Management Control Systems

Chapters 1 & 2,
Management Control Systems, 12th Ed.,
Anthony and Govindarajan
Chapter 2
Understanding Strategies
Chapter Objectives
 To study and understand the goals in any
organization

 To understand strategies at two levels-

The corporate level and
The business unit level
 Profitability- most important goal, broadest
isGOALS - Profitability
a product of two ratios:
1. profit margin percentage
X
2. investment turnover i.e.

(revenues-expenses/revenues) X
(revenues/investment)
Result is Return on Investment (ROI)=
((revenue-expenses)/investment)
 Profitability refers to profits in long run

Q)
 What does profitability depict?

 Does the company’s goal, change its

interpretation of profitability equation?
 GOALS - Maximizing Shareholder
Value
Q)
 Maximizing Shareholder Value means what?
 Is earning maximum and increasing
profitability same?

 Maximizing shareholder value may be a

major goal but not the only goal
GOALS- Risk
 Risk also means POSSIBILITIES

 The risk-taking varies from company to

company, among personalities and
managers

 Some companies make it very clear that the

primary responsibility is to preserve
company’s assets
GOALS -Multiple Stakeholder
Approach
 Organizations deal in – capital market,
product market, factor market

 The firm has responsibilities to all these

multiple stakeholders

The Concept of Strategy
Strategies describe the general direction in which an
organization plans to move to attain its goals

Core Competencies Industry Opportunities

Strategies
Strategy

 Corporate Strategy
 To maximize use of resources

 Business Strategy
 To compete in selected markets
Goals and Strategy

 Strategy Formulation
 Goals
 How to attain
 Strategy Implementation (Execution)
 Objectives
 Management Control Systems
Management Control

 The process by which managers influence

other members of the organization to
implement the organization’s strategies.
Management Control

 Activities include:
 Planning
 Coordinating
 Communicating
 Evaluating
 Deciding
 Influencing
Management Control Systems

 Facilitate management control

 Primarily focus on strategy execution
 Encompass both quantitative and
qualitative performance measures
 Concerned with broadly defined activities
Conflict of Interests

 Goal congruence implies that individual

goals and organizational goals are
consistent

 Agency Theory implies the opposite

Good Management Control

 Achieves goal congruence by aligning

 Organizational goals
 Individual goals
Goal Congruence

 Influenced by
 Informal factors
 External – work ethic
 Internal – culture, management style, informal
organization, perception, communication
 Formal factors
 Rules
 Formal control system
Organizational Structure

 Functional organization
 Highly centralized
 Matrix organization
 Business unit organization
 Highly decentralized
Lines of Control within the
Organization

 Solid lines
 Direct reporting

 Dotted lines
 Coordination / reporting
The Controller

 Responsible for
 Design of the Management Control System
 Operation of the Management Control
System
 Normally the CFO