control lies in between.
Each activity involves both planning and control but the emphasis varies with the type of activity.
The planning process is much more important in strategy formulation, the control process is
much more important in task control and planning and control are of approximately equal
importance in management control.
Management control does not necessarily require that all actions correspond to a predetermined
plan. The plans are based on circumstances believed to exist at time they are formulated. The
actions followed by the plan may no longer be approximate, if these circumstances are changed
at the time of implementation.
The management control involves anticipating future conditions to ensure the organization’s
objectives are achieved.
Thus confirming a budget is not necessarily good, and departure is also not necessarily bad.
MCS help managers move an organization towards its strategic objectives.
18. Goal congruence
Goal congruence means that as far as feasible, the goals of
organization individual members should be consistent with the goals of
the organization itself.
1. What actions does it motivate people to take in their own self-interest?
2. Are these actions in the best interests of the organization?
Informal Factors that Influence Goal Congruence
Formal systems include
strategic plans, budgets and reports. Informal process takes into account work ethic, management
style and culture, which are again external and internal to the organisation.
Informal factors that influence goal congruence:
External factors – set of attitudes of the society, work ethics of the society
Internal factors – (Factors within the organization)
Culture-Common beliefs, shared values, norms of behavior & assumptions
Implicitly accepted and explicitly built into.
Mgt. Style – Informal/Formal
The Communication Channels
Perception and Communication – e.g. Budget (meaning) strict profit
19. 1. External Factors
External factors are norms of desirable behaviour that exist in the society of which organization is a part.
These norms include a set of attitudes, often collectively referred to as the work ethic, which is
manifested in employees’ loyalty to the organization, their diligence, their spirit, and their pride in doing
a good job (rather than just putting in time). Some of these attitudes are local – that is, specific to the city
or region in which the organisation is located. In encouraging entrepreneurs to locate in their city or
state, chambers of commerce and other promotional organizations, often claim that their location has a
loyal diligent work force. Other attitudes and norms are industry specific e.g. rail road industry has
norms different from airlines industry.
2. Internal – Culture
Culture is one of most important internal factor (internal to the organization) – the common belief,
shared values, norms of behaviour and assumptions that are implicitly accepted and explicitly
manifested throughout the organization. Cultural norms are extremely important since they explain why
two organizations, with identical formal management control systems, may vary in terms of actual
control.
20. Formal Control System
These systems can be classified as
(1)The management control system itself and
(2) rules.
Rules: The word rules denote all type of formal instructions and controls including
standing instructions, job descriptions, standard operating procedures, manuals and
ethical guidelines. Rules range from most trivial like requisitions to the most important
(e.g. capital expenditure over `5 crores must be approved by the Board of Directors
Example: Increase the credit limit of a customer whose performance in the past was
satisfactory and under specific circumstances.
Some rules are positive requirements that certain actions should be taken (e.g. fire
drills at prescribed intervals). Others are prohibited against unethical, illegal or other
undesirable actions. Finally there are rules that never be broken under any
circumstances.
21. Some specific types of rules are given below:
1. Physical control: Security guards, locked storerooms, vaults, computer passwords, television surveillance
and other physical controls may be part of the control process.
2. Manuals: Manuals in bureaucratic organizations are more detailed than are those in other organizations.
Large organizations have more manuals than small organizations; centralized organizations have more than
decentralized ones and organisation with geographically dispersed units performing similar function (such
as fast food restaurant
chains) have more than do single-site organizations. With passage of time, some rules become outdated
hence manuals and other sets of rules should be re-examined periodically to see that are still consistent with
the senior managements wishes.
3. System safeguards: Various safeguards are built into the information processing system to ensure that
information flowing through the system is accurate and to prevent fraud of any sort. These include cross
checking totals with details, requiring signature and other evidence that the transaction has been
authorized, separating duties, counting cash and
other movable assets at frequent intervals and other procedures mentioned in auditing. This also includes
checks of the system performed by the external and internal auditors.
4. Task Control System: Many of the tasks are covered by rules. In case of automation, the
system itself provides the control.