1
Introduction
We begin with
three terms :
1. Control
2. Managemen
t
3. Systems
Management control
is a must in any
organization that
practices
decentralization
2
Basic Concepts
Control
An organization must be
controlled, that is, devices
that ensure it goes where
its leaders want it to go
must be operative
3
Basic Concepts
1. Detector/Sensor
A device that
measures what
is actually
happening in
the process
being controlled
Elements of a
Control
System
4
Basic Concepts
2. Assessor
A device that
determines the
significance of
what is actually
happening by
comparing it with
some standard of
what should
happen
Significance is
assessed by
comparing the
information on what
is actually happening
with some standard
or expectation of
what should be
happening
5
Basic Concepts
3. Effector
A device that
alters behavior
if the assessor
indicates the
need to do so
The device is
often called
“feedback”
6
Basic Concepts
4. Communication
network
Devices that
transmits
information
between the
detector and the
assessor and
between assessor
and the effector
Communication
network
7
Basic Concepts
Elements of the Control Process
2.Assessor,
Control
comparison
device
with standar
1.Detector,
observed
information
3. Effector,
about what
behavior
is happening
altering
Entity
being
controlled
communication
if needed
8
Basic Concepts
Management
The management control
process is the process by
which managers at all
levels ensure that the
people they supervise
implement their
intended strategies
9
Basic Concepts
Systems
A system is a
prescribed and
usually repetitious
way of carrying out
an activity or a set of
activities
Boundaries of Management
Control
Management
control fits
between strategy
formulation and
task control in
several respects
10
Boundaries of
Management Control
11
General Relationships among Planning and Control Functions
Activity
Nature of End Product
Strategy Formulation
Goals, Strategies and
Policies
Management Control
Implementation of
Strategies
Task Control
Efficient and Effective
Performance of
Individual Tasks
Boundaries of
Management Control
Management control is the
process by which
managers influence
other members of the
organization to
implement the
organization’s strategies
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Boundaries of Management
Control
1. Planning, what the
organization should do
2. Coordinating, the activities
of several parts of the
organization
3. Communicating,
information
4. Evaluating, information
5. Deciding, what, if any,
action should be taken
6. Influencing, people to
change their behavior
Management
control
involves a
variety of
activities,
including :
13
Boundaries of Management
Control
Goal Congruence
Goal congruence means that, insofar as is feasible, the
goals of an organization’s individual members should
be consistent with the goals of the organization itself.
Tool for Implementing Strategy
Management control focuses primarily on strategy
execution.
Management control are only one of the tools managers
use in implementing desired strategies.
Strategies are also implemented through the
organization’s structure, its management of human
resources and its particular culture.
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15
Basic Concepts
Framework for Strategy Implementation
Implementation Mechanism
Management
Controls
Strategy
Organization
Structure
HR
Management
Culture
Performance
Boundaries of Management
Control
Strategy
Formulation ?
Strategy
formulation is the
process of deciding
on the goals of the
organization and
the strategies for
attaining these goals
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Boundaries of Management
Control
Distinctions
between strategy
formulation and
Management
Control
Strategy Formulation
is the process of
deciding on new
strategies
Management Control
is the process of
implementing those
strategies
17
Boundaries of Management
Control
Task Control ?
Task control is
the process of
assuring that
specified tasks
are carried out
effectively and
efficiently
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Boundaries of Management
Control
Task Control
• Transaction oriented
Distinctions • Scientific
between Task • The focus is on specific tasks
Control and
Management Control
Management
• Involves the behavior of
Control
managers
• Can never be reduced to
science
• The focus is on organizational
units
• Concerned with the broadly
activities of managers
19
Boundaries of Management
Control
20
Examples of Decisions in Planning and Control Functions
Strategy Formulation
Management Control
Task Control
Acquire an unrelated
business
Introduce new product Coordinate order entry
or brand within product
line
Enter a new business
Expand a plant
Schedule production
Add direct mail selling Determine advertising
budget
Book TV commercials
Change debt/equity
ratio
Issue new debt
Manage cash flows
Devise inventory
speculation policy
Decide inventory levels
Reorder an item
Boundaries of Management
Control
21
Impact of the Internet on Management Control
• Instant access
• Multi targeted
communication
• Costless
communication
• Ability to display
images
• Shifting power and
control to the
individual
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The Concept of Strategy
Strategy Formulation
Environmental analysis
Competitor
Supplier
Regulatory
Social/Political
Internal analysis
Technology know how
Manufacturing know how
Marketing know how
Distribution know how
Logistics know how
Opportunities and threats
Identify opportunities
Strengths and weaknesses
Identify core competencies
Fix internal competencies
Firm’s strategies
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Business Unit Strategies
Business Unit Mission : The BCG Model
Cash source
High
Low
Hold
Build
“ Star “
“ Question mark “
Harvest
Divest
“ Cash cow “
“ Dog “
High
Market
growth
rate
Low
High
Relative market share
High
Cash use
Low
Low
24
Business Unit Strategies
Business Unit Competitive Advantage
Industry Structure Analysis : Porter’s Five Forces Model
New Entrants
Suppliers
Industry
Competitors
Substitutes
Customers
25
Types of Organizations
A firm’s strategy has a major influence on its
structure. Their structures can be grouped into
three general categories :
1. A functional structure
• In which each manager is responsible for a
specified function such as production or
marketing.
2. A business unit structure
• In which business unit managers are responsible
for most the activities of their particular unit,
and the business unit functions as a semi
independent part of the company
3. A matrix structure
• In which functional units have dual
responsibilities
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Types of Organizations
A. Functional Organizations
CEO
Staff
Manufacturing
Marketing
Manager
Manager
Staff
Staff
Manager
Manager
Manager
Manager
Manager
Manager
Plant 1
Plant 2
Plant 3
Region A
Region B
Region C
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The Types of Organizations
Disadvantages of a functional
structure
1. There is no unambiguous way of
determining the effectiveness of
the separate functional
managers
2. A dispute between managers of
different functions can be
resolved only at the top, even
though it may have originated at
a much lower organizational
level.
3. Functional structures are
inadequate for a firm with
diversified products and markets
The important
advantage of a
functional
structure is
efficiency
28
Types of Organizations
B. Business Unit Organizations
CEO
Staff
Manager
Manager
Business Unit X
Business Unit Y
Staff
Plant Manager
Staff
Marketing
Manager
Plant Manager
Manager
Business Unit Z
Staff
Marketing
Manager
Plant Manager
Marketing
Manager
A business unit, also called a division, is responsible for
all the functions involved in producing and marketing a
specified product line.
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The Types of Organizations
Advantages of a business unit
organizations :
1. Provides a training ground in
general management. The
business unit manager should
demonstrate the same
entrepreneurial spirit that
characterizes the CEO of an
independent company.
2. Its manager may make sounder
production and marketing
decisions than headquarters
might, and unit as a whole can
react to new threats or
opportunities more quickly
Disadvantage of a business
unit organizations are :
1. Each business unit staff
may duplicate some
work that in a
functional organization
is done at
headquarters.
2. The disputes between
functional specialists in
a functional
organization may be
replaced by disputes
between business units
in a business unit
organization.
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Types of Organizations
C. Matrix Organizations
CEO
Staff
Function A
Manager
Project X
Manager
Function B
Manager
Project Y
Manager
Function C
Manager
Project Z
Manager
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The Types of Organizations
Implications for
System Design
Once management
has decided that a
given structure is
best, all things
considered, then
the system designer
must take that
structure as given
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Responsibility Centers
Nature of Responsibility Centers
• A responsibility center exists to accomplish
one or more purposes, these purposes are its
objectives.
• The objectives of responsibility centers are
to help implement the strategies.
• The goods and services produced by a
responsibility centers may be furnished
either to another responsibility centers or to
the outside marketplace
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Responsibility Centers
The Core Operation of Responsibility
Center
Input
Resources used,
measured by cost
Output
Work
Capital
Goods or
services
The products produced by a responsibility center may
be furnished either to another responsibility center
(as input) or to the outside marketplace (as output)
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Responsibility Centers
Types of Responsibility Centers
Engineered Expense Centers
Optimal relationship
can be establish
Inputs
Work
(Dollar)
Examples
Outputs Manufacturing
function
(Physical)
35
Responsibility Centers
Types of Responsibility Centers
Discretionary Expense Centers
Optimal relationship…….
……..
..
..
cannot
be
establish
.
.
..
.
..
Outputs
Inputs
Work
(Dollar)
Examples
(Physical)
R&D
function
36
Responsibility Centers
Types of Responsibility Centers
Revenue Centers
Input do not related…….
……..
..
..
to
outputs
.
.
..
.
..
Outputs
Inputs
Work
(Dollar only for
costs directly incurred
Examples
(Dollar revenue)
Marketing
function
37
Responsibility Centers
Types of Responsibility Centers
Profit Centers
..……..
..
..
Input are related …….
..
to outputs
.
..
Outputs
Inputs
Work
(Dollar costs)
Examples
(Dollar profits)
Business
unit
38
Responsibility Centers
Types of Responsibility Centers
Investment Centers
Profits are related …….
……..
..
..
to
capital
employed
.
.
..
.
Inputs
(Dollar costs)
Examples
..
Capital
Employed
Outputs
(Dollar profits)
Business
unit
39
Transfer Pricing Methods
Transfer Price is to refer to the
amount used in accounting for
any transfer of goods and
services between
responsibility centers.
40
Transfer Pricing Methods
Fundamental Principles
The fundamental principle is that the transfer price should
be similar to the price that would be charged if the
product were sold to outside customers or purchased
from outside vendors
When profit centers of a company buy products from, and
sell to, one another, two decisions must be made
periodically for each product :
1. Should the company produce the product inside the
company or purchase it from an outside vendor ?. This
is the sourcing decision.
2. If produced inside, at what price should the product be
transferred between profit centers ?. This is the
transfer price decision.
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Transfer Pricing Methods
Upstream Fixed Costs and
Profits
a. Agreement Among Business
Units
Some companies establish a formal
mechanism whereby representatives
from the buying and selling units meet
periodically to decide on outside
selling prices and the sharing of
profits for products with significant
upstream fixed costs and profit
42
Transfer Pricing Methods
Upstream Fixed Costs and
Profits
b. Two Step Pricing
Establish a transfer price that
includes two charges :
• For each unit sold, a charge is
made that is equal to the standard
variable cost of production.
• A periodic charge is made that is
equal to the fixed costs associated
with the facilities reserved for the
buying unit.
43
Transfer Pricing Methods
Business Unit X (manufacturer)
Product A
Expected monthly sales to business unit Y
Variable cost per unit
Monthly fixed costs assigned to product
Investment in working capital and facilities
Competitive return on investment per year
5,000 units
$ 5
20,000
1,200,000
10 %
One way to transfer product A to business unit Y is at price
per unit, calculated as follows :
Variable cost per unit
Plus fixed cost per unit
Pus profit per unit
Transfer price per unit
Transfer price for product A
$
5
$ 4
$
2
$ 11
44
Transfer Pricing Methods
Correction by two step pricing :
Transfer price for product “A” $ 5 + $ 20,000/month
fixed cost + $ 10,000 per month for profit :
$ 1,200,000 x 0.10 = 10,000
12
Unit “Y” will pay the variable cost of
(5,000 unit x $ 5/unit)
:
$ 25,000
Plus fixed cost and profit :
$ 30,000
Total
$ 55,000
Unit “X” will pay $ 11/unit (5.000 unit x $ 11 = $ 55,000)
If transfers in another month were 4,000 units, Unit “Y”
would pay $ 50,000 [(4,000 unit x $ %) + $ 30,000],
under two step pricing, compared with $ 44,000 ($ 11 x
4,000 unit).
The difference is penalty for not using a portion of unit X’s
capacity that it has reserved.
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Transfer Pricing Methods
Upstream Fixed Costs and
Profits
c. Profit Sharing
The system operates as follows :
• The product is transferred to the
marketing unit at standard variable cost
• After the product is sold, the business
units share the contribution earned,
which is the selling price minus the
variable manufacturing and marketing
costs.
46
Transfer Pricing Methods
Upstream Fixed Costs
and Profits
d. Two Sets of Prices
The manufacturing unit’s
revenue is credited at the
outside sales price and the
buying unit is charged the total
standard costs. The difference
is charged to a headquarters
account and eliminated when
the business unit statements
are consolidated.