Management Control Systems

Introduction

Basic Concepts
From Corporate Angle, Study of Management Control System requires understanding of 3 terms Control Management Systems

Collapse Of Companies

Consider the collapse of companies such as World Com, Enron and Global Crossings. Part of their demise was the lapse in controls. CEO and Top management compensation in these companies was so heavily tied to stock options that executives were motivated to manipulate financials to buoy the short term stock price

World-Class Companies

Consider the world-class companies such as 3M corporation, Dell Computers, Wal-Mart, South west Airlines. Their long term success is not just because they have developed good strategies, but more importantly, they have designed systems and processes that energize their employees to execute those strategies effectively

Control
Control refers to keeping track of the organizational activities & regulating diversions through a mechanism.

To do this, knowledge of elements of a Control System is required. Broadly, there are 4 elements.

Elements of Control Systems

Elements of a control system consists of: 1. A detector 2. An assessor 3. An effector 4. A communication network

Elements of a control system

1.

A detector or sensor is a device that measure what is actually happening in the process being controlled.

1.

An assessor is a device that determines the significance of what is actually happening by comparing it with some standards or expectations of what should happen.

Elements of a control system

3. An effector (feedback) is a device that alters behavior if the assessor indicates the need to do so. 4. A communications network consist of devices that transmit information between the detector and the assessor and between the assessor and the effector.

Example: You are driving a car

Detectors= Your eyes Assessor= Your brain Effector= Your foot Communication network= Your nerves system

Automobile driver
Assessor (brain)

Detector (eyes)

Control System

Effecter (foot)

Communication Network (nerves

Example

Your eyes (detectors) measure actual speed by observing the speedometer. Your brain (assessor) compares actual speed with desired speed (standard: the highest speed is 80 km/hour) to detect a deviation from standard.

Example

Your brain (assessor) directs your foot (effector) to ease up the accelerator if actual speed (90 km/hour) is faster than the standard speed (80 km/hour), press down the accelerator if the actual speed (70 km/hour) is slower than standard speed (80 km/hour). And, your nerves (communication network) form the communication system that transmits information from eyes (detectors) to brain (assessor) and brain (assessor) to foot (effector

Example : Thermostat
1.

Thermometer which measures the current temperature of a room (detector)

2. An Assessor which compares the current temperature with the accepted standard for what the temperature should be.

Example : Thermostat contd..

3.An effectors which prompts a furnace to emit heat or activates an air conditioner which also shuts off these appliances when the temperature reaches the standard levels

4. A communication network, which transmit information from thermometer to the assessor and from the assessor to the heating or cooling element

Example : Body temperature

1.

2.

3.

The sensory nerves scattered through the body The Hypothalamus center in the brain, which compares information received from detectors with the 98.6 f standard. The muscles and organs (effectors) that reduce the temperature when it exceeds the standard and rise the temperature when it falls below the standard

Example : Body temperature ..

4. The overall communications system of nerves is self regulating. If the system is functioning properly, it automatically corrects for deviations from the standards with out requiring conscious effort.

Management

In terms of process, Management refers to monitoring the actions of sub-ordinates by the superior to ensure that all actions are in accordance with the organizational strategy & are directed towards achievement of the organizational GOAL. This is required on account of multiple levels of hierarchy & complexity of business environment. Though management control system inculcates the 4 elements of a simple control process, there are significant differences between a simple control process & management control process.

DIFFERENCE BETWEEN SIMPLE CONTROL SYSTEM & MANAGEMENT CONTROL SYSTEM

1)

In Simple Control System, Standards are pre-set, whereas, in Management Control system, an independent process of planning is carried out which in turn will help in setting up standards. That again, is a continuous process. Simple Control System usually has an automatic detector while management control is not automatic. It requires self judgment & assessment along with use of mechanical assessor devises, by the person in charge of the control process. Based on such assessment, alteration is initiated, if need is felt, with the approval of higher level of authority.

2)

DIFFERENCE BETWEEN SIMPLE CONTROL SYSTEM & MANAGEMENT CONTROL SYSTEM

3) As against simple control system where function is performed by an individual, the management control requires coordination among individuals. 4) In a simple control system, action for alteration is easily initiated when need is felt by assessor & communicated to effector. But in management control, such direct initiation is not always possible due to complexities of business vis-a-vis organizational authority structure. 5) Management Control is unique in the sense that much of the control is self control rather than monitored control by external device.

Systems

System refers to a prescribed & well laid out manner of carrying out an activity on a single basis or as a combination of activities. Management Control Systems are quite complex and judgmental. Many occasions arise for which either well defined rules are not available completely or the available rules may not be sufficient to handle the peculiar complexity. This requires judgment from managers, based on their skill and knowledge. The success of such managers depend on how effectively they handle the situation by dealing with people.

Result of lack of control at Organizational level .

In 2001, Enron Corporation , the global energy giant, collapsed , in what was one of the largest case of bankruptcy in US Corporate history. WorldCom, the telecom giant , had artificially inflated its earning that rocked the corporate world & shook investors confidence in the stock markets. WorldCom deliberately misrepresented expenses as Capital expenditures, in order to inflate its profits. Andersen Consulting, Global crossing, Toyo etc are other prominent examples where demise of company took place due to lack of control

Barings Bank

Founded in 1762 Britains Oldest Merchant Bank It was the official bank of British Queen

Barings Bank

Nick Leeson was a trader with Barings banks Singapore office from 1992 to 1995. At the age of 27, in 1994, he got an annual compensation of GBP 2,00,000 He single handedly pulled down the Barings Bank in 1995 His illegal trading activities resulted in a loss of US $ 1.3 billion (GBP 837 million) for the Bank The bank declared bankruptcy and shut its doors in Feb 1995

Barings Bank

It did not happen suddenly. Leeson was accumulating losses since 1992 in a fake account number 88888. By the end of 1992, the 88888 account was under water by about GBP 2 million. By the end of 1993 losses had mushroomed to GBP 23 million. By the end of 1994, 88888 account had lost a total of GBP 208 million. Barings Banks Head Quarters in London did not know what was happening in Singapore. A classic example why business organizations need to ensure control over their activities

The lesson

It is not enough to prepare a good strategy / plan and implement it or have intention to implement it.. The organization should have a proper system to control to ensure that everything is implemented as per the strategy / plan

Concept of Management Control

Ensure that Resources are mobilised and deployed efficiently and effectively. Methods and procedures adopted by management to provide reasonable assurance that available resources and assets are properly deployed and safe guarded against waste, mismanagement and frauds. Management control covers the administrative, accounting and financial management areas.

MANAGEMENT CONTROL DEFINED

Robert Anthony and Vijay Govindrajan: Management control is a process by which managers influence other members of the organization to implement the organization strategy. William Newman: Control one of the basic phases of managing, along with planning, organizing and leading. Control is an integral and essential art of the management process and all the managerial efforts of an organization.

CHARACTERISTICS OF MANAGEMENT CONTROL

Focuses on programs and responsibility centers. Relies on two types of information viz. planned data and actual data. Aims at assuring that all aspects are in balance and are operating in close co-ordination. Built around financial structures Follows a definite pattern and time schedule Co-coordinated and integrated to other sub systems

PROCESS OF MANAGEMENT CONTROL

Organizing the process Segmenting the organization Risk assessments: Planning further activities Management control evaluations: Corrective actions Reporting:

FACTORS AFFECTING MANAGEMENT CONTROL

Identify the key factors in the business operations Basis for establishing standards of performance such as budgets, standard cost Define the information required for measuring the performance Establishing a reporting system process of measuring may lack objectivity Management control specialists

MANAGEMENT CONTROL SYSTEMS

It system refers to a framework by which the manager controls the actions of his subordinates and the entire operation of an organization. It facilitates target fixation, collection of information, comparison of actual with targets, identifying and reporting variations and initiating suitable action to ensure attainment of objectives.

NATURE OF MANAGEMENT CONTROLS SYSTEMS

Focuses on those activities that facilitate attainment of targets of responsibilities centres. functions on the basis of two sets of information viz. planned data and actual data. Management Control System covers all functional aspects of a companys operation.

It is built around financial variables, although non-monetary variables are also taken in to consideration. It follows a definite pattern and sequence of activities. Management Control System is a coordinated and integrated system.

SCOPE OF MANAGEMENT CONTROL SYSTEM

Management control system process involves communications and interactions in the form of memoranda meetings and conversations In addition it also includes the following Programs/Goals Budgeting Operating and Accounting Reporting and Analysis

Features of ideal MCS

A total system Monetary standards Definite pattern Coordinated system Line manager Effective Planning Involvement of Top Management: Motivation of Employees: Establish proper communication mechanism:

Activities of Management Control Systems

Control systems in an organization involve the following activities: i. Planning-decides what the organization should do ii. Coordinating the activities of the organization iii. Communicating information to different levels of the hierarchical structure iv. Evaluating information v. Deciding what, if any, action should be taken vi . Influencing people to change their behavior.

Boundaries of management control

Strategy Formulation

Goals, strategies & policies

Management Control

Implementation of strategies

Task Control

Efficient & effective performance of individual task

Strategy Formulation

Strategy formulation is the process of deciding on the goals of the organization and the strategies for attaining these goals.

Management Control

Management control : is the process by which managers influence other members of organization to implement the organizations strategies.

Task Control

Task control is the process of ensuring that specified tasks are carried out effectively and efficiently.

Distinctions between strategy formulation and management control:

Characteristics System design Strategy Formulation Management Control Unsystematic, Strategic Rhythmic, decision may be made any predetermined time procedures Tailored-made to faced problems, more external and predictive, less accurate Integrated, more internal and historical, more accurate Difficult Top management and line managers

Nature of information

Communication Simple of information Involved people Top management and staffs

Distinctions between strategy formulation and management control:

Characteristics Strategy Formulation Management Control Many people Administrative and persuasive Social psychology Tend to short-term Strategy implementation Number of Few people involved people Mental activity Discipline Time horizon End products Creative and analytic Economics Tend to long-term Goals, strategies

Distinctions between Management Control and Task Control

Characteristics Focus of activity Nature of information Management Control The whole of operation Integrated, many financial data Task Control Individual task or transaction Tailored-made to individual task, more non-financial data Supervisor or none Follow direction or none Tasks are carried out effectively and efficiently

Involved people Management Mental activity End products Administrative and persuasive Strategy implementation

Distinctions between Management Control and Task Control

Characteristics Mental activity Discipline Management Control Administrative and persuasive Social psychology Task Control Follow direction or none Economics, physics

Time horizon

Weekly, monthly, annually

Daily

Type of cost

Discretionary costs

Engineered costs

Examples of decisions in planning and control function:

Strategy Formulation Management Control Task Control

Enter a new business Change debt to equity ratio

Add direct mail selling Decide magnitude and direction of research Acquire an unrelated business

Expand a plant
Issue new debt Determine advertising budget Control of research organization

Schedule production Manage cash flows

Book TV commercials Run individual research project

Introduce new product Coordinate order or brand within entry product line

Significance of human behaviour pattern in Management control.

Perception Attitudes and Beliefs Motivation Goal Congruence Inter-unit Conflict and Cooperation Managerial Styles Force Field Analysis Resistance to Change Entrapment Compromising and Sacrificing Socio-Cultural Influences