Management Control Systems (302)

CHAPTER NO-01

Characteristics of Management control systems

Characteristics of MCS

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Objectives
Evolution of control systems in an organization Strategic planning Management Control and Operational Control Cybernetic Paradigm of Grissinger

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Introduction
Companies like Tyco, Global Crossing, WorldCom and

Enron and Satyam collapse because of lapses in Controls. CEO and Top Management of these companies Focused on short term goals by compromising on long term plans. Companies like Emerson Electric, 3 M (Minnesota Mining and Manufacturing) corporation, Dell Computer, TATA Manufacturers, Infosys are having effective control systems.
Characteristics of MCS

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MCS
The MCS is a set of inter-related communication

structures that facilitates the processing of information for the purpose of assisting managers in coordinating the parts and attaining the purpose of an organisation on a continuous basis.

MCS = Control + Management + Systems.

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MCS
Control: A control system has at least four elements

1. Detector/Sensor: Identifies actual happening in the situation being controlled. 2.Assessor : Comparing actual situation with some standard or expectation. 3.Effector: which alters behaviour if the assessor indicates the need. 4.Communication Network: transmit information betn Detector & Assessor and Assessor & Effector.

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MCS
Management: Group of people in an organisation

who work together to accomplish certain goal (earning satisfactory profit). Management control Process is more complicated bcoz: 1. The standard is not present. (planning by management for the business activity). 2.Management control is not automatic. Action taken to change the organisations behaviour involve human being.

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MCS
3.An organisation consists of many separate parts and management control must ensure that these parts work in harmony with one another. 4.The connection between the observed need for action and the behaviour that is required to obtain the desired action is not be clear cut.

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MCS
System: A system is a prescribed way of carrying out

an activity or set of activities, usually the activities are repeated. A system is characterized by more or less rhythmic, recurring, coordinated series of steps that are intended to accomplish a specific purpose. User of the system must make judgments when certain eventualities occur with systems.

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Management Control Activities

1. Planning what the organisation should do. 2.Coordinating the activities of the several parts of the organisation. 3.Communicating information. 4.Evaluating information. 5.Deciding what, if any, action should be taken. 6.Influencing people to change the behaviour.

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Management Control Activities

Management control does not necessarily mean that

action should correspond to a plan, bcoz parameters are changing continuously. Management control should anticipate what situations are going to be in future and accordingly apply control measures. The purpose of management control is to ensure that strategies are carried out so that organizations goals are attained.

Characteristics of MCS

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Boundaries of Management Control

Activity
Strategic Planning

Management Control

Task/Operation Control

Nature of end product

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Characteristics of MCS

Boundaries of Management Control

Management

control: is the process by which managers influence other members of the organisation to implement the organisations strategies. Nature of Management control decisions: Management control decisions are made within the guidance established by strategic planning. Decisions are limited by nature and amount of available resources.

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Boundaries of Management Control

A management control system is a total system and it

encompass the whole organisations coordination and balancing. Management control system focuses on the monetary bottom line i.e. net income, return on equity. Management control process involves interaction between individuals, it goes towards reacting, somewhat goal congruence.

Characteristics of MCS

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Boundaries of Management Control

Strategic Planning: Strategic planning is the process of

deciding the goals of the organisation and the strategies for attaining these goals. Goals are timeless, they exist until they are changed and they are changed only rarely. Strategies are big important plans, which state the direction in which senior management want the organisation to be heading to. The need for reconsidering strategies arises either in response to a perceived threat(A change in customer test) or to take advantage of a perceived opportunities (technical innovation).

Characteristics of MCS

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Boundaries of Management Control

Strategic Planning

Management Control

1. Strategic planning is essentially unsystematic. 2.Strategic planning almost always involve only part of the organisation. It may result in a change in one or a few existing strategies.

1. Management control process take place according to a more or less fixed time table and step by step. 2.Management control process involves whole organisation & various parts coordinated with one another.
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Characteristics of MCS

Boundaries of Management Control

Strategic Planning

Management Control

3.Analysis of proposed strategy usually involves relatively few people the sponsor of the idea, HQ staff and senior Management. 4.Very few peoples hence communication among them is relatively simple.
Characteristics of MCS

3.Management control process involves managers and their staff at all levels in the organisation. 4.Many more peoples are involved & communication therefore is much more complicated.
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Boundaries of Management Control

Strategic Planning

Management Control

5.Behavioural considerations are less important in the strategic planning process.

5.Managers interact with one another and behavioural considerations are very crucial.

Characteristics of MCS

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Boundaries of Management Control

Task /Operation control

Management Control

1. Task control systems are scientific 2. Human beings are not involved at all or the interaction is between a manager and a non manager (Automation).

3.Different type of task control systems are required to control different activity.
Characteristics of MCS

1. Management control can never be reduced to scientific. 2.Managers interacts with other managers. 3.Management control system is basically similar throughout the organisation.
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Boundaries of Management Control

Task /Operation control

Management Control

4.Focus is on specific task. 5.Relates to specified tasks and for most of these tasks little or no judgment is required as to what is to be done. 6.

4.Focus is on Organisation unit. 5.Relates to broad type of activities & managers decide what is to be done within the general constraints of the strategies.

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Focus of an Business Enterprise

An Enterprise has to use its resources effectively and efficiently for:

Maintaining Competitive edge over competitors. Meeting the growing demands of stakeholders.

MCS: A Management control system assist the

management in formulating strategies, coordinating the activities of the organization, and in steering those activities toward the achievement of the overall goals and objectives

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Need for Management Control

Absence control systems may lead to huge losses and even to corporate bankruptcy. Concerned with the attainment of goals and implementation of strategies. Help in assuring better quality Help in coping with unanticipated change Helps create faster cycles to market.

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Cybernetic Approach to Management Control

The term Cybernetics, coined by Norbert Weiner in the 1940s, has its origin in the Greek word Kybernetes. According to Weiner, cybernetics is the study of the entire field of control and communication theory, whether in the machine or the animal. Even though control systems are tailored to suit specific situations, they often involve basic process.

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Basic Control Process

Determining areas of control Establishing Standards Measuring performance Comparing actual performance against standards Rewarding performance and/or taking corrective action Adjusting standards and measures when necessary

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Determining areas of control

Quite expensive and virtually impossible to control every activity in an organization.

Determined based on the Organizational goals and objectives defined during the planning process Exercising control over critical areas helps manage a large number of subordinates effectively.

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Establishing standards
Standards state the criteria on the basis of which employee performance and related behavior can be evaluated. Standards are often incorporated into goals when the goals are established during the planning process. Helps employees understand what is expected of them and how their work will evaluated. Provides a basis for identifying job difficulties with reference to personal limitations of employees.

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Measuring performance
Once standards have been established, the actual performance must be measured. Performance standards are clearly established evaluating the expected or actual performance becomes fairly easy. Qualitative performance measures may include qualitative judgment by peers. Managers has to decide how frequently performance is measured.
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Comparing actual performance against standards

Performance measured in step 3 is compared with the standards established in step 2. Comparison enables managers to determine whether the actual performance meets the standards earlier. Computerized information systems give supervisors direct access to real time, unaltered data and information.

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Rewarding performance and/or taking corrective action

Managers should recognize and acknowledge good or positive performance by their employees. When the negative discrepancy occurs between the actual output and predetermined performance standards, specific corrective actions must be taken to correct the situation. Managers redraw their plans or modify their goals to correct deviations. The control process fails when the recommended corrective actions are not implemented properly.

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Adjusting standards and Measures when necessary

Established standards may not be realistic. To ensure that standards and their associated performance measures meet future needs, managers must periodically review the standards.

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Formal Control Process & Role played by Accounting system and Information System
Goals & Strategies Rules Other Information Reward (Feed back) Yes
Responsibility Center Operations Was Performa nce satisfacto ry

Other Information

Strategic Plans

Budgets

Reports Act v/s Plan

Revise

Revise

Corrective Action

Measurement Feedback Communication

No

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Adaptive Control Systems

A control system is a set of formal and informal

systems that are designed to assists management in steering the organisation towards its goal achievement. 1. Formal Control System 2.Informal Control System

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Adaptive Control Systems

Formal Control System: Consists of following five

mutually supportive management sub systems. 1. Management style and culture of the organisation. 2.Formal Control process. 3.Infrastructure. 4.Rewards. 5.Coordination & Integration of Mechanisms. 6. 7.
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Adaptive Control Systems

Informal Control System: well taken care in the

organisations through: 1. Informal Control Process. 2.Informal Recognition & Rewards. 3.Informal Coordinating Mechanisms. 4. 5.

Characteristics of MCS

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End Points
Evolution of control systems in an organization Strategic planning Management Control and Operational Control Cybernetic Paradigm of Grissinger

Characteristics of MCS

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Thank You!

Characteristics of MCS

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