Management Control Systems

Dr. Mary Ipe

Flow of discussion
      
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Introduction of MCS Nature of management control Purpose of MCS Organizational context of MCS Formal and informal control systems Components of control systems Cybernetic approach to MCS
(Sources: MCS, ICMR, 2008 Ed. Ch-1; MCS, ICMR 2003, Ch 1; MCSRobert Anthony & Vijay Govindarajan , Ch.1)
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Introduction
Enron collapse (2001), WorldCom artificial inflated earnings (2001), Satyam scandal (2008) rock the corporate worldAbove examples illustrate absence or malfunctioning of MCS MCS is broadly concerned with attainment of goals and implementation of strategies (eg: TATA groups TBEM Model) MCS is a set of interrelated communication structures that facilitate the processing of information for the purpose of assisting managers in coordinating the parts and attaining the purpose of an organization on a continuous basis.

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How is MCS viewed?

 Collection of controls used to address the following situations:  Managers and employees do not have a clear idea of what is expected of them  They have a fair idea of what is expected, but do not feel motivated due to the working conditions (e.g. reward system)  Nevertheless employees are not able to perform  MCS assists the management in formulating strategies, coordinating the activities and steering them towards the achievement of the overall goals and objectives  MCS is an interdisciplinary subject with contributions from all branches of management
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Purpose of MCS
Purpose : Assist management in the coordination of the activities and in steering those activities towards the achievement of the firms overall goals Ensure that the right strategies are carried out to attain the organizations objectives Objectives: Effectiveness and efficiency of business operations Enhance reliability in financial reporting Helping in compliance with applicable regulatory and legal framework

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Domain of MCS
MC is the process by which managers influence other members of the organization to implement the organizations strategies (Anthony & Govindrajan) MC activities planning, coordinating, communicating, evaluating and influencing Planning- control process compares actual accomplishments with the set plans MCS ensures that each part of the organization is in harmony with that of the other

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Brings about unity of purpose through the efforts of individuals

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Boundaries of MCS
MC fits between strategy formulation and task control
ACTIVITY NATURE OF END-PRODUCT
Goals, strategies & policies

Strategy Formulation Management Control

Implementation of strategies

Task Control

Efficient & effective performance of individual tasks

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Planning & Control functions

Strategy formulation is in response to a perceived threat or opportunity or emergence of new ideas Strategies are important plans- setting the direction in which senior management wants the organization to move Strategy formulation is essentially unsystematic Involves few people the sponsor of the idea, HQ staff and senior management

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Management & Task Control

MC process is a series of steps in predictable sequence to a fixed time-table MC process involves managers & staff at all levels Task control ensures that specified tasks are carried out effectively and efficiently Task control is transaction-oriented involving performance of individual tasks according to rules established in the MC process Numerically controlled machine tools, process control computers and robots are mechanical task control devices
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Impact of internet on Mgmt.Control

Internet has changed the rules of the game in business to- individual consumer sector Major benefits of internet  Instant access  Multi-targeted communication  Costless communication  Ability to display images  Shifting power and control to the individual
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Internet & Mgmt. Control

MCS involves information & organizations require an infrastructure to process that information Internet provides that infrastructure making the processing of information easier and faster, with fewer errors Internet facilitates coordination and control through the efficient and effective processing of information Internet cannot substitute for the fundamental processes involved in management control Implementing strategies through management controls is a social process and cannot be fully automated
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Organizational context of MCS

Nature and purpose of the organization Organization structure and size National culture Corporate strategy & organizational diversification Competitive strategy Internal and external stakeholder expectations
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Responsibility of organization toward stakeholders

Shareholders-financial returns, sustainable growth Employees-reward systems , safety & health, participative decision-making , job satisfaction, Customers-right quality & quantity ,value , safety & health Suppliers/Creditors-Proper pricing & licensing, continuing business relations, adherence to payment terms Government- compliance ,competitiveness , fair business practices Community-protection of the environment , promoting human development
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Formal Control Systems

Formal control systems make explicit the structure, policies and procedures to be followed by members of the organization The members of organizations can perform their duties efficiently when they are provided with formal documents of these structures, policies and procedures Formal control systems are laid out in writing by the management Examples include plans , budgets , regulations and quotas

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Formal Control Systems

(Source: Management Control Systems, Maciarello & Kirby, 1997)
INFRASTRUCTURE
Organizational structure Strategy Operations Patterns of autonomy Measurement Methods Responsibility centers Transfer Pricing

MANAGEMENT STYLE & CULTURE

Prevailing style External/internal/mixed Principal values Norms and beliefs

FORMAL CONTROL PROCESS

Strategic planning Capital budgeting Operation planning Cost accounting Budgeting Reporting systems Strategy/ project management Operations/ variance analysis

REWARDS
Individual and group Short-term and long-term Promotion policy

COORDINATION & INTEGRATION

Standing committees Strategy Operations Formal conferences Involvement techniques

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Informal Control Systems

Informal controls arise as a result of employees behavior Informal controls include group norms and organizational culture; They originate with employees and are affected by general socio-cultural factors Informal systems promote greater compatibility of personnel and encourage the willingness to serve organizational purposes Informal control process consists of activities engaged in by members of the organization outside the formal control process These systems help the organization to adapt itself to the environmental change and technical innovation
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Informal Control Systems

(Source: Management Control Systems, Maciarello & Kirby, 1997)
INFRASTRUCTURE
Personal contacts Networks Expertise-oriented Minimal structure Emergent roles

MANAGEMENT STYLE & CULTURE

Prevailing style External/internal/mixed Principal values Norms and beliefs

INFORMAL CONTROL PROCESS

Search/alternative generation Ad hoc as needed Uncertainty coping Rationalization/ dialogue

INFORMAL AWARDS
Recognition Status-oriented Intrinsic Performance-oriented Stature-oriented Personal contact

COORDINATION & INTEGRATION

Based upon trust Simple/ direct/ personal Telephone conversation Personal memos

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Subsystems & components of control systems

Style & culture - Corporate culture - Corporate culture as a control mechanism - Management indoctrination and skill-training Formal control process - Formal planning process - Formal reporting process Infrastructure Rewards Coordination and integration mechanisms - Committees - Formal conferences
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Cybernetics & Systems Approach to control

Source Initial data Predictions & Inferences Values & Choice Target Initial action

Source

Feedback data

Predictions & Inferences

Values & Choice

Action

Source: Subash Sharma, Management Control System Texts & Cases (Tata McGraw Hill, 7th Reprint, 1997)

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