Chapter 1Introduction

• Meaning of Management Control: process by which managers influence other members of the organization to implement the organizational strategies. It involves the influences on the behavior, operations, performance, output, quality, physical resources and processes.

Management Control Systems• Management Control Systems (MCS) is a system which

gathers and uses information to evaluate the performance of different organizational resources like human, physical, financial and also the organization as a whole considering the organizational strategies. Finally, MCS influences the behavior of organizational resources to implement organizational strategies. MCS might be formal or informal. The term ‘management control’ was given of its current connotations by Robert N. Anthony (Otley, 1994).

Elements of Management Control

• Goals• Strategic planning • Budgeting • Resource allocation • Performance measurement, evaluation, and

reward• Responsibility centre allocation • Transfer pricing

Meaning and characteristics of control system

• A control system is a mechanism that monitors, measures, and evaluates the functions and performance of ongoing process and develops means to ensure the efficient and smooth functioning of the system. It involves the following elements:

• A detector or sensor • An assessor • An effector • A communication network

Boundaries of Management Control

• Activities – Planning – Coordinating – Communicating – Deciding what, if any, action should be taken – Influencing people

• Goal congruence • Tool for Implementing Strategy

• Financial and nonfinancial emphasis • Strategy formulation • Task control

The Impact of Internet on MCS

The Internet provides the following major benefits in management control:

• Instant access: on the Web, huge amounts of data can be sent to anyone, anywhere in the world in a matter of seconds.

• Multi-targeted communication: the Internet has a vastly expanded one-to-many reach; one Web entry can reach millions of people.

• Costless communication: A business that uses telephone operators to interface with customers must pay for telephone personnel salaries, toll-free call, and bricks and mortars to support the customer service functions. Communication with customers via the Internet avoids all these costs.

• Ability to display images: Unlike the telephone, the Web enables consumers to see the products being offered for sale.

• Shifting power and the control to the individual: Perhaps the most dramatic benefits of the Web is that the individual is “virtually king”. Consumers are in control and can use the Web 24 hours a day at their own conveniences without being interrupted or unduly influence by sales representatives or telemarketers.

Limitations of the uses of Internet facilities

The Internet facilitates coordination and control through the efficient and effective processing of information, but the Internet cannot substitute for the fundamental processes that are involved in management control. This is because implementing management strategies through management controls is essentially a social process thus cannot be fully automated. The availability of electronic access to database contributes little to the judgment calls required to design and operate an optimal control system. Thus judgments involve:

• Understanding the relative importance of various, and sometime competing, goals that drive individuals to act (e.g., personal achievement versus collective achievement, value creation for customers and shareholders rather than for oneself).

• Aligning various individual goals with those of the organization. • Developing specific objectives by which business units, functional areas, and

individual departments will be judged.

• Communicating strategy and specific performance objectives throughout the organization.

• Determining the key variables to be measured in assessing an individual’s contribution to strategic goals.

• Evaluating actual performance relative to the standard and making inference as to how well the manager has performed.

• Conducting productive performance meetings• Designing the right reward structure• Influencing individuals to change their behavior.• In sum, the Internet has vastly improved information processing; the fundamental

elements of management control—was information to collect and how to use it—are essentially behavioral in nature and thus not amenable to a formula approach.

Classification of MCS

Experts have classified management controls based on

• the object of control, • the extent of formalization of control, and • the time of implementation of controls.

Based on the object of control

management controls have been classified into• action controls• results controls• personnel/cultural controls

• action controls: Action controls are aimed directly at the actions which take place at different levels of an organization. These can be further classified into behavioral restrictions, pre-action appraisal, and action accountability.

• results controls: Results controls focus on the consequences of actions taken rather than on the actions themselves.

• Personnel/cultural controls influence the people and the organizational culture, with the expectation that the right people in the right culture will perform the right actions that will ultimately yield the desired results.

Extent of Formalization

Management controls can be classified into • formal controls and• informal controls,

Based on the time of implementation

Controls can be classified into: • open loop controls and • closed loop controls. – feedback (follow-up) control and – feedforward (anticipatory) control.

contextual factors influence the design and use of management control

systems.

• nature and purpose of the organization; • organization structure and size; • national culture; • corporate strategy and organizational diversification; • competitive strategy;• managerial styles; • organizational slack; • stakeholder expectations and controls; and • organizational life cycle.

Nature and Purpose of the Organization

• The nature and purpose of an organization, that is, whether it is a for-profit or a non-profit organization has a major impact on management control systems. The aspects in which non-profit organizations differ from for profit organizations include measurement of the profitability and utilization of profits.

Organization Structure

• The organization structure establishes the formal pattern of job roles and responsibilities that individual employees and groups have to undertake, and the hierarchical structure and reporting relationships.

Size of the Organization

• The size of the organization influences the nature of controls such as rules, documentation of information, creation of specialized role functions, and a higher degree of decentralization.

National Culture• The management control system of any organization is

influenced by the national culture of the country in which it operates. Geert Hofstede identified four dimensions along which national cultures vary. The dimensions are: – power distance (acceptance of hierarchical levels); – uncertainty avoidance (avoiding risk and ambiguity); – individualism/collectivism (people's preference to work as

individuals or in a team); and– masculinity (competitive spirit, independent thinking,

assertiveness)/femininity (interdependence, nurturing nature).

Corporate Strategy and Organizational Diversification

• To achieve goal congruence between the goals of the organization and those of individual strategic business units, it is necessary that the management control system has a good fit with the corporate strategy. Management controls also differ depending on the type of diversification - related or unrelated.

Competitive Strategy

• The choice of generic competitive strategy - overall cost leadership, differentiation, or focus - also influences the management control system.

Managerial styles

• Managerial styles (autocratic or democratic, permissive or directive) play an important role in influencing the behavior of the employees in an organization and thus the design and implementation of control systems.

Organizational Slack

• Organizational slack refers to that capacity in an organization which is in surplus of what is required for normal operations. It may be created voluntarily or involuntarily and may be good or bad for the organization.

Stakeholder Expectations and Controls

Stakeholders (investors, employees and managers, suppliers, customers, community, government, etc.) are defined as individuals or groups of people who are impacted by or who impact the activities and operations of the organization. It is necessary for organizations to consider what the stakeholders want while designing their management control systems.