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Dr.P.Madhusoodanan Pillai
S3 MBA
Management Control Systems
Unit 1
1
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MCS- University Syllabi
Unit ICharacteristics of Management Control System - Evolution of
control systems in an organization - Relating system toorganizational objectives - Strategic Planning, Management
Control and Operational Control - Goal Congruence -
Cybernetic Paradigm of Grissinger - Functions of the
Controller
2
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Management Control System- MCS
MCS is the process of evaluating, monitoring
and controlling the various sub-units of the
organization, so that, there is effective andefficient allocation and utilization of resources
in achieving the predetermined goals
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Meaning of Management Control
Management control is a systematic effort to set performance
standards with planning objectives to design information feedbackwith these pre determined standards and to measure their
significance and to take any action required to assure that all
corporate resources are being used in the most effective and
efficient way possible in achieving corporate objectives- Mockler
Management control involves extensive measurement and it is
therefore related to and requires contributions from accounting
especially management accounting. Second, it involves resourceallocation decisions and is therefore related to and requires
contribution from economics especially managerial economics.
Third, it involves communication, and motivation which means it
is related to and must draw contributions from social psychology
especially organizational behavior
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Definition of Management Control Systems A management control system (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 theorganizational strategies. Finally, MCS influences the behavior of organizational
resources to implement organizational strategies. MCS might be formal or informal.
Robert N. Anthony (2007) defined Management Control as the process by which
managers influence other members of the organization to implement the
organizations strategies. Management control systems are tools to aidmanagement for steering an organization toward its strategic objectives and
competitive advantage. Management controls are only one of the tools which
managers use in implementing desired strategies. However strategies get
implemented through management controls, organizational structure, human
resources management and culture.
[Anthony & Young (1999) showed management control system as a black box. The
term black box is used to describe an operation whose exact nature cannot be
observed. MCS involves the behavior of managers and these behaviors cannot be
expressed by equations. Anthony & Young (1999) showed that management
accounting has three major subdivisions: full cost accounting, differential
accounting and management control or responsibility accounting.
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According to Horngren et al. (2005), management control
system is an integrated technique for collecting and using
information to motivate employee behavior and to evaluate
performance. Chenhall (2003) mentioned that the terms Management
Accounting (MA), Management Accounting Systems (MAS),
management control systems (MCS), and organizational
controls (OC) are sometimes used interchangeably. In this case,MA refers to a collection of practices such as budgeting or
product costing. But MAS refers to the systematic use of MA to
achieve some goal and MCS is a broader term that
encompasses MAS and also includes other controls such as
personal or clan controls. Finally OC is sometimes used to refer
to controls built into activities and processes such as statistical
quality control, just-in-time management.
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According to Simons (1995), Management Control
Systems are the formal, information-based routines
and procedures managers use to maintain or alter
patterns in organizational activities.
Management controls, in the broadest sense, include
the plan of organization, methods and procedures
adopted by management to ensure that its goals aremet. Management controls include processes for
planning, organizing, directing, and controlling
program operations. A subset of management
controls are the internal controls used to assure thatthere is prevention or timely detection of
unauthorized acquisition, use, or disposition of the
entity's assets.
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Characteristics of Control System inOrganization
Involvement of people Information about the actual state of the
organization is compiled by people.
It is compared by people. With the desired state decided by people.
For significant difference, a course of action isrecommended by people
Action taken by people
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The management decides the desired state orstandards against which performance is
compared. It decides what the organization plans to
achieve in a given time framework which isknown as Planning Process.
Actual Performance is compared to PlannedPerformance in control, so planning andcontrolling are interlinked and are known as
P&C systems
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Information Systems for Managerial Control and Decision Making
Corporate
DatabasesInformation for decision
Making
Information for control
MIS
DSS
EIS
Feedback
Control Systems
Mgt Control Systems
Balanced Scorecard
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Objectives of MCS
Relationship with organizational goals
Identification of critical processes that affect goals
Identify key success factors
Identify responsibilities
Accountability
Financial Vs non financial performance
Improvement of collective decision making
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Why Management Control system fail??
Most control systems are past action oriented
Precision Leave little margin for error
Controls do not change with missions, strategies,objectives and plan
Behavioral and human side of the control systemoverlooked
Standards are not modified as per the situation at hand
Importance of speedy and reliable feedback
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Management Control Systems
Actual
Performance
MeasurePerformance
Comparison
Desired
performance
Deviations
Reason
For
Deviation
Corrective
Actions
Feedback Loop
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Feedback Loop of Management Control
Desired
Performance Actual
Performance
Measurement
Performance
Analysis
Deviations
Identification
Of deviations
Comparison
Against
Standards
Corrective
Action Implementation
Of correction
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Cont..
Management Control helps in..
1. Coping with uncertainty
2. Detecting irregularities3. Identifying opportunities
4. Handling complex situations
5. Minimizing costs
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Basic Concepts
Elements of a control system consists of:
1. A detector
2. An assessor
3. An effector4. A communication network
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1. A detector or sensor is a device that measurewhat is actually happening in the process being
controlled.2. An assessor is a device that determines thesignificance of what is actually happening bycomparing it with some standards or expectationsof what shouldhappen.
3. An effector (feedback) is a device that altersbehavior if the assessor indicates the need to doso.
4. A communications network consist of devicesthat transmit information between the detectorand the assessor and between the assessor andthe effector.
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Example: You are driving a car
Detectors= Your eyes
Assessor= Your brain
Effector= Your foot
Communication network= Your nervessystem
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Your eyes (detectors) measure actual speed byobserving the speedometer.
Your brain (assessor) compares actual speed withdesired speed (standard: the highest speed is 80km/hour) to detect a deviation from standard.
Your brain (assessor) directs your foot (effector) toease up the accelerator if actual speed (90km/hour) is faster than the standard speed (80km/hour), press down the accelerator if the actualspeed (70 km/hour) is slower than standard speed(80 km/hour).
And, your nerves (communication network) formthe communication system that transmitsinformation from eyes (detectors) to brain(assessor) and brain (assessor) to foot (effector).
19
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Boundaries of Management Control
Strategy formulation is the process of deciding on
the goals of the organization and the strategies
for attaining these goals.
Management control (Anthony and Govindarajan,
2004): is the process by which managers influenceother members of organization to implement the
organizations strategies.
Task control is the process of ensuring that
specified tasks are carried out effectively andefficiently.
20
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Distinctions between strategy formulation and
management control:
21
Characteristics Strategy Formulation ControlManagement
System design Unsystematic, Strategic
decision may be made
any time
Rhythmic,
predetermined
proceduresNature of
information
Tailored-made to faced
problems, more external
and predictive, less
accurate
Integrated, more
internal and
historical, more
accurateCommunication
of information
Simple Difficult
Involved people Top management and
staffs
Top management and
line managers
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Distinctions between strategy formulation
and management control:
22
Characteristics Strategy Formulation Control
Management
Number of
involved people
Few people Many people
Mental activity Creative and analytic Administrative and
persuasive
Discipline Economics Social psychology
Time horizon Tend to long-term Tend to short-term
End products Goals, strategies Strategy
implementation
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Distinctions between management and task
controls:
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Characteristics Control Management Task Control
Focus of
activity
The whole of operation Individual task or
transaction
Nature of
information
Integrated, many financial
data
Tailored-made to
individual task, morenon-financial data
Involved people Management Supervisor or none
Mental activity Administrative and
persuasive
Follow direction or
none
End products Strategy implementation Tasks are carried out
effectively and
efficiently
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Distinctions between management and task
controls:
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Characteristics Control Management Task Control
Mental activity Administrative and
persuasive
Follow direction or
none
Discipline Social psychology Economics, physics
Time horizon Weekly, monthly,
annually
Daily
Type of cost Discretionary costs Engineered costs
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Examples of decisions in planning and control
function:
25
Strategy
Formulation
Management
Control
Task Control
Enter a new business Expand a plant Schedule production
Change debt to
equity ratio
Issue new debt Manage cash flows
Add direct mail
selling
Determine
advertising budget
Book TV
commercials
Decide magnitude
and direction of
research
Control of research
organization
Run individual
research project
Acquire an unrelated
business
Introduce new
product or brand
within product line
Coordinate order
entry
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Functions of MCS
1. Planning activities of an organization
2. Coordinating activities of an organization
3. Communication information to differentlevels of the hierarchical structure
4. Evaluating information and deciding the
actions to be taken
5. Influencing people to change their
behavior.
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Effectiveness of Contemporary
Control Systems
1. Focus on constantly changing information thathas potential strategic importance.
2. The information is important enough to demandfrequent and regular attention from all levels ofthe organization.
3. The data and information generated are bestinterpreted and discussed in face-to-facemeetings.
4. The control system is a key catalyst for anongoing debate about underlying data,assumptions, and action plans.
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Behavioral Control
Behavioral control is focused on
implementationdoing things right
Three key control levers
Culture
Rewards
Boundaries
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Reasons for an increased emphasis on
culture and rewards
1. The competitive
environment is
increasingly
complex andunpredictable,
demanding both
flexibility and quick
response to itschallenges.
2. The implicit long-
term contract
between the
organization and itskey employees has
been eroded.
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Building a Strong and Effective
Culture Organizational culture
a system of shared values and beliefs that
shape a companys people, organizational
structures, and control systems to producebehavioral norms.
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Building a Strong and Effective
Culture Culture sets implicit boundaries (unwritten
standards of acceptable behavior)
Dress
Ethical matters
The way an organization conducts its
business
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Example: Wal-Mart
A lot of Wal-Mart's success was attributed to the
strong and pervasive culture at the company,
which was developed and nurtured by founder
Sam Walton. In over four decades of operation, Wal-Mart
managed to retain most of the elements of
culture it had when it first started out, as well as
the entrepreneurial spirit which often drivesstartup companies to success.
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Sustaining an Effective Culture
Effective culture
must be
Cultivated
Encouraged
Fertilized
Maintaining an
effective culture
Storytelling
Rallies or pep
talks by top
executives
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Motivating with Rewards and
Incentives Rewards and incentive systems
Powerful means of influencing an
organizations culture
Focuses efforts on high-priority tasks
Motivates individual and collective task
performance
Can be an effective motivator and controlmechanism
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Motivating with Rewards and
Incentives Potential downside
Subcultures may arise in different business
units with multiple reward systems
May reflect differences among functionalareas, products, services and divisions
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Characteristics of Effective Reward and
Evaluation Systems
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Setting Boundaries and
Constraints Focus efforts on strategic priorities
Provide short-term objectives and action
plans
Specific and measurable
Specific time horizon for attainment
Achievable, but challenging
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Setting Boundaries and Constraints
Improve operational efficiency and
effectiveness
Minimize improper and unethical conduct
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Question
Effective boundaries and constraints:
A.Tend to inhibit efficiency and effectiveness
B.Distract employees who are trying to focus
on organizational priorities
C.Minimize improper and unethical conduct
D.Tend to limit organizational growth
O i i l C l
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Organizational Control:
Alternative Approaches
E l i f B d i
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Evolving from Boundaries
to Rewards and Culture System ofrewards and incentives coupled
with a strong culture
Hire the right people
Training plays a key role
Managerial role models are vital
Reward systems clearly aligned with
organizational goals and objectives
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Role of Corporate Governance
Corporate governance
the relationship among various participants in
determining the direction and performance of
corporations. primary participants are the shareholders, the
management, and the board of directors.
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The Modern Corporation
Corporation
A mechanism created
to allow different
parties to contribute
capital, expertise, and
labor for the maximum
benefit of each party.
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Agency Theory
Deals with the relationship between
Principals who are owners of the firm
(stockholders)
Agents who are the people paid byprincipals to perform a job on their behalf
(management)
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Agency Theory: Two Problems
1. The conflicting
goals of principals
and agents, along
with the difficulty ofprincipals to monitor
the agents, and
2. The different
attitudes and
preferences towards
risk of principals andagents.
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Governance Mechanisms
Board of directors
a group that has a fiduciary duty to ensure
that the company is run consistently with the
long-term interests of the owners, orshareholders, of a corporation and that acts
as an intermediary between the shareholders
and management.
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The New Rules for Directors
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Governance Mechanisms
Shareholder activism
actions by large shareholders, both
institutions and individuals, to protect their
interests when they feel that managerialactions diverge from shareholder value
maximization.
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TIAA-CREFs Principles on the Role of
Stock in Executive Compensation
E t l G
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External Governance
Control Mechanisms
External governance control
mechanisms
methods that ensure that managerial actions
lead to shareholder value maximization anddo not harm other stakeholder groups and
that are outside the control of the corporate
governance system.
E t l G
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External Governance
Control Mechanisms
Market for corporate control
Auditors
Banks and analysts
Regulatory bodies
Media and public activists
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Sarbanes-Oxley Act
Auditors
Barred from certain types of non-audit work
Not allowed to destroy records for five years
Lead partners auditing a firm should be
changed at least every five years
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Sarbanes-Oxley Act
CEOs and CFOs
Must fully reveal off-balance sheet finances
Vouch for the accuracy of information
revealed
Executives
Must promptly reveal the sale of shares in
firms they manageAre not allowed to sell shares when other
employees cannot
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THE PURPOSE OF MANAGEMENT CONTROL SYSTEMS
The purpose of a management control system is to
assist management in the coordination of the parts of
an organization and the steering of those parts toward
the achievement of its overall purposes, goals and
objectives. A control system is designed to bring unityout of the diverse activities of an organization as it
seeks to fulfill its overall purpose.
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The Organizational Context of Managerial Control
Systems
Organizations:
a. Subunits
b. Effectiveness and Efficiency
Effectiveness relates to the social purpose of the organization,whereas efficiency relates to the personal motives of the stakeholders
of the organization.
c. Internal and External Stakeholders
d. Executive Functions
i) Securing essential efforts: inducing participation of stakeholdersinto the organization.
ii) Provide the system of organizational communication.
a) Formal and informal organization
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e. Organizational Survival and Control Systems
The organization must provide inducements that are sufficient to
attract the essential contributions from stakeholders, such as capital
from investors, labor from employees, materials resources from
suppliers, and product purchases from customers.
The real bottom line of the firm is to be able to convert the
contributions of the principal stakeholders into potential inducements
efficiently enough to meet present stakeholder requirements and
also to provide sufficient resources to continue the innovation
process so that the competitive challenges of the future will be met.
f. Assumptions about Human Behavior
Control systems are designed to favorably influence human behavior
as organizations pursue their goals and objectives.Five assumptions about human drives are:
1. Basic rationality. Human beings are basically rational
and as such are able to reason, make plans, and control
behavior.
CONTD
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2. Creativity. A basic human instinct is the desire to be creative.
3. Mastery. Humans desire to manage; therefore, the desire to be
incontrol is innate.
4. Morality. Human beings have strong moral instincts, although
these instincts may not always dominate behavior.
5. Community. Human beings have strong needs and desires for
human associations.
Elements of a Control System
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Elements of a Control System
DetectorMeasuring device
SELECTORComparing device
EFFECTORCorrecting device
COMMUNICATION NETWORKTransmitting device
Nature of MCS
Activity Nature of end product
Strategy Formulations
Management Control
Task Control
Goals, Strategies, Policies
Implementation of strategies
Effective Performance
Interdependence & Relationships
Important feature of MCS
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Important feature of MCS
Nature of decision
Decisions are systematic & rhythmic
Strategy implementation tool
Behaviour considerations
Characteristics of a good MCS
Future oriented
Clear objective
Minimum Control losses
Input Control Selection, recruitment, training, strategic plan etc.
Process Control Inventory Control, Budgetary Control etc.
Output Control Setting standards, monitoring, evaluating
Formal Control Process
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Formal Control Process
Infrastructure
Organisation Structure
Operations
Patterns of autonomy
Management Methods
Management, Style & Culture
Style
Principles &
Values
Formal Control Process Strategic planning
Capital budgeting
Operation planning
management Accounting
Budgeting Reporting Systems
Project Management
Variance Analysis
Rewards
Coordination &
Integration
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Informal Control Systems
INFRASTRUCTURE
Personal contacts Networks
Expertise oriented
Minimal structure
Emergent roles
INFORMAL CONTROL PROCESS
Search/alternative generation
Ad hoc as needed
Uncertainty coping
Rationalization/dialogue
INFORMAL REWARDS
Recognition
Status oriented
Intrinsic
Performance oriented
Stature oriented
Personal contact
COORDINATION &INTEGRATION
Based upon trust
Simple/direct/personal
Telephone conversations
Personal memos
MANAGEMENT STYLE &CULTURE
Prevailing style External/Internal/mixed
Principal values
Norms and beliefs
Formal Control SystemsGeneral Electric under Welch
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General Electric under Welch
INFRASTRUCTURE
Very Decentralized
Eliminated Sectors
Wider Span of Control
Role of Staff Reduced
Strong Inter SBU Relations
Drastic Reductions in Personnel
Flattened Organization
FORMAL CONTROL PROCESS Goals: #1 or #2 in Each SBU
Simplified Strategic Planning Systems
Global Orientation
Strong Financial Systems
Work Simplifications Procedures
Improved Quality and Speed of Information
REWARDS
Candid Perf. Evaluations
Drastic Increase in use of Stock Options
Risk Taking Encouraged
COORDINATION & INTEGRATION
Strong Corporate ExecutiveCouncil
SBU Executive and Operating
Councils Strong Training Programs
STYLE & CULTURE
Hands on/Strategic operators
More Informal
Speed in Adaptation
Loyalty-Performance Based
Hard Headed/Soft Hearted
Focus on the Truth
Informal Control SystemsGeneral Electric under Welch
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General Electric under WelchINFRASTRUCTURE
Non Bureaucratic Behaviour in Relationships
Boundaryless Organization
Inside Outside
Cross Functional Teams
Blur Distinctions between Management andEmployees
INFORMAL CONTROL PROCESS
Emphasis on Creating Vision & Providing Leaderships
Frank Assessment of Operations & Strategy
Speed and Agility in Decision Making
Best Practices Shared Among SBUs
INFORMAL REWARDS
Team Achievement
Pride in Accomplishment
Recognition Programs
Pride of Accomplishment
Winning
INFORMAL COORDINATION & INTEGRATION
Candor is Emphasized
Realism is Valued
Constructive Conflict is Emphasized
Problem Identification Encouraged
Teamwork is Endorsed
STYLE & CULTURE
Hands on/Strategic operators
More Informal
Speed in Adaptation
Loyalty-Performance Based
Hard Headed/Soft Hearted
Focus on the Truth
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Strategic
Planning
Strategic
Control
TacticalPlanning
TacticalControl
Operational
Control
Operational
Planning
Framework for planning and control:
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Framework for planning and control:
Anthony and Deardens framework
Consistent with the three levels of management and three levels of decision-making, the total planning and control system could be subdivided into three
categories.
(i) Strategic planning (ii) Management control (iii) Operational control
Corporate management Institutional level Strategic planning
Divisional management Managerial level Corporate management
Operating management Technical level Operational control
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The Cybernetic Paradigm
The cybernetic paradigm allows us to capture the essential
elements of the repetitive control process:
1. Set goals and performance measures.
2. Measure achievement.
3. Compare achievement with goals.
4. Compute the variances as the result of the preceding
comparison.
5. Report the variances.
6. Determine cause (s) of the variances.
7. Take action to eliminate the variances.
8. Follow up to ensure that goals are met.
The Cybernetic Paradigm of the Control Process
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BehaviorChoice
Perception
Goals
Feedback
Environment
Effector
Decision Maker
FactualPremisesComparator
ValuePremises
BehavioralRepertoire
The Cybernetic Paradigm .
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The Cybernetic Paradigm .
ASSUMPTIONS
Decisions are explained as the result of the interaction between the
manager / decision maker and the environment.
The manager constructs from these data certain beliefs concerning
performance and the state of the external environment. These beliefs are
referred to as factual premises.
Factual premises are formed by passing these data through a cognitiveprocess referred to as perception.
Goals are themselves a result of past learning concerning performance and
accomplishments and represent the desired state for the manager.
When a difference is determined to exist between what decision makersdesire (that is, value premises) and their beliefs about the environment (that is,factual premises), they are motivated to seek to close the gap.
The comparator represents the comparison process that takes betweenperformance measures and performance information.
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The Cybernetic Paradigm
When a performance gap exists, decision makers are motivated to searchfor courses of action that will move them closer to their goals. This choice isreferred to as behavioural choice and is made by evoking from experiences alimited set of alternatives that have been successful in solving similar problems
in the past.
The content of the set of alternatives evoked from the decision makers
behavioural repertoire is itself a function of goals, past experience, and thedecision makers perception as to the state of the environment.
Decisions require implementation. The effector, a manager, activates thedecision, thus serving as a change agent.
Control is brought about by action taken by the manager, who next seeks to
determine the effects of the action. This new information is referred to as
feedback.
KEY SUCCESS VARIABLES AS
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KEY SUCCESS VARIABLES AS
CONTROL INDICATORS
Concept of Key Variables:
A key variable is a significant indicator of business activity. Any
change in its value is expected to have an impact on the
performance of the organization.
Key variables require examination and in-depth
evaluation. At the stage of in-depth evaluation, the
manager has to make a subjective judgement as towhether each factor identified is important in explaining
the success or failure of attaining management goals.
Contd.
They must be measurably, either directly or via a
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surrogate or substitute.
Key variables are volatile; they can change rapidly for
reasons often beyond the control of the manager. Changes in key variables are not easily predictable. The
choice of key variables requires the manager to make a
subjective judgement.
Management action is required when a significant
change occurs in any key variable. The manager should
select as many key variables as required to run the
business, possibly two or three, but no more than six.
Predictable variables are of little use as key variables.
Obviously, if an event can be predicted with a degree of
certainty, then appropriate management action can
easily be taken.
SOURCE OF KEY SUCCESS
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SOURCE OF KEY SUCCESS
VARIABLES
1. Industry Characteristics
2. Competitive Strategy
3. Environmental Forces
4. Significant Problems
5. Functional Issues
Key variables come from five sources. They are:
Input Variables:
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p
Raw material availability
Raw material quality Raw material costs
Production Variables:
Capacity utilization
Losses
Quality control
Maintenance
Costs
Delivery
Marketing Variables:
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g
Order book position
Market share Institutional sales
Asset Management Variables:
Asset turnover
Working capital turnover
PERFORMANCE BUDGETING
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PERFORMANCE BUDGETING
Important Features:
a) That object-wise or function wise budgeting is almost always
likely to cut across departmental boundaries. In planning and
budgeting for such programs inter departmental cross walks
are indispensable.
b) Budgeting should start with the main output areas, or end-resultpoints. Objective-wise budgets should flow in the second sage
from such budgets.
c) Physical accomplishment should be budgeted for and
comparisons with actual achievements made.
d) A constant search for meaningful, measurable assessment criteria,even for apparently non-quantifiable areas, should be made.
e) The underlying logic of PB is fairly universal. It can, therefore, be
easily adapted to help budgeting and review.
PERFORMANCE BUDGETING
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PERFORMANCE BUDGETING
BASIC STEPS:
a) Establishing a meaningful program & activity
classification.
b) Bringing the system of Accounting & Financialmanagement in accord with this classification; and
c) Evolving suitable norms, yardsticks, work units of
performance and unit costs, wherever possible
under each program and activity for their reporting
and evaluation.
Understanding Risk Management
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g g
No universally accepted definition of risk exists. Risk is commonly
used to refer to insured items, to causes of loss and to the chance of
loss. Statisticians and economist associate risk with variability A
situation is risky if a range of outcomes exists and the actual outcome
is not known in advance, - Harold Skipper.
Risk management guides us over a vast range of decision-making,
from allocating wealth to safeguarding public health, from aging war
to planning a family, from paying insurance premiums to wearing a
seat belt, from planting corn to marketing cornflakes,Bernstein.
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Enterprise Risk Management (ERM)
Addresses some fundamental questions:
What are the various risks faced by the company?
What is the magnitude of each of these risks?
What is the frequency of each of these risks?
What is the relationship between the different risks?
How can the risks be managed to maximise shareholders wealth?
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Strategic Cost Management
Strategic Cost Management combines threestrategic management themes. The threethemes are:
Value Chain Analysis
Cost Driver Analysis
Strategic Positioning Analysis
Value chain analysis is a strategic analysis tool that
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Value chain analysis is a strategic analysis tool thatcan be used to identify areas in which value can beenhanced for customers or costs can be reduced.
Value chain analysis thus helps a firm gain competitiveadvantage.
The value chain of a company is the linked set ofvalue-creating activities, all the way from basic rawmaterial sources for component suppliers through to
the ultimate end product delivered into the finalconsumers hands.
Value chain analysis consists of three steps:
Step 1: Identifying value chain activities
Step 2: Identifying the cost driver(s) at each value activity
Step 3: Developing a competitive advantage by reducing
cost or adding value.
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Cost driver analysis is used to quantify the cost
of poor quality and determining the root causes
of poor quality or high costs.
Structural Cost Drivers
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Cost Driver Implications Controlling structural cost
drivers
Scale Take decisions concerninginvestments in manufacturing, R&D
and marketing
Develop Scale economies tocontrol costs
Scope Decide on the degree of vertical
integration needed
Enhance vertical integration;
otherwise outsource
Experience Identify the repetitive tasks Enhance employee learning and
experience
Complexity Decide about product line and
number of products
Find sharing opportunities with
other business units in the
enterprise
Technology Take decisions pertaining to
technologies to be used at every
stage of value chain
Optimize the use of technology
between value chain activities
E ti l C t D i
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Executional Cost Drivers
Commitment of workforce to continuous
improvement
Managements attitudes towards quality
Cycle time for getting new products to market
Firms utilization of existing capacity
Proper design of internal business processes
Managements ability to work efficiently with
suppliers and/or customers to reduce costs.
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Strategic Positioning Analysis
A firm can choose to compete in the market either
on the basis of cost or differentiation.
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Managerial Styles and the Design ofControl SystemsManagerial Style is important to the design of
control systems because:
1. Control systems influence the behavior of those
controlled in that the controlee focuses his or herenergies on the maters thatcount because this is
the manner in which performance is evaluated.
2. The precise manner in which the control system
influences behavior depends on how the systemsare used by managers.
3. Managers differ in their use of control systems; that
is, they have different styles of control.
1 The external control style
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1. The external control style
2. The internal control style
3. The mixed control style
Under the external style the decision-making mechanism is
maintained by top executives after data are gathered at lower
levels in the organization.
The internal style is more participative and attempts to
capitalize upon the internal needs and motivations of the
subordinate, such as the need for accomplishment, mastery,
socialization, power, and self-esteem in an attempt to build
internal commitment for organizational goals.
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Decentralization versus Centralization
The very fact that conditions exist which create the need for a
decentralized organization structure indicates that the
complex organization will not make decisions through a
central decision-making process but rather through a diffuse
one.
Organization units are not normally part of a given
corporation unless they share some common characteristics
with other organization units. These characteristics includewhat Porter calls tangible or intangible interrelationships.
O i ti l d t li ti f fit d i t t
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Organizational decentralization of profit and investment
responsibility has significant benefits. It allows closer control and
supervision within the division than does centralization. It
facilitates information processing, since it permits analysis of
trade-offs among cost, revenue, and investment at lower levels of
management closer to the impact of the decision. It produces
greater managerial motivation as general managers of divisions
run their own business, given only broad constraints in terms of
company goals, objectives, strategies, and policies.
Adaptive Organization
Informal Control for Adaptive Organization
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Informal Control for Adaptive OrganizationINFRASTRUCTURE
Expert emergent roles for local
cultures and markets Acceptance of temporary
assignments
INFORMAL CONTROL PROCESS
Verbal informal actions
Use of multidisciplinary teamsfor problem solving
REWARDS
Based on peer recognition ofthe adaptive values of theorganization
COORDINATING & INTEGRATION
Use of personal travel formanagers to become familiarwith worldwide conditions
MANAGEMENT SYLE & CULTURE
Global operating perspective
Opportunistic action oriented
Change oriented
Lifelong learning
Agility in new assignments
Formal Control for Adaptive Organization
INFRASTRUCTURE MANAGEMENT SYLE & CULTURE
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INFRASTRUCTURE
Organization structure
Easily formed and dissolved
Use of adhoc Teams
Widespread use of outsourcing
Widespread use of teams
FORMAL CONTROL PROCESS
Clear company vision
Integrated information systems
Rapid response times for information flows
Accurate worldwide reporting
Simple and rapid authorization procedures
REWARDS
Emphasize ability to achieve
excellence in uncertain
environments
COORDINATING & INTEGRATION
Use of management rotation on aglobal basis
Use of multidisciplinary teams for
accomplishing specific objectives
MANAGEMENT SYLE & CULTURE
Global operating perspective
Opportunistic action oriented
Change oriented
Lifelong learning
Agility in new assignments
AUDITING
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AUDITING
Audit is the activity of examination andverification of records and other evidence by
an individual or a body of persons so as to
confirm whether these records and evidencepresent a true and fair picture of whatever
they are supposed to reflect.
Audits are most commonly used in theaccounting and finance functions
Categories of Audits
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Categories of Audits
Audit category Brief description
Financial
statement audit
Gives an opinion on the accuracy of the financial
statements
Ensures compliance with the relevant accounting
standards and reporting framework
Internal audit An independent appraisal function established withinan organization to examine and evaluate its activitiesas a service to the organization
Need not be limited to books of accounts and related
records
Fraud auditing andforensic audit
Deters, detects, investigates, and reports fraud
Forensic: related to the legal system, especiallyissues of evidence
Operational audit Audits operational aspects of the enterpriseQuality audit, R&D audit, etc
Audit category Brief description
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Information systems
audit
Audit of computer systems
Checks whether the computer system safeguards
assets, maintains data integrity, and contributes to
organizational effectiveness and efficiency
Management audit Audit of the management, as a tool for evaluation andcontrol of organizational performance
Examines the conditions and provides a diagnosis of
deficiencies with recommendations for correcting them
Social audit Audit of the enterprise's reported performance in meetinits declared social , community, or environmental
objectives
Environmental audit Environmental compliance audit: a checking mechanismEnvironmental management audit: an evaluation
mechanism
The Auditing process
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The Auditing process
Staffing the audit team Creating an audit project plan
Laying the ground work
Conducting the audit
Analyzing audit results Sharing audit results
Writing audit reports
Dealing with resistance to auditrecommendations
Building an ongoing audit program
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MANAGEMENT AUDIT
An examination of the conditions and a diagnosis of
deficiencies with recommendations for correcting them.
According to John C Burton, in a management audit, the
auditor will see whether management is getting information
relevant to the decisions and actions which it must take. This
will require a much more intensive analysis of informationneeds and the efficiency of the existing system in meeting them.
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Objective of a Management Audit
to critically analyze and evaluate management
performance.
Apart from this, it is conducted to detect and
overcome existing managerial deficiencies and
resulting operational problems.
Benefits of Management Audits
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Benefits of Management Audits
Management auditing is proactive, it provides anearly-warning signal of managerial problems and
related operational difficulties.
A source of information is assisting the organization toaccomplish the desired objectives.
Objectively evaluate organizational plans, structure,
and the directions that management gives in the formof strategies and management processes in planning,
organizing, directing and controlling the organizational
resources.
Types of Management Audit
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Types of Management Audit
Complete management audit
Compliance management audit
Program management audit
Functional management audit
Efficiency audit
Propriety Audit
Management audit can be categorized into six types:
Internal Auditors
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Internal Auditors ... The internal audit function operates in staff capacity and
reports high in the organization, at least to the controlleror financial vice-president.
Financial audits
External auditors / GAAP
Compliance audits External / internal auditors;
Compliance with laws and rules / administrative policies.
Performance audits
External / internal auditors / consultants;
Evaluation of the performance of the company, its
management,
a department, or a specific activity (+ make
recommendations).
A dit t b fit
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Auditstwo benefits
The audit report adds credibility to the
information provided to user groups;
Anticipationof the audit increases the
motivation
of the individuals involved to act in alegal, ethical way and in the best
interest of the company and its owners.
Social Audit
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Social Audit
The inadequate reflection of the social performance of theorganization has given rise to the concept of social accounting
and social auditing.
Definition of Social Audit
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Definition of Social Audit
Blake, Fredrick and Myers in their book Social Auditingdefine social audit as systematic attempt to identify, analyze,
measure, evaluate and monitor the effect of an organizations
operations on society.
Features of Social Audit
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Features of Social Audit
Social audits adhere to the specified norms. Thesenorms may pertain to the governments standards of
social performance, standards established by the
organization and norms set by outside agencies.
The aim of conducting a social audit is to influence
the policies, objectives and actions of the concerned
organization to improve its social performance.
Social audit is conducted by professionals who have
knowledge about the social area being audited.
Service Organizations
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Service Organizations
Characteristics
Absence of Inventory Buffer
Difficulty in Controlling Quality
Labour Intensive
Multi-Unit Organizations
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Management Control Systems
Pricing
Profit Centers and Transfer Pricing
Strategic Planning and Budgeting
Control of Operations
Performance Measurement and Appraisal
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Nonprofit Organizations
Special Characteristics
Absence of the Profit Measure
Contributed Capital
Fund Accounting
Governance
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Management Control Systems
Product Pricing
Strategic Planning and Budget Preparation
Operation and Evaluation
What Is Cybernetics?
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What Is Cybernetics?
Cybernetics began as the science ofcommunication and control in the animal,machine, and society; i.e. special types ofsystems.
It operates on two levels: study of anobserved system & study of the peoplestudying a system.
Originated from R & D process in thedevelopment of the atomic bomb- appliedscientific theory & principles in real-world
setting
What Are the Main Points?
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What Are the Main Points?
Theoretical-sciences of complexity--including AI, neuralnetworks, dynamical systems, chaos, and complexadaptive systems.
Practical-Many of the concepts used by systemscientists come from the closely related approach ofcybernetics: information, control, feedback,communication.
There was also a return from the machine to the livingorganism, which accelerated progress in neurology,
perception, the mechanisms of vision In the sixties MITsaw the extension of cybernetics and system theory toindustry, society, and ecology.
Who Were the Main People?
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Who Were the Main People?
Three men can be regarded as thepioneers of great breakthroughs (in
cybernetics):
the mathematician Norbert Weiner, whodied in 1964,
the neurophysiologist Warren McCulloch,
who died in 1969; Jay Forrester, professor at the Sloan
School of Management at MIT.
How It relates to IDD
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How It relates to IDD
The fundamental concepts of cybernetics haveproven to be enormously powerful in a variety of
disciplines: computer science, management,
biology, sociology, thermodynamics, etc.
Cybernetics and Systems Science combine the
abstraction of philosophy and mathematics with
the concreteness of dealing with the theory and
modeling of "real world" evolving systems.
How It Relates to IDD
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(Continued)
Although there are many exceptions,researchers in cybernetics and systems science
tend to be trained in a traditional specialty (like
biology, management, or psychology) and then
come to apply themselves to problems in other
areas, perhaps a single other area. Thus their
exposure to cybernetics and systems science
concepts and theory tends to be somewhat adhocand specific to the two or three fields they
apply themselves to.
Specific Ways Cybernetics
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Incorporated Into Dick & Carey
Dick & Carey shows evidence of an
underlying system and approach to
instruction. Dick & Careys modelhighlights the principle that is applicable to
solve any kind of problem. The approach
can be broken apart and each partexamined. Also, it has a linear structure.
Dick & Carey Continued
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Dick & Carey Continued
If we would uncover those general laws,we would be able to analyze and solve
problems in any domain, pertaining to any
type of system. Following D & C all stepsare incorporated.
Five Websites
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Five Websites
1.pespmc1.vub.ac.be/CYBSYSTH.html
2. link.springer.de/link/service/journals/0042
3. cyvision.if.sc.usp.br
4. www.evolutionaryethics.com
5. www.xmission.com/~cyberman
Associated Books
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Associated Books
How we became posthuman : virtualbodies in cybernetics, literature, andinformatics / N. Katherine Hayles.
The computer and the brain / John vonNeumann ; with a foreword by Paul M.Churchland and Patricia S. Churchland.
The foundations ofcybernetics / F. H.
George.
Associated Books
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Associated Books
The soft machine : cybernetic fiction /David Porush.
How colleges work : the cybernetics of
academic organization and leadership /Robert Birnbaum
Something New
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Something New
Cybernetics should be understood as a key toolor cognitive methodology for the observer who
would know himself and his world.
Understanding Cybernetics is similar to finding
ways of navigating between the many islands of
discourse that explore relations between
disciplines in the sciences and humanities.
Controlling as a Management
F ti
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Function
ControllingA process of monitoring performance and
taking action to ensure desired results.
It sees to it that the right things happen, in theright ways, and at the right time.
Controlling as a Management
F ti
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Function
Controlling Done well, it ensures that the overall
directions of individuals and groups areconsistent with short and long range plans.
It helps ensure that objectives andaccomplishments are consistent with oneanother throughout an organization.
Controlling as a Management
F ti
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Function
Controlling It helps maintain compliance with essential
organizational rules and policies.
The Cybernetic Control System
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One that is self-contained in its performancemonitoring and correction capabilities.
(thermostat)
The control process practiced in organizations
is not cybernetic, but it does follow similar
principles.
The Control Process
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The Control Process
Establish objectives and standards.
Measure actual performance.
Compare results with objectives and
standards.
Take necessary action.
Establish Objectives and
St d d
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Standards
The control process begins with planning
and the establishment of performance
objectives.
Performance objectives are defined and
the standards for measuring them are set.
Establish Objectives and
St d d
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Standards
There are two types of standards:
Output Standards - measures performanceresults in terms of quantity, quality, cost, or
time.
Input Standards - measures work efforts that
go into a performance task.
Measuring Actual Performance
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g
Measurements must be accurate
enough to spot deviations or variances
between what really occurs and what is
most desired.
Without measurement, effective control
is not possible.
Comparing Results with
Obj ti d St d d
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Objectives and Standards
The comparison of actual performance with
desired performance establishes the need for
action.
Ways of making such comparisons include:
Historical / Relative / Engineering
Benchmarking
Taking Corrective Action
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Taking Corrective Action
Taking any action necessary to correct or
improve things.
Management-by-Exception focuses
managerial attention on substantial
differences between actual and desired
performance.
Taking Corrective Action
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g
Management-by Exception can save themanagers time, energy, and otherresources, and concentrates efforts on
areas showing the greatest need. There are two types of exceptions:
Problems - below standard
Opportunities - above standard
Effective Controls
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The Best Controls in Organizations are:
1.Strategic and results oriented
2.Understandable
3.Encourage self-control
Effective Controls
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The Best Controls in Organizations are:
1. Timely and exception oriented
2. Positive in nature
3. Fair and objective
4. Flexible
Types of Control
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yp
PreliminarySometimes called the feedforwardcontrols, they are accomplished beforea work activity begins.
They make sure that proper directions
are set and that the right resources are
available to accomplish them.
Types of Control
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yp
ConcurrentFocus on what happens during the work
process. Sometimes called steering
controls, they monitor ongoing operationsand activities to make sure that things are
being done correctly.
Types of Control
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yp
Postaction
Sometimes called feedback controls,
they take place after an action iscompleted. They focus on end results,
as opposed to inputs and activities.
Types of Controls
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yp
Managers have two broad options withrespect to control.
They can rely on people to exercise self-
control (internal) over their own behavior. Alternatively, managers can take direct
action (external) to control the behavior of
others.
Types of Control
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yp
Internal Controls
Allows motivated individuals to exercise
self-control in fulfilling job expectations.
The potential for self-control is enhanced when
capable people have clear performance
objectives and proper resource support.
Types of Control
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yp
External ControlsIt occurs through personal supervision and the
use of formal administrative systems. Performance appraisal systems,
compensation and benefit systems,
employee discipline systems, and
management-by-objectives.
Organizational Control Systems
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g y
Management Processes Strategy and objectives
Policies and procedures
Selection and training
Performance appraisal Job design and work structures
Performance modeling, norms, andorganization culture
Organizational Control Systems
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Compensation and BenefitsAttract talented people and retain them.
Motivate people to exert maximum effortin their work.
Recognize the value of theirperformance contributions.
Organizational Control Systems
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Employee Discipline Discipline is defined as influencing behavior
through reprimand.
Progressive Discipline ties reprimand to theseverity and frequency of the employeesinfractions.
Positive Discipline tries to involve peoplemore positively and directly in making
decisions to improve their behavior.
The Hot Stove Rule
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Immediate Focus on activity
not personality
Consistent
Informative Occur in a
supportive setting
Support realistic
rules
To be Effective Discipline Should be:
Organizational Control Systems
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Information and FinancialActivity-based costing - the true cost of all
products and services.
Economic value added - examine the valueadded by all activities.
Understand the implication of key financialmeasures of (ratios) organizational
performance
Operations Management and
Control
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Control
Purchasing Economic Order Quantity
automatic reorder points
Just-In-Time Scheduling
Operations Management and
Control
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Control
Project Management Program Evaluation and Review
Technique (PERT) - Identifies and controlsthe many separate events in complex
projects.
Operations Management and
Control
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Control
Statistical Quality Control Based on the establishment of upper and
lower control limits, that can be graphicallyand statistically monitored to ensure that
products meet standards.