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Management Control Systems, Introduction To MCS

This document discusses management control systems and provides examples of management control failures. It covers the key elements of a control system including detectors, assessors, effectors, and communication networks. The document also discusses the goals of management control systems, differences between management control and task control, and factors that influence management control.

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Anshu
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119 views

Management Control Systems, Introduction To MCS

This document discusses management control systems and provides examples of management control failures. It covers the key elements of a control system including detectors, assessors, effectors, and communication networks. The document also discusses the goals of management control systems, differences between management control and task control, and factors that influence management control.

Uploaded by

Anshu
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Management Control

Systems (October-2020)
Koya Raghu Nadh, CFA
• Koya Raghu Nadh
• [email protected]
• 9542098000
• Course handout

• Cases:
• Managing Organizational Tensions (HBS 9-117-101)
• ATH Micro Technologies: Making the numbers (HBS: 9-108-091)
Introduction to Management Control Systems
• 2001: Enron Corporation
• WorldCom, the telecom giant: Accounting irregularities, inflating
cashflows
• 2008: Satyam
• Recently: Amtek Auto, DLF, Geetanjali Gems, Vijay Malya
• Moral of the story: Accounting Control?
• Financial
• Nonfinancial

• Profit
• Productivity with less resources
• Cost minimization
• Economies of scale
• Shareholders wealth
• Improving margins
• Cash budgeting
• Capital Structure
•

• Shape of Typical Management Structure in an organization


• System: A system is a prescribed and usually repetitive way of carrying
out an activity or a set of activities.
• If all systems ensured the correct action for all situations, there would
be no need for human managers.
• System: Both physical infrastructure and Process

• Elements of a Control System:


1. A detector
2. An assessor
3. An effector
4. A communication network

• Management: Leaders
• Management Control process is the process by which managers at all
levels ensure that the people they supervise implement their
intended strategies.
• Management control Vs other processes
• The standard is not pre-set.
• Management control is not automatic.
• Management control requires coordination among individuals/units.
• Much of Management Control is driven by managers/ Initiative has to come
from managers.
• No unique solution, nor a predictable response
• Boundaries of Management Control
• General relationship among planning and control functions
Activity Nature of End Project Planning/Control
Strategy Formulation Goals, strategies and policies Planning oriented
Management Control Implementation of strategies Both planning & control
Task control Efficient and effective Control Oriented
performance of individual
tasks.
• Typical Goals:
• Sales growth
• Profit max
• Market share
• Shareholders’ wealth
• Productivity increase
• Employee well being
• A reasonable profit
Strategy Management Task Control
Formulation Control
least systematic most systematic
Long-run activities Short-run activities
Rough approximations Accurate Data
Future Current
• Management Control Activities
1. Planning
2. Coordinating
3. Communicating
4. Evaluating
5. Deciding
6. Influencing
• Goal Congruence
• Framework for Strategy Implementation
• Strategy Formulation:
• Goals, Objectives

Strategy Formulation Management Control


Process of deciding on new strategies Process of implementing those strategies
Unsystematic Structured
Rough estimates Accurate information.
Involves judgement Series of steps at predictable intervals.
Fixed Intervals
Fewer people Managers and staff at all levels in the
organization
Task Control Management Control
Systems are scientific, mechanical Human oriented.
Behavioural aspects dominate.
Managers interact with non-managers, or Managers interact with managers.
with machines.
Focus is on the specific tasks performed by Focus is on organization units.
the units. (say, a manufacturing job)
Task control relates to specified tasks which MC is concerned with the broadly defined
require little or no judgement. activities of managers to implement
strategies.
Examples of Decisions in Planning and Control Functions
Strategy Formulation Management Control Task Control
Acquire an unrelated business Introduce new product or brand Coordinate order entry
Enter a new business Expand a project Schedule production
Add direct mail selling Determining advertisement budget Run TV commercials
Change debt/equity ratio Issue new debt Manage cash Flows
Devise inventory speculation policy Implement minority recruitment Maintain personnel records
programme
Decide magnitude and direction of Decide inventory levels Reorder raw materials
research
Control research organization Run individual research projects
1. The Management Control Environment
1. Understanding strategies
2. Behaviour in Organizations
3. Responsibility Centres: Revenue, Expense, Profit and Investment Centres
4. Transfer Pricing
5. Measuring and Controlling the Assets Employed
2. The Management Control Process
1. Strategic Planning
2. Budgeting
3. Performance Measurement
4. Management Compensation
• Variations in Management Control
a) Service Organizations
b) MNCs
c) Projects
d) Differentiated Controls for differentiated strategies
FACTORS THAT INFLUENCE MANAGEMENT CONTROL
1. the nature and purpose of the organization; (Profit, non-profit organizations)
2. organization structure and size. (Centralised/decentralized; Reporting
structure, span of control; Size and location of the organisation)
3. National culture. (MNCs)
4. strategic mission and competitive strategy.
5. corporate strategy and organizational diversification.
6. competitive strategy.
7. managerial styles.
8. organizational slack.
9. stakeholder expectations and controls.
10.Organizational life cycle.
Geert Hofstede’s Dimensions of National Culture
Dimension Definition
Power distance Acceptance of hierarchical levels, that is, inequality in
the distribution of power.
Uncertainty avoidance Avoiding risk and uncertainty

Masculinity/femininity Higher masculinity shows higher competitive spirit,


independent thinking, assertiveness, etc. while higher
femininity shows higher interdependence, nurturing
nature, etc.
Individualism/collectivism People’s preference to work as individuals or in a team.
• Formal controls entail delegation of tasks
• Structured
• rewards, penalties, and approvals to ensure compliance.
•  
• Examples of formal controls:
• Policies, audit, standard operating procedures (SOPs), budgetary controls,
• financial reporting, performance measurement systems, incentive systems.
•   
• Informal controls
• interpersonal relationships or peer interactions among individuals and groups
• informal networks and contacts.
• found in organizations which are innovative and creative.
• Informal controls dilute some drawbacks of formal control systems
• encourage peer interaction, self-initiation, and creativity.
•  
• Informal and formal controls co-exist
• not independent of the other; Interdependent and complementary
The Cybernetic Approach to Management Control
• Cybernetics is the study of control and communications, whether in
the machine or the animal.

• Basic Control Process


• Step 1: Determining areas to control
• Step 2: Establishing standards
• Step 3: Measuring performance
• Step 4: Comparing actual performance against standards
• Step 5: Rewarding performance and/or taking corrective action
• Step 6: Adjusting standards and measures when necessary

• MBO
Objectives of management control systems
• Effectiveness and efficiency of business operations
• Reliability of financial reporting
• Compliance with applicable regulatory and legal framework

•
The triple bottom line
• aims to measure the financial, social, and environmental performance
of a company over time.
• The TBL consists of three elements: profit, people, and the planet.
• TBL theory holds that if a firm looks at profits only, ignoring people
and the planet, it cannot account for the full cost of doing business.
SCHEMES FOR Classification Basis Classifications
CLASSIFYING
MANAGEMENT Object of control Action controls
CONTROLS Behavioral restrictions
Pre-action appraisals
MCS could be classified Action accountability
as under: Results controls
1. based on the object of Personnel/Cultural controls
control,
2. based on the extent of Extent of formalization of Formal controls
formalization of control Informal controls
control,
3. based on the time of Time of implementation Open loop control
implementation of of controls Closed loop Control
controls.
Feedforward control
Feedback control

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