BEHAVIOUR IN ORGANISATIONS

BEHAVIOUR IN ORGANIZATION

Goal Congruence:-In a goal congruent process,the actions people are led to take in accordance with their perceived self-interest are also best interest of the organization.

In evaluating any MCS practice: What action does it motivate people to take in their own self interest? Are these actions in the best interest of the organization?

Informal factors that influence goal congruence

Both formal systems and informal process influence human behaviour in organization

Formal control systems consists of strategic planning,budgeting and reporting.

Informal processes consists of work ethic,culture,management style etc.

Informal having internal and external factors that play a key role in achieving goal congruence

Contd..

1.External factors:are norms of desirable behaviour that exist in the society of which the organization is a part.The norm include a set of attitude ,work ethics,which is manifested in employees loyalty to the organization,their diligence,their spirit and their pride in doing a good job e.g India and China.

2.Internal Factors: Culture:The most important internal factor is the organization own

culture-the common beliefs,shared values,norms of behaviour& assumptions that are implicitly accepted and explicitly manifested throughout the organization.

Management Style:The internal factor that probably has the strongest impact on management control is management style.usually,subordinates attitudes reflect what they perceive their superiors attitude to be and their superior attitudes ultimately stem from the CEO.

Contd..

Informal Organization:-the production manager of div A reports to the general manager of div A

• To fulfill her responsibilities,the production manager of Div A actually communicate with other people in the organization as well as other managers ,support units,headquarters staff.

• Perception and Communication:Working towards the goals of the organization,operating managers must know these goals are and what action are supposed to take to achieve them.

Receive their information through various channels,both formal (e.g budget and their official documents)and informal(e.g conversation)

The Formal Control System The systems can be classified into 2 types1.MCS2.Rules.Rules:-are shorthand for all types of formal instructions and control

including standing instructions,job description,standard operating procedures,manuals and ethical guidelines.

Physical control:Security guards,locked store rooms,vaults,computer passwords,television,surveillance and other physical control may be part of the control structure.

Manuals:rules should be written into a manual which considered as a guideline for an organization.

System Safeguard:Various safeguards are built into the information processing system to ensure that the information flowing through the system is accurate and to present(or at least minimize)fraud of every sort

Contd..

• This includes cross-checking totals with details requiring signatures and other evidence that a transaction has been authorized separating duties,counting cash and other portable assets frequently and a no.of.other procedures described in texts on auditing .They also include checks of the systems performed by internal and external auditors.

• Task Control System:is the process of ensuring that specific tasks are carried out efficiently and effectively

Formal Control Process

Goals&StrategyRules Other information

Strategic planning budgeting Responsibilitycenter

performance

Report actual

versus planWas performance

Satisfactory?

reviseCorrection action

measurement

feedback

communication

Revise

Reward(feedback)

yes

no

TYPES OF ORGANISATION

Organization structure are grouped into 3 categories

1.A Functional Structure:in which each manager is responsible for a specified function such as production or marketing

2. A business unit structure:in which business unit managers are responsible for most of the activities of their particular units and the business unit functions as a semi independent part of the company

3. A matrix structure in which functional units have dual responsibilities.

Functional Organization

Chief executive officer

staff

Manufacturing manager Marketing manager

stafffstaff

manager manager manager manager manager manager

plant1 Plant 2 Plant 3 Region A Region B Region C

Disadvantage to a functional organization Functional organization there is no unambiguous way of determining

the effectiveness of the separate functional managers because each functions contribute jointly to the organization final output

There is no way of measuring what fraction of profit was contributed by each.

Similarly at lower levels in the organization there is no way of determining how much of profit was earned respectively by the several production departments ,the product engineering department and the sates office.

Business unit:-is designed to solve problems in the functional structure

A business unit also called a division is responsible for all the functions involved in producing and marketing a specified product line.

Advantage of the business unit

• It provides a training ground in general management.

• Business unit structure is closer to the market for its product than headquarters,its manager may take sounder production and marketing decisions and the unit can react to new threats or opportunities more quickly.

Function of the controller;

The person who is responsible for designing and operating the MCS as the controller

• designing and operating information and control system

• Preparing financial statements and financial reports(including tax return)for shareholders and other external parties.

• Preparing and analyzing performance reports,interpreting these reports for managers and analyzing program and budget proposals from various segments of the company and consolidating them into an overall annual budgets.

Cont…….

• Supervising internal audit and accounting control procedures to ensure the validity of information,establishing adequate safeguards against theft and fraud and performing operational audit.

• Developing personnel in the controller organization and participating in the education management personnel in matters relating to the controller function.

MEASURING AND CONTROLLING ASSETS EMPLOYEDWhen profit earned by an SBU is compared with the assets

employed in earning it.The SBU is called an investment center.Thus investment center is nothing but a special type of profit center.

There are two ways to elate profit to the investment base:a)ROI = Profit/Investmentb)EVA=NOPAT-Capital ChargeThe purpose of measuring assets employed1)To provide information that is useful in making sound

decisions about assets employed and to motivate managers to make sound decision that are best interest of the company

2)To measure the performance of the business unit as an economic entity

In business unit managers have two performance objectives:

1)They should generate adequate profits from the resources at their disposal.

2)They should invests in additional resources only when the investment will produce an adequate return or else disinvest the assets which give inadequate returns.

Business unit financial statements

Balance sheet(2000)

Current Assets: Current liabilities:

Cash……………..50 Accounts payable…………..90

Receivables……….150 Other current……………..110

Inventory…………200 TCA……400 TCL……………………..200

Fixed Assets: Corporate equity…………500

Cost………………600

Depreciation……..(- 300)

Book value…………………300

Total assets………………….700 Total equities…………….700

Income Statement

Revenue…………………………………………………………..1000

Expenses,except depreciation…………………850

Depreciation…………………………………..50900

Income before taxes………………………………………………..100

Capital charges(500*10%)…………………………………………50

Economic value added(EVA)………………………………………50

Return on investment =profit/corp.equity=PBT/corp.equity=100/500=20%

MEASURING ASSETS EMPLOYEDIn deciding what investment base to use to evaluate the investment center

manager,headquarters ask two questions:1.what practices will motivate B.U managers to use their assets most efficiently

and to acquire the proper amount kind of new assets?while using the criteria of ROI or EVA SBU managers should take goal congruent decisions.

2.what practices bets measure the performance of the unit as an economic entity?

CASH:-most companies control cash centrally because central control permits use of a smaller cash balance.

• It permits smaller cash balances at SBU levels.• B.U cash balances will be only the ‘float’ between daily receipts and daily

disbursements.• The actual cash balance at the business unit level tend to be much smaller

than would be required if the business unit were an independent company.• If only the actual cash were shown ,the return by internal units would appear

abnormally high and mislead senior management. RECEIVABLES:B.U managers can influence the level of receivables

indirectly by their ability to generate sales,and directly by establishing credit terms and approving individual credit a/c and credit limits and their vigor in collecting overdue amounts.

INVENTORIES:-are often recorded at end-of-period balances through an intra period average would be better

• Accounting policies like LIFO could show a very low amount during inflation period so standard cost or avg cost is used .

WORKING CAPITAL IN GENERAL:-At one extreme companies include all CA in investment base with no offset for CL.this method is sound from motivational standpoint if the SBU cannot influence accounts payable or other CL.

• The amount of corporate capital required to finance the B.U because the CL are a source of capital,often at zero interest cost.

PROPERTY PLANT AND EQUIPMENT:-

Business Unit Balance Sheet (Rs.000)

Corporate Equity

600 Fixed Assets

Current liabilities

Accounts Payable

Other Current Assets

100

100

200

Cost

Depreciation

700

350 350

Current Assets

Cash

Receivables

Inventory

60

170

220450

800 800

BUSINESS UNIT INCOME STATEMENT (Rs.000)

Revenue 1200

Expenses less depreciation

1000

Depreciation 50 1050

Income before taxes 150

Capital charges 600*10%(assumed 10% as normal return)

60

EVA 90

Suppose the B.U has an opportunity to acquire a new machnie at a cost of Rs 120,000,which is estimated to produce a cash saving of Rs.33000 a year for 5 years.if the company has a required return 10%,

Investment in machine-life 5years

(Rs.000)

120

Cash inflows Rs.33000 per year

Present value of cash inflow 33,000*cum pv at 10% for 5 years that is 33,000*3.791 125

Net present value 5

Without the machine

First year with machine

Revenue 1200 1200

Expenses less depreciation

1000 1000-33 =967

depreciation 50 1050 50+24 =74 1041

Income before taxes

capital charge 10% on 600

150

60

10% on 600+120

159

72

EVA 90 87

ROI 150 25% 159 22.1%

600 720

year Book value at the beginning of the year

(1)

Income

(2)

{33-24saving depreciation}

Capital charges

(3)

=10% on (1)

EVA

(2)-(3)

ROI

2/1

1 120 9 12 -3 7.5%

2 96 9 9.6 -0.6 9.5

3 72 9 7.2 1.8 12.5

4 48 9 4.8 4.2 18.75

5 24 9 2.4 6.6 37.50

If Assets are leased

Revenue Expenses other than depreciation and rental

1000 1200 1000 1200

Depreciation 50

Rental 70

1050 1070

Income before tax 150 130

Capital charge 10% on 600 60 10%on250 25

EVA 90 105

ROI 150 =25% 130 =52%

600 250

LEASED ASSETS:- IDLE ASSETS:- if a B.U has idle assets hat can be used by other

units,it may be permitted to exclude them from the investment base if it classifies them as available.The purpose of this permission is to encourage B. u managers to released underutilized assets to units that may have better use for them.