IBS - MCS - 2013

7/27/2019 IBS - MCS - 2013

1/79

INTODUCTION TO

MANAGEMENT CONTROL

SYSTEM

**************

7/27/2019 IBS - MCS - 2013

2/79

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.

A Management control system assist the

management in

formulating strategies,

coordinating the activities of the organization, and

steering those activities toward the achievement

of the overall goals and objectives

7/27/2019 IBS - MCS - 2013

3/79

INTRODUCTION

Role of ManagementPLAN, ORGANISE,

INTEGRATE & INTERRELATEorganizational activities to achieve objectives.

ControlPoints - To check whether Organizationis on right path

They compare desired state with actual state.

System - set of interrelated communicationstructure of gathering and monitoring thesecontrol points to achieve organizationalobjectives

7/27/2019 IBS - MCS - 2013

4/79

Controls

Control helps in guiding employees inaccomplishments of organizational goals

But increased control reduces creativity and

entrepreneurship

Control process at three levels

Strategic

Management

Operational

These levels are not mutually exclusive

7/27/2019 IBS - MCS - 2013

5/79

Strategic Control

Deals with

Domain definition

Direction setting

Issues that impact organizations long term

survival

Organizations objectives and

implementation & monitoring progress

7/27/2019 IBS - MCS - 2013

6/79

Controls

Management Control

Deals with effective resource utilization

State of competitiveness of the unit

Translation of corporate goals into business unit

objectives Operational Control

Concerned with efficiency issues

At specific functional / departmental levels

Outcomes are tangible and easily measurable Benchmarks are known and well-defined

Time horizon is short

7/27/2019 IBS - MCS - 2013

7/79

CONTROL SYSTEM

Control has elements

Detector / Sensor

Assessor Effectors

A Communication Network

System is a prescribed, usually repetitive

way of carrying out an activity or set ofactivities.

But MCS are complex and judgmental.

7/27/2019 IBS - MCS - 2013

8/79

7/27/2019 IBS - MCS - 2013

9/79

Management Control System MCS is a set of interrelated communication structure

that facilitates the processing of information for thepurpose assisting managers in coordinating theparts and attaining the purpose of an organizationon a continuous basis

MCS is a collection of controls to address followingsituations

Employees are not clear about expectations fromthem

Employees are clear about the expectations butthey are not motivated

They are clear and motivated but goals are notattained

7/27/2019 IBS - MCS - 2013

10/79

7/27/2019 IBS - MCS - 2013

11/79

Objectives of Management Control

Answer contextual issues that impact success

and survival of the organization Detect environmental variables that can

significantly affect organization

Effective resource allocation

Sustaining competitive advantage Transforming corporate goals into business

objectives

Maintaining transparency and clarity in financial

reporting Conformance with relevant regulatory

requirements

Operational efficiency

7/27/2019 IBS - MCS - 2013

12/79

Classification of Objectives

Effectiveness and Efficiency of businessoperations Effectiveness is perceived when the purpose is

accomplished

Efficiency is achieving purpose with minimumresources

Reliability of Financial Reporting Should bring out true and fair picture of all financial

transactions

These reports should be understandable and relevant

Compliance with applicable regulatory and legalframework

7/27/2019 IBS - MCS - 2013

13/79

Contextual Factors Influencing

Management Control

Nature and Purpose of the Organization

Profit or Non-profit organization

In Non-profit organization, Donors play

important role in setting expectations

In Non-profit organization, surplus is utilized

for the benefits of the society

In Non-profit organization, rewards areintangible

7/27/2019 IBS - MCS - 2013

14/79


Management Control

Organization Structure and Size

Centralization/ Decentralization and span of control

are important for consideration of MCS

Large organizations call for higher degree ofdecentralization

Large organizations tend to have more influence over

the environment

In large-sized organizations, it is necessary todevelop controls such as rules, documentation of the

information, creation of specialized role of functions,

and a higher degree of decentralization

7/27/2019 IBS - MCS - 2013

15/79

7/27/2019 IBS - MCS - 2013

16/79

7/27/2019 IBS - MCS - 2013

17/79


Management Control

Competitive Strategy

Three generic strategies to gain competitivesuccess are Overall cost leadership,differentiation and focus

For overall cost leadership, management controlsystems are designed to achieve its objective ofefficiency

For differentiation, management control systems

will work toward building value into the product For Focus, management control systems may be

used to ensure the right pricing policy for theproduct offerings

7/27/2019 IBS - MCS - 2013

18/79

7/27/2019 IBS - MCS - 2013

19/79

7/27/2019 IBS - MCS - 2013

20/79

National culture

Management Control System of any organization isinfluenced by the national culture of the country.

Managers working in multinational corporations should

be aware of the culture that is prevalent in the country.

Four dimensions on which culture varies acrosscountries are power distance, Uncertainty avoidance,

individualism/collectivism and Masculinity/feminity

7/27/2019 IBS - MCS - 2013

21/79

Types of MCS

Two Broad Areas Formal laid out in writing by management

also referred to as bureaucratic controls

Entails the delegation of tasks in a structured

manner

Policies, standard operating procedures (SOPs),

budgetary controls, financial reporting, audit,

performance measurement systems, and

incentive systems are examples of formal

controls

7/27/2019 IBS - MCS - 2013

22/79

7/27/2019 IBS - MCS - 2013

23/79

Types of MCS

Informal Control Arise out of employees behavior Informal controls are not about to follow any fixed

rules and regulations

Interpersonal relationships or peer interactionsamong individuals and groups at various levels

are encouraged

Co-exist with formal controls in a controlled

organization and the effect of the one is notindependent of the other.

7/27/2019 IBS - MCS - 2013

24/79

Types of MCS

Classified in three types

Self Control Can be beneficial if the organizations

goals are in congruence with those of individuals

Social Control Organization establishes certainstandards monitors and takes action when deviations

occur

Arise out of mutual commitments towards common

goals

Cultural Controls can be realized social interaction,

rituals relating to the organization

7/27/2019 IBS - MCS - 2013

25/79

Subsystems and components of MCS

Formal Control Process

Formal Planning Process

Strategic planning necessary to assist inprojects.

Helps to decide key objectives and goals &strategies

Operations Planning undertakes activitieswhich are short term in nature

Formal Reporting ProcessTo assess the progress and decide on nextset of actions

7/27/2019 IBS - MCS - 2013

26/79

7/27/2019 IBS - MCS - 2013

27/79

7/27/2019 IBS - MCS - 2013

28/79

DESIGNING THE CONTROL

PROCESS AND MANAGEMENT

CONTROL

***************

7/27/2019 IBS - MCS - 2013

29/79

Approaches to MCS

Contingency Approach

Cybernetic Approach

Management Control Approach

7/27/2019 IBS - MCS - 2013

30/79

7/27/2019 IBS - MCS - 2013

31/79

7/27/2019 IBS - MCS - 2013

32/79

Contingency Theory

Fisher identified five contingent control

variables

Uncertainty

Technology and Interdependence

Industry, firm and unit variables

Competitive strategy

Mission and observability factors

7/27/2019 IBS - MCS - 2013

33/79

Cybernetic Approach to MCS

Word Cybernetic is derived from the Greekword Kybernetics meaning Steersman.

According to definition by Norbert Weiner

who started the term Cybernetics,It is study of the entire field of control &

communication theory whether in machine

or in animal.

It deals with self-regulating principles in a

variety of systems

7/27/2019 IBS - MCS - 2013

34/79

Characteristics of Cybernetic System

Complex structure Mutual interaction

Complementary

Evolvability System tends to evolve and growin opportunistic manner rather than beingdesigned and planned in optimal manner.

Constructivity System increases in size &complexity on its own through evolution

7/27/2019 IBS - MCS - 2013

35/79

7/27/2019 IBS - MCS - 2013

36/79

Cybernetic Paradigm Goal-oriented controls reflect cybernetic paradigm.

Paradigm begins with the assumption that decisions are

made because of interaction between the decision-maker and the external environment.

Manager scans environment & collects data as sensor.

Based on data manager builds up certain assumptionsabout external environment & present performance of

the unit.These are termed as Factual Premises.

They can be formed on the basis of perception.

Factual premises are compared with organizationalgoals & performance measures (Value Premises).

Action is taken to bridge the gap. Alternative courses of action available are Behavior

Choice.

The best action is implemented.

After implementation, get required feedback to determinethe effect of action.

7/27/2019 IBS - MCS - 2013

37/79

7/27/2019 IBS - MCS - 2013

38/79

Management Control

Communicating information

Evaluating information

Deciding what, if any, action should be taken

Influencing people to change their behavior

Management Control is not automatic; it requirescoordination among individuals.

The connection from perceiving the need for action todetermining the action required to obtain the desired

result may not be clear. Much management control is Self-control i. e. it is not

by external regulating device

7/27/2019 IBS - MCS - 2013

39/79

Control ProcessSteps in basic Control Process

Determining areas to control It is expensive to control all areas

Employees may resent if all activities are controlled

Organizational goals and objectives form the basis for decidingcontrol area

Establish Standards Often incorporated into goals when they are established

Sometimes they are required to be developed

Should be set to achieve desired quality & quantity within aspecific cost and time frame

Helps employees to perform effectively Helps in identifying job difficulties, remove them or take

appropriate actions

To evolve standards and make them more effective participativeapproach may be followed

7/27/2019 IBS - MCS - 2013

40/79

Control Process

Measure Performance

Decide how to measure and how frequently to measure Compare performance with standard

Reward performance and / or Take corrective action

Recognize and acknowledge good or positive performance

It helps sustain the performance and encourage furtherimprovement

For negative performance

Take corrective action

Sometimes goals may require modification

Clarify duties and responsibilities of sub-ordinates Explain the job in detail

Train, recruit or remove inefficient sub-ordinates

Implement corrective actions properly

7/27/2019 IBS - MCS - 2013

41/79

7/27/2019 IBS - MCS - 2013

42/79

7/27/2019 IBS - MCS - 2013

43/79

7/27/2019 IBS - MCS - 2013

44/79

Choice of Controls Action Control - Works on standard sets of procedures

and policies

Advantages are Directly linked to task being performed

Direct managerial attention to actions being taken

Uniform application in the organization, so aids in

coordination Being standardized procedures, key persons leaving

the organization does not affect CS

These controls are means of attaining efficiency

Disadvantages are Useful only for highly routine jobs

Do not promote creativity, resulting in more employeeturn-over

Because of rigidity of rules, difficulty in adapting tochanging environment

7/27/2019 IBS - MCS - 2013

45/79

Choice of Controls

Result Controls

They inform employee what is expected & toachieve and what they should do

They control behavior of employees and areeffective in addressing motivational problems

First step is to define the dimensions on whichcontrols have to be set

Measure performance based on these

dimensions Final step is setting performance targets and

providing adequate incentives

7/27/2019 IBS - MCS - 2013

46/79

7/27/2019 IBS - MCS - 2013

47/79

7/27/2019 IBS - MCS - 2013

48/79

External Control

Advantages

Motivation because of reward system

Because of high level of control no manipulation bysub-ordinates

Disadvantages

No commitment to organizational goals

Concentration only on one aspect and balance is

ignored Only positive outcomes are informed; negative are

hidden

Internal Control

7/27/2019 IBS - MCS - 2013

49/79

Internal Control Works on the premise that sub-ordinates are motivated

and committed to organization if they are involved in

decision-making process Style assumes that employees will experience a senseof achievement, recognition & self-esteem if they areinvolved in decision-making process

Important Strategies for implementation

Participative Management; more emphasis is on howgoals are set, rather than achieving the goals

Problems are solve jointly; rather than blamingparticular individual

Work in positive direction to analyze problem at anearly stage

Rewards are on overall performance

Always look forward for improvement in performancein future

7/27/2019 IBS - MCS - 2013

50/79

Internal Control Advantages

Induce high level of commitment & motivation Because of participative management employees are

more focused on achieving the targets

Encourages accountability towards work

Open work atmosphere

Disadvantages

Loose control

Information is for problem identification and corrective

action but not for performance evaluation

Employees who are not willing to participate, may not

perform well

7/27/2019 IBS - MCS - 2013

51/79

Mixed Control

Both Internal & External Controls have their own

advantages & disadvantages

Mixed Control is evolved balancing both types. The

important issues are

Congruency between control & managerial style

Analyzing the climate, structure & reward system of

the organization they determine employee behavior

Reliability of job performance measure particularly

important for External control system

Individual differences among sub-ordinates like

participative nature

7/27/2019 IBS - MCS - 2013

52/79

Designing Management ControlsPoints to care

Establishing controls should be a constructive process

Should help enhancing the performance

Standards should be challenging but attainable

Objectives should be measurable for the purpose ofevaluation

There should not be too many objectives

There should not be too much focus on easilymeasurable and short term variables

Responsibility for results should be with single individual

7/27/2019 IBS - MCS - 2013

53/79

Designing Management Controls

It is advisable to take samples of the variables to be

controlled

Acceptable range of variation should be developed for

each variable

Exceptions to desired results should be reported

Severity of the problem should be determined by

analyzing the causes of the problem

A system of control requires judgment and insight

7/27/2019 IBS - MCS - 2013

54/79

Control Process Hierarchy

Control Process involves relationship betweenSuperior and subordinates

Superior decides on target for subordinates

Negotiates the targets to acceptable level

Ensure that goals of subordinates and superiorsare in congruence with organizations goals

Track the performance at periodic interval

If performance is unsatisfactory, find reasons

Device plan of correction and implement Set targets and course of action for next period

7/27/2019 IBS - MCS - 2013

55/79

I t l C i ti

7/27/2019 IBS - MCS - 2013

56/79

Internal Communication

Meetings, serve not only as control activities but

also as mechanisms of internal communication

Consistency/inconsistency of managements

behavior with its formal communications(oral/written) is an important component of internal

communication to employees

Employees can help in internal communication by

spreading the organizations culture Orientation

and socialization of and shared values to new as

well as existing employees

7/27/2019 IBS - MCS - 2013

57/79

External Communication

External communication includes communication

with the suppliers, customers, external auditors,

regulators, etc.

Helpful to the organization in various ways such as

customers providing feedback regarding the quality

of products and services, and external auditors and

regulators providing information regarding theeffectiveness of the internal controls of the

organization

Report Format

7/27/2019 IBS - MCS - 2013

58/79

58

Report Format

Refers to the layout of the information.

Information presented is a function of three factors:

Information to be provided

Questions to be answered

Form of presentation

I f i I f i b id d i i

7/27/2019 IBS - MCS - 2013

59/79

Information to

be

provided

Information to be provided in a report consists

of a title and is described by the number and

types of the variables.

Variables can be categorical, ordinal andquantitative.

Question to be

answered

Question is generally the decision-making

problem for which information is required.

Answer to the question depends on thecomplexity of the question.

Form of

presentation

Refers to the visual representation of the

information.

Information can be presented in the text form,

tabular form, graphical form or combination of

any of two or all three.

Presentation also depends on the number of

different variables.

Internal Performance Reports

7/27/2019 IBS - MCS - 2013

60/79

Internal Performance Reports

Measures the performance of the organization in a periodic

form from time to time.

Not disclosed to the public like the corporate annual

reports.

Used to rectify any deviation from the planned

performance.

Helps in exerting control on the performance of the

organization on a constant basis.

Types of Internal Performance Reports

7/27/2019 IBS - MCS - 2013

61/79

61

Types of Internal Performance Reports

Performance appraisal report.

Progress reports of the projects.

Trend charts of the sales.

Variance reports

Problem analysis sheets.

Financial schedules

Inventory status reports

Exception reports in sales.

Corporate Annual Report (CAR)

7/27/2019 IBS - MCS - 2013

62/79

Corporate Annual Report (CAR)

Key public document prepared by organizations to fulfill

corporate reporting requirements.

Company informs the public about its financial

performance in a particular financial year.

Format of CAR

7/27/2019 IBS - MCS - 2013

63/79

Format of CAR

Format of representation is specific for specific countries.

Consists of two sections-first includes non-statutory

matters and latter section consists of Financial statements.

Contents of the reports are partly Voluntary and Partly

mandatory.

Information to be disclosed in CAR

7/27/2019 IBS - MCS - 2013

64/79

Information to be disclosed in CARInformation Item Relative

Importance

Information regarding assets, revenue, expenses and profit. Essential

Major elements of cost: Marketing, Salaries, restructuring,

asset

maintenance

Essential

Capitalized interest Very important

Capital expenditure (Actual vs. Planned) Very important

Major contractual relationships Very important

Monetary and Non-monetary risk disclosure Very important

All performance measures: financial, Pricing, efficiency,

market

Very important

Discussion on major factors influencing next year Intermediate

Business Ethics and

7/27/2019 IBS - MCS - 2013

65/79

Business Ethics and

Management Control

Ethics is a science of Moral, Moral principles &

recognized rules of conduct

Philosophers thought Ethics as System of moralprinciples and methods for applying them

Business Ethics concerns itself with what is right

and wrong at the workplace

Ethi l B h i i O i ti

7/27/2019 IBS - MCS - 2013

66/79

Ethical Behavior in Organization

Ethical Behavior in Organization depends on

Ethical Philosophy and Ethical Decision Ideology

Individual factors

Organizational Factors

External Environmental Factors

Ethical philosophy

Utilitarianism If action does greatest good to

greatest number of people, then it is ethical

Individual Rights Deals with safeguarding the rightsof individual

Justice Requires that rules of organization are

enforced fairly and impartially

7/27/2019 IBS - MCS - 2013

67/79


Ethical Decision Ideology Concerned with how differentindividuals apply their ethical philosophies to decision

making.

Can be classified on two dimensions

Idealism Belief that behaving ethically ensurespositive results

Relativism Belief that Moral value depends on

circumstances

Absolutist High Idealism & Low Relativism Exceptionist Low Idealism & Low Relativism

Situationist High Idealism & High Relativism

Subjectivist Low Idealism & High Relativism


7/27/2019 IBS - MCS - 2013

68/79


Individual Factors

Individual's value system Age

Ego

Organizational Factors

Organizational Culture and Structure Performance Measurement System

Reward System

Position-related factors

External Environmental factors Political and Economical Factors

Social Factors

Management Control and Ethical Issues

7/27/2019 IBS - MCS - 2013

69/79

Management Control and Ethical Issues

Budgetary slack is an issue applicable across allfunctions

Managing Earnings So that reported financialperformance different than what is actual

Ethical Issues in Sales Salesperson is representative of an organization

Samples and gift adjustment

Higher discounts

Ethical Issues in Operations Quality

Productivity

Ethical Issues in HRM Lack of Job Security Excessive Scrutiny and Control

Discrimination

Qualitative measures of performance appraisal

7/27/2019 IBS - MCS - 2013

70/79

Regulating Ethical Conduct

Code of Ethics gives details about expectedbehavior

Ethics Committee responsible for reporting totop management on the ethical aspects of the

organization

Ethics training for employees

Corporate governance and Ethics

Whistle blowing Act of an employee to informhigher authorities or public about conduct ofunethical practices

7/27/2019 IBS - MCS - 2013

71/79

Corporate Culture

Corporate Culture

An important asset of organization

Control system should fit in existing culture

Can be done by

stressing on the values management wants to

follow and

rewarding the employees for achieving goalsbased on these values

Total Quality Culture

7/27/2019 IBS - MCS - 2013

72/79

Total Quality Culture

Due to competition , it is essential to concentrate

on customer satisfaction TQM ensures that organization attains required

level of efficiency targets as well as satisfy

customers

TQM emphasizes customer satisfaction and

continual improvement in products and services

TQM requires empowerment and active

involvement of all staff

TQM follows cybernetic paradigm in solving

problems

T f O i ti l St t

7/27/2019 IBS - MCS - 2013

73/79

Types of Organizational Structure

Functional People are grouped based on their expertise and

skills

Vertical hierarchy is stronger

Calls for centralization

Cannot adapt easily to environmental changes Divisional Also known as Product Structure or

Strategic Business Unit (SBU) Based on Product range/specific market/geographical

location, divisions are formed

Higher adaptability to change Higher decentralization and hence quick response

Possible negative impact of action of one division onother

Organizational Structure

7/27/2019 IBS - MCS - 2013

74/79

Organizational Structure

Organization can be Centralized or Decentralizes

Decentralization means delegation of authorityto the lowest feasible level of decision-making

Growth in size of organization requiresDecentralization

Centralization pertains to geographicconcentration or concentration of specializedactivities

Centralization restricts the delegation of

decision-making authority

Decentralization

7/27/2019 IBS - MCS - 2013

75/79

Decentralization

Advantages of decentralization

Information processing becomes simpler asanalysis of trade-offs between cost etc. is doneby lower levels of management

Closer control & supervision of sub-ordinates

Being decision-maker, managers are motivatedto perform better

Helps in evaluation of performance of various

units Managers get right environment and autonomy

to get trained in making right decisions


7/27/2019 IBS - MCS - 2013

76/79


Matrix Integrates desired features of Functional andDivisional structure

Along with hierarchy, there is some form of lateralauthority, influence or communication

Employee reports to two supervisors simultaneously

Managers share the resources Promotes interaction between functions and so useful

where such interactions are necessary or desirable

Lot of time is consumed in conflict resolution

Matrix organization has advantage of motivation andcoordination

7/27/2019 IBS - MCS - 2013

77/79


Horizontal Emphasis is on teams which directthemselves

Team members are multi-skilled

Employee empowerment and customer-centricapproach are main characteristics

Adapts easily to changing environment Employee requires great deal of training

Functional specialty is hampered

Hybrid also called as flexible or Adaptive structure

The organization adapts itself to rapidly changingenvironment, by fast decision-making and realigningthe resources rapidly


7/27/2019 IBS - MCS - 2013

78/79


Factors creating need for Hybrid / Adaptive Organization

Environmental uncertainty leads to more informal

organizations

Environmental complexity may lead todecentralization in focused market segment

Environmental diversity leading segmentation; may

result into development of business unit Environmental hostility may lead to centralization of

decision-making

Adaptive organization requires High level of awareness,Skill and Integrity within the work group

7/27/2019 IBS - MCS - 2013

79/79

Evaluation of Organizational Design

Each design must be evaluated on the basis of efficiency andcoordination

It should operate with minimum cost per unit of output

Matrix organization helps avoid problems in coordination and

integration

But the incremental cost of matrix organization is more than that of afunctional organization

There are certain organizational problems in the implementation of

matrix structure

Difference in orientation between program manager and

functional manager

Diffuse responsibility

Program personnel in temporary assignments

Documents

IBS - MCS - 2013