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
