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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 networ

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

Communication Network
(nerves

Effecter (foot)

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.

2)

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.

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

Management Control

Task Control

Goals, strategies & policies

Implementation of strategies

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

Strategy Formulation

Management
Control

System design

Unsystematic, Strategic
Rhythmic,
decision may be made any predetermined
time
procedures

Nature of
information

Tailored-made to faced
problems, more external
and predictive, less
accurate

Integrated, more
internal and
historical, more
accurate

Communication Simple
of information

Difficult

Involved people Top management and


staffs

Top management
and line managers

Distinctions between strategy formulation


and management control:
Characteristics

Strategy Formulation

Management
Control

Number of
Few people
involved 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

Distinctions between Management Control


and Task Control
Characteristics

Management
Control

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, more
non-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

Distinctions between Management Control


and Task Control
Characteristics

Management
Control

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

Examples of decisions in planning and


control function:
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 Book TV


budget
commercials

Decide magnitude
and direction of
research

Control of research
organization

Acquire an
unrelated business

Introduce new product Coordinate order


or brand within
entry
product line

Run individual
research project

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