Management Control
Systems
Part 1
Recommended Books
1. Maciariello, J.A. & Kirby, C.J.: Management
Control Systems: Using Adaptive Systems to
Attain Control, PHI
2. Anthony, R.N. & Govindarajan, Vijay,
J.: Management Control Systems, McGraw
Hill
3. Management Control Systems, Text and
Cases, Dutta, Abhijit, Jaico Publishers
2
Purpose
of
Management Control Systems
Unity of diverse activity
Management
Organization
Steers
Departments/units
Purpose
Goals
Objectives
3
Domain
of
Management Control System
• Different views
– Anthony, Dearden & Govindrajan: “the process by which
managers influence other members of the organization to
implement the organizations strategy” (strategic planning,
management control, task control are independent but
interrelated processes of planning & control)
– William Newman: “control is one of the basic phases of
managing, along with planning, organizing and leading” (
control function of management)
– ***Macieriello , Kirby: control of strategy and control of
operations and include aspects of planning, organizing
and leading functions of management.
4
What is Management Control System
• It is a set of interrelated
communication structures that
facilates the processing of information
for the purpose of assisting managers
in coordinating the parts and attaining
the purpose of an organisation in a
continous basis.
Purpose
• To assist management in coordination
of parts of organisation and steering of
those parts towards the achievements
of overall purposes goals and
objectives.
System
It’s a prescribed and usually repetitious
way of carrying out an activity or set of
activities.
Control System
• It is designed to bring unity out of these diverse activities of
an organisation to fulfill purpose. According to phillip Kotler
Control Process is :-
Goal
Setting
Performance
Management
Performance
Diagnosis
What do we
Want to
Achieve?
What is
Happening?
Why is it
Happening?
Corrective
Action
What should
We do
About it?
Management Control
• It is the process by which managers
influence other members of the
organisation to implement the
organisation strategies
– Planning (What organisation should do)
– Coordinating(the act of several parts of
organisation)
– Communicating information
– Evaluating information
– Deciding what if any action should be taken
– Influencing people to change their
behaviour
Understanding strategies
• Strategy describes the general
direction in which an organisation
plans to move to attain its goals.
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Organizations
• Sub units
• Effectiveness & efficiency
• Internal & External Stakeholders
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Organization
unit
Sub-unit
Sub-unit
Sub-unit
Sub-unit
Sub-unit
Sub-unit
Sub-unit
Sub-unit
Sub-unit
Sub-unit
Sub-unit
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Sub-units
• Perform portions of the organization purpose
• Grouped by specialization, division of labor
Challenges
– Efficient coordination (transaction costs- keeping it
minimal)
– Managing excessive transaction costs
– Autonomy needed for specialized sub-units
– given objectives as part of the overall objectives
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Effectiveness & Efficiency
• Effective
– Meets overall purpose
– Fulfills a genuine need of society
• Efficient
– Minimum waste of resources
– competitive ROI on stakeholders’
investments
– Competitive wages for the worker
– Satisfaction for customers
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Internal & External
Stakeholders
• Organizations are open systems and includes
internal & external resources
• Make situations
– Buy resources in the external market
– Control systems must coordinate the external
exchanges, internal activities
• Buy situations
– Control systems must integrate efforts of external
stakeholders and the external activities
• Must quickly adapt to the market changes
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Executive Functions
• Essential managerial functions
– Securing essential efforts
– Provide system for organizational
communication
– Formulating and defining purpose
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Securing Essential Efforts
• Motivate participation & performance
– Recruit the right people
– Inducements that are equivalent or better
– Encourage contributions from participants
that generate income
– Participants include customers,
employees, executives, owners,
distributors, suppliers
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Provide System for
Organizational communication
• Design & refine formal organization or the
organization chart (define the sub-units &
the structure)
• Define purposes, proper sequence of
steps to be maintained
• Define management positions and fill
them
• Relevant communications are the
communications that coordinate the
activities of the organization
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Provide System for
Organizational communication
• Formal organization
– Relatively permanent systems of communications
for a common purpose
• Informal organization
– Not part of the org chart
– “aggregate of personal contacts and
interactions and the groupings of people.
…though common or joint purposes are
excluded by definition, common or joint results of
important character nevertheless come from
such organizations”
– Develops by design and spontaneously
– Helps personalize the organization
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Establish purpose, goals and
Objectives
• Job for the entire management team
• Delegate responsibilities to sub-units
• Overall purposes (ends) are redefined
in terms of sub-purposes(means) of
sub-units
• Each sub-unit purpose becomes the
means to the purpose of the higher
unit
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Organizational Survival &
Control Systems-1
• Conditions for survival
– Sufficient inducements to attract essential
contributions form stakeholders
•
•
•
•
Capital from investors
Labor from employees
Material resources form suppliers
Product purchases from customers
– Inducements are effective if stakeholders prefer
them to those offered by comparable
competing organizations
– Internal production processes need to convert
contributions into sufficient inducements that
sustains stakeholder participation & cooperation
and achieve organizational purpose
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Organizational Survival &
Control Systems-2
• On-going survival requires
– Management must process and act upon information
in all the stakeholder markets as efficiently as other
entities in the same market
– Managerial controls that monitor the inducementcontribution balance for each stakeholder
– Decision processes agile enough to react to changes
– Control systems must facilitate innovation, adaptation
and change
– Ability to convert contributions of main stakeholders
to meet current needs and have resources left over
for continuing innovation processes to meet
competitive challenges
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Assumptions about Human
Drive
• Rationality: basically rational, able to
reason, make plans and control behavior
• Creativity: basic instinct to be creative
• Mastery: desire to control, innate desire
to be “in control”
• Morality: usual strong moral instincts, may
not always dominate behavior
• Community: strong desire for human
association
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Adaptive Control Systems
Two Sets of Mutually Supportive
System
From the perspective of
Control System Designer
Control System Designer
• May be a
– System analyst
– A controller
– A manager
• People who are most concerned with
the design & operation of a control
system. Usually are the people who are
responsible for it.
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Control System Characteristics
• Effectiveness is strongly related to the
leadership characteristics of the
management
• Control systems function within the
dynamics of the organizations
• Actions taken in MCS influence
people, control in organization is
accomplished by people through
people
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Mutually Supportive Systems
• Formal/informal systems help an
organization to be steered towards its
purpose by bringing unity of diverse
efforts of the sub-units and individuals
• These are two distinct yet interrelated
(often indistinguishable) sub divisions
• Considered adaptive when they are
internally consistent, consistent with one
another and designed to permit learning
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The Formal Systems
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Formal System Characteristics
Mutually Supportive Management System Model (MSSM)
• Focuses on needs of customers &
markets
• Consistent with informal system
• Mutually supportive of the formal &
informal
• Each subsystem must support
managing short term concerns as well
as innovations necessary for the longterm survival
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Formal Control Systems
Management
Style & Culture
Infrastructure
Formal Control Process
Rewards
Coordination &
Integration
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Management Style
&
Culture
• Prevailing Style
– External/internal/mixed
• Principal values
– Norms & beliefs
37
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Infrastructure
• Organization Structure
– Strategy
– Operations
• Patterns of autonomy
• Measurement methods
– Responsibility centers
– Transfer pricing
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40
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Mixed control style
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Rewards
• Individual & groups
• Short term & long term
• Promotion policy
43
Coordination & Integration
• Standing committees
– Strategy
– Operations
• Formal conferences
• Involvement techniques
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Formal Control Process
• Strategic planning
– Capital budgeting
• Operations planning
– Cost accounting
– Budgeting
• Reporting systems
– Strategy/project management
– Operations/variance analysis
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The Informal System
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Informal System Characteristics
• Aggregate of personal contacts and
interactions and the associated
groupings of people
• Activities of members outside the formal
control process when dealing with nonroutine decision making 9realignment of
goals or seeking new information to
increase understanding of a problem
area)
• Supplements formal system, increases
adaptability
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Informal Control Systems
Management
Style & Culture
Infrastructure
Informal Control Process
Informal Rewards
Coordination &
Integration
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Management Style
&
Culture
• Prevailing Style
– External/internal/mixed
• Principal values
– Norms & beliefs
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Infrastructure
• Personal
• Networks
– Expertise oriented
– Minimal structure
• Emergent roles
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Informal Rewards
• Recognition
• Status oriented
• Intrinsic
– Performance oriented
– Stature oriented
• Personal contact
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Coordination & Integration
• Based upon trust
• Simple/direct/personal
• Telephone conversations
• Personal memos
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Informal Control Process
• Search/alternative generation
– Ad-hoc as needed
• Uncertainty coping
• Rationalization/dialog
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Control Systems Actions
Formal system
If action refer to
Infrastructure
Chartering or appointing
Establishing management support
Setting a direction or mission
Style & culture
Training in beliefs, values, or social dynamics
Planning & Control
process
Establishing procedures
Clarifying procedures
Documenting procedures
Developing measurement metrics
Reporting/providing feedback
Reward system
Giving a merit increase
Coordinating
mechanisms
Establishing communications among organizational
units
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Control Systems Actions
Informal system
If actions refer to
Emergent roles
Becoming the expert
Assuming new responsibilities
Style & culture
Training in values, beliefs or social dynamics
Planning & control
Searching and gathering information
Investigating & brain-storming
Discussing developments regarding problems
Reward system
Showing appreciation
Giving thanks, recognizing accomplishments
Coordinating
mechanisms
Members checking with others in other units
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The Subsystem &
Components of Control
Systems
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Style & Culture
• Methods of “doing things”
• Style of top management
• Decides how to implement control
systems
• Ranges from highly dictatorial to highly
participative
• Systems need to fit the style & culture
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What is Corporate Culture?
• Consists of shared values, common
perceptions, common decision
making premises
• Develops over time
• Strength of the culture depends on the
number of key premises shared, how
extensively, and how deep
commitments to these premises are
58
Corporate Culture
as
Coordination and Control Mechanism
• Facilitates control by
– Internalizing in individuals key decision
premises and decisions
– Developing a sense of group loyalty
– Reducing dissonance and friction
– Most effective system as long as the
values are the right values
– “self control” through acceptance of
common values is the best method of
control
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Effectiveness of
Corporate Culture as a Control
mechanism
• Corporate culture must be consistent
with the environment and widely
accepted
• Sub-units may develop its own subculture due to differences in
specializations, perspectives, etc.
• Spreading a uniform corporate identity
is essential
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Managerial Indoctrination and Skill
Training
• Formal indoctrination & training helps
instill the common attitudes & skills
• Indoctrination involves socializing
members to values, policies,
procedures of the organization
• Skill development methods to perform
tasks in the organization
61
Formal Control Process in
planning and reporting
dimensions
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Formal Planning Process
• Strategic and operational aspects
• Budget, formal planning& control,
reporting has these two components
• Infrastructure, rewards and
communication systems must cater to
both
• Cost accounting systems provide crucial
measurements for both strategic and
operational planning processes
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Formal Reporting Process
• Progress is measured against the plans
• Monthly/quarterly/year to date reports
on both strategic and operational
plans are made to measure variances
• Strategic plans are measured by
treating each strategic thrust as a
project and looking at its progress
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Integrated Planning & Reporting
Process
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Integration of Strategic &
Operational
• Fair amount of integration exist
between the two
• Need for strategic thrust arise out of
operational needs
• Strategic projects are funded out of
operations
• Strategic plans & programs impact
operations and need be monitored for
this impact continually
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Infrastructure
• Formal control system infrastructure
consists of
– Organizational structure
– Patterns of autonomy
• Infrastructure must cater for both the
strategic and the operational
• Common organization for strategic
planning is to organize strategic business
units (SBU)
• Then, organize profit centers
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Rewards
• Inducements needed to motivate
individuals to contribute more
• These need to have components that
are comparable in the environment
and meets individual needs
• Materialistic and non materialistic
• Rewards cannot exceed the value
added by individual, obviously
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Individual Rewards
• Strategic, operations, individual and
group are the four reward dimensions
• Individual rewards include
– Compensation
– Linked to performance
– Short term as well as long term
– Comparable to what the market offers
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Group Rewards
• Most effective is tied to organization’s
performance
• Short as well as long term
• ESOP for example, could be linked to
the organization meeting specified
earnings per share target each year
for a number of years from now
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Coordination and Integration
Mechanism
• Specific communication schemes are
needed
Coordination
Resource allocation decision making
Conflict resolution
Building identification with organizational
purpose
– Developing commitment and trust in the
organization
–
–
–
–
• Timely and accurate flow of information
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Committees
• Two committees with overlapping
memberships for resource allocation
• Manage conflict resolution( short and
long term needs) in resource
allocation
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Strategy Committee
• Top officers and managers, top level
staff are members
• Monitor strategy periodically, as
needed by market developments
• Decide actions, resources, all aspects
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The Operating Management
Committee
• Same composition as the strategy
committee
• Looks at operational issues
• Conflicts between strategic and
operational resources
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Formal Conferences
• Periodic conference of managers
down to profit center level
• Formalize planning process
• Improve communications
• Keep organization together
• Public commitment by managers on
next year’s targets
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Informal Organization Structure
& Emergent Roles
• Difficult to define “soft structure”, hard
to define, but exists in all organizations
• Person to person contacts, networks,
ad hoc teams, available expert
resources
• Help increase adaptability of
organization
• Temporary grouping s can form for
coping with uncertainties
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Informal Control Processes
• An adaptive system needs to
– Exact information from environment
– Form and adopt goals
– Select and emit goal-directed behavior
– Learn to adapt
• In a situation when fast environmental
changes are happening it is the
informal system that usually takes over
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Informal Recognition & Rewards
• Informal rewards contribute
significantly to organization success
• Stature oriented
• Respect being shown for capability of
an individual to operate in t5he
informal set up
• Formal rewards should be appropriate
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Informal Coordinating
Mechanisms
• Communication/coordination
develops as people develop working
relationships
• Communications are less guarded,
more effective
• Necessary for effective adaptive
control
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Interaction Between Formal &
Informal Systems
• In stable environments the formal
system dominates
• At times of changes the informal
system dominates
• Formal and informal overlap
• Management must ensure each
system as well as both systems are
supportable
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Adaptive Controls & Individual
Actions
• By observing actions and identifying
where they come out from, the
designer can asses if the system is
formal or informal
• What needs to be done to increase
adaptability
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