CHAPTER 5
Designing and Implementing
Management Control Systems
Introduction
• Management control systems are increasingly
called upon to find an appropriate balance
between efficiency and flexibility, between
short- and long-term orientation, between
formal and informal tools and techniques.
Introduction….
• Managers are responsible for controlling in the
organization
and
a
manager
must
improve
the
effectiveness of the organization’s control system; as can
do a great deal to improve the effectiveness of their
control systems.
• Controlling is the last step of management where how
the implemented plan is working is assessed and evasive
actions are taken.
Designing Appropriate MCSs
• An effective control system is important for an
organization to run properly and achieve its
goals.
• If any part of it is ignored; then controlling the
organization’s resources will be very difficult
for managers.
Designing…..
• The evolution of management control systems
is closely linked to changes occurred both in
the external environment and the internal
organization, both of which have become
increasingly complex (Golinelli, 2000).
Designing…
• MCSs can be designed with an understanding of what
the organization wants the employees to do.
• Objectives and, more importantly, strategies that are
derived from a good understanding of the
organization’s objectives often provide important
guides to the actions that are expected.
• A better understanding of objectives and strategies
yields a larger set of feasible control alternatives,
provides a better chance that each control alternative is
appropriately tightly applied, and reduces the chance
of producing behavioral displacement problems.
Choice of controls
• The different types of management controls are not equally
effective at addressing each of the management control
problems.
• The specific set of management controls to be selected
from the feasible alternatives should be those that will
provide the greatest net benefits (i.e. benefits less costs).
• The benefits of a MCS are derived from the increased
probability of success or obtaining the desired outcomes.
Personnel/cultural controls as an initial
consideration
• In deciding among the many management control
alternatives, managers should start by considering
how adequate personnel or cultural controls will be,
or can be made to be.
• Personnel/cultural controls are worthy of first
consideration because they have relatively few
harmful side effects and relatively low out-of-pocket
costs.
Choice of control tightness
• The decision as to whether controls should be
applied more or less tightly in any particular
organization, or in an area within the organization,
depends on the answer to three questions:
– (1) What are the potential benefits of tight controls?;
– (2) What are the costs?; and
– (3) Are any harmful side-effects likely?
Choice of….
• In any organization, tight control is most
beneficial over the areas most critical to the
organization’s success.
• The critical success factors vary widely across
organizations.
• For example, inventory control is critical in
retail superstores because carrying heavy
inventories without tight controls amounts to
inefficient use of resources without valueadded for the customer experience.
Adapting to change
• Most organizations emphasize one form of management
control at a given point in time, but they often change their
emphasis from one form to another as their needs,
capabilities, and environments change.
• Many situational factors, such as growth, intensifying
competition, global expansion, or technological change,
inevitably drive organizations to (have to) adapt their
management control systems to their changing environments.
Keeping a behavioral focus
• What makes the analysis of management controls so
difficult is that their benefits and side effects are
dependent on how employees will react to the controls
that are being considered.
• Predicting these behaviors is far from an exact science.
• Significant behavioral differences exist among people in
different countries, in different parts of a single country,
in different organizations, and in different areas of the
same organization.
• Managers must be aware of such differences because the
effectiveness of the management controls used will vary
depending on the reactions of the employees involved.
Maintaining good control
• Control is a complex part of the management function.
• There is no perfect MCS.
• There is no single best way to accomplish good control.
• However, Managers should implement proper, or the
most suitable, management controls.
• Of course, MCSs only reduce the probability of poor
performance; they do not eliminate it.
1. Suitability
12 Principles of MCSs
2. Simplicity
3. Objectivity
4. Economical
5. Flexibility
6. Quick Reporting
7. Suggestive
8. Forward-Looking
9. Individual Responsibility
10. Strategic Point Control
11. Self-Control, and
12. Feedback
1. Suitability
• According to this principle, the control system
should be appropriate to the needs, kind of
activity and circumstances of an enterprise.
• Control is executed through managerial
position.
2. Simplicity
• According to this principle, to be effective, control
system must be clear, easy to understand and operate.
• Unless the control system is understood properly by
those responsible for its implementation it cannot
succeed.
• A complex system will not only create hurdles in the
performance of activities, but it will also not bring the
results expected of it.
3. Objectivity
• The
fixation
of
standards,
measurement
of
performance and corrective action must be objective
and impersonal.
• Subjective and arbitrary control cannot be effective.
• It is essential that the standards to judge the actual
performance are clear, definite and stated in
numerical terms.
4. Economical
• The systems of control must be worth their costs.
• They must justify the expenses involved. The cost
of control system should not exceed the possible
savings from its use.
• The complicated control system should be
avoided to keep a check on the costs of control.
5. Flexibility
• The system of control must be flexible, i.e., workable
even if the plans have to be changed.
• A good control system must keep pace with the
continuously changing pattern of a dynamic business
world.
• It must be responsive to changing conditions. Control
system should be flexible so that it can be adjusted to
any modification or alteration in a plan.
6. Quick Reporting
• Time is an important element in enforcing a control system.
• Subordinates should inform their superiors quickly with
actual results and all deviations from standards.
• Delays in reporting of information will make control
ineffective.
•
Promptness is also needed in initiating the corrective
action.
• Quick reporting helps in the timely disposal of deviations.
7. Suggestive
• A
control
system
should
not
only
measure
performance and detect deviations; it should suggest
remedial measures as well.
• In other words, good control system should be selfcorrecting.
• In fact, a control system can be effective only when it is
considered as part of the internal working and not as a
mechanism, operating from outside.
8. Forward-Looking
• The control system should be directed towards future.
• In fact, the control system can at times be so devised as
to anticipate possible deviations or problems.
• It should be preventive and not merely corrective Ideal
control is spontaneous.
• Cash forecasts and cash control is an example where a
financial manager can forecast the future cash needs and
provide for in advance.
9. Individual Responsibility
• This principle argue that control can be effective
when it focus on individual rather than on jobs or
works.
10. Strategic Point Control
• All deviations from standards are not of equal importance.
• Hence, to control all deviations is not desirable.
• Therefore, the control system should focus on key, critical
or strategic points which require management attention.
• Effective and efficient control is control by exception.
Uncontrollable deviations need not be given much care
and thought.
11. Self-Control
• Different departments may be asked to
control themselves.
• If a department can have its own control
system, much of the detailed controls can be
handled within the department.
• These sub-systems of self control can then be
tied together for an overall control system.
12. Feedback
• It means information on previous performance.
• For effective control, regular flow of information
regarding the actual performance is necessary.
• Feedback can be supplied through personal contact,
observation or reports.
• Automatic feedback assists in taking corrective action
at the right time or in adjusting future operations.
Implementing MCSs
• Now if we are to implement an MCS at our
organization, we would, just as with most
systems and strategies, need to focus on certain
essential factors to guarantee efficiency.
• For MCS, three core elements can determine the
success and the effectiveness of this framework.
Implementing MCSs…
• MCSs should be at the heart of your strategy from
the start.
• The three are:
– The MCS is aligned with the organization’s strategies and
goals.
– Designed to fit the organizational structure, and
– Motivate people through different reward systems.
1. Aligning MCSs with the organization’s
strategies and goals
• Before the implementation of the system, we need to
understand and outline the current strategies in use, as well
as define the objectives the organization wants to fulfill.
• These need to be the overall operational goals and not
simply the aims we have for the MCS.
• It’s crucial to ensure the framework you choose to
implement is in harmony with these existing processes and
objectives.
1. Aligning MCS…
• If the processes are not aligned, then our MCS will
end up being ineffective or insufficient for your
needs.
• It’s important to understand that the implementation
of the system does not require the organization to
change its core policies or redirect its objectives, but
that the system can be made to fit within the current
system.
2. Designing MCSs to fit the organizational
structure.
• the MCS must consider the current organizational
structure carefully.
• We want the management control system to fit the how
the company operates and how it has structured these
operations, especially in terms of its management.
• The key part of this is the understanding of the
decision-making structures currently in place.
2. Designing MCSs…
• It’s essential to create a management control system,
which understands these decision-making structures
and enhances them, instead of turning them around or
hindering them.
• This can easily be done through the study of
management structures and aligning the new model by
dividing the responsibilities according to these
structures.
3. Motivating people through different reward systems
• The final key element of the implementation should be
focused on the reward structures you will use as part of
MCS.
• The idea of the system is about motivating the
managers, as well as the subordinates, to work towards
attaining the organizational goals in place.
• The effectiveness of the motivation can be improved by tying a
variety of rewards to the achievement of these goals.
3. Motivating …
• The rewards themselves can change and include a
variety of different types, depending on the task
achieved or the performance the person displays.
• They can be purely monetary rewards, such as
bonuses or increases in salary, or have a more
material benefit, such as access to gyms or health
clubs or updates on tools and other equipment.
End of CH5