Characteristics Of Effective Control SystemsEffective control
systems have certain characteristics. For a control system to be
effective, it must be:1. Accurate. Information on performance must
be accurate. Evaluating the accuracy of the information they
receive is one of the most important control tasks that managers
face.2. Timely. Information must be collected, routed, and
evaluated quickly if action is to be taken in time to produce
improvements.3. Objective and Comprehensible. The information in a
control system should be understandable and be seen as objective by
the individuals who use it. A difficult-to understand control
system will cause unnecessary mistakes and confusion or frustration
among employees.4. Focused on Strategic Control Points. The control
system should be focused on those areas where deviations from the
standards are most likely to take place or where deviations would
lead to the greatest harm.5. Economically Realistic. The cost of
implementing a control system should be less than, or at most equal
to, the benefits derived from the control system.6. Organizational
Realistic. The control system has to be compatible with
organizational realities and all standards for performance must be
realistic.7. Coordinated with the Organization's Work Flow. Control
information needs to be coordinated with the flow of work through
the organization for two reasons: (1) each step in the work process
may affect the success or failure of the entire operation, (2) the
control information must get to all the people who need to receive
it.8. Flexible. Controls must have flexibility built into them so
that the organizations can react quickly to overcome adverse
changes or to take advantage of new opportunities.9. Prescriptive
and Operational. Control systems ought to indicate, upon the
detection of the deviation from standards, what corrective action
should be taken.10. Accepted by Organization Members. For a control
system to be accepted by organization members, the controls must be
related to meaningful and accepted goals.
Evolution of MCSOrganizational life cycle theory presumes that
start-up ventures move through developmental stages as they evolve
from start-up to maturity. Organizational structures and management
control systems tend to evolve as the organization develops.New
organizational structures are developed with the objective of
creating more advanced control instruments so as to enhance the
ability to control evermore complex processes .
Thus, there is evidence to suggest thatthe number and types of
controls instituted is correlated with the company size, number of
employees, and years in operation.
Start-Ups:Organizations start as simple forms where the
owner/entrepreneur exercises centralized authority reinforced by
close personal supervision. Planning and control are exercised
without formal structures or systems, and parameters are set for
the amount of discretion that can be exercised by
subordinates.Procedural control or formalization:Successful
start-ups typically reach a point where the demands of growth and
size require that informality and looseness give way to a set of
systems and structure.. At this stage in the evolution of the
organization, behavior is sought to be controlled through policies
and plans designed to prescribe correct or expected
action.Formalizationfacilitates greater delegationandlessens the
need for close supervision. Greater individual effort may follow as
delegation permits a higher degree of individual freedom,
discretion and control.
Functional Departments:With the development of larger, more
complex organizations seeking scale economies, control comes to be
exercised through professionalized management and a
bureaucracy.This had provided the advantage of division of labour
based on skill requirements which in turnbrought about increased
efficiency in individual functional departments. Standardization of
work-related policies is introduced along with the formal
programming of behavior. Responsibility for behavioral control and
control of outputs is delegated to individuals according to their
level within an increasingly hierarchical structure. This implied
the onset of bureaucratic framework.
Bureaucracy was appropriate for the industrial age in that
well-delineated lines of command, organizational structures, and
areas of responsibility, authority and accountabilityallowed for
specialization by functionand theexploitation of economies of
scale.
However managers in different departments tend to develop their
own departmental identities and philosophies. Decisions become
increasingly based on departmental rather than organizational goals
and a parochial outlook makes coordination more difficult. It has
lead to conflict in priorities among the departments.Hence in
functional organization, strategic planning and control gets
concentrated at the top management
Strategic Business Unit (SBU):Starting in 1920, companies became
too large and diversified to manage under a traditional, pyramid
organization. The firm, then adopt appropriate organizational
structure and change their control strategy. Hierarchies are
replaced by flatter structures. The solution was decentralization
via the creation of organizational divisions that performed some
functions independently of the company headquarters. This strategy
was successful until 1960, when growth of profits stagnated. Given
strategic direction from headquarters, some divisions could not
adjust to their markets while others were stuck in low growth
areas.Conglomerates needed to become more agile to respond quickly
to changing economic or market situations. Further, as firms focus
becomes increasingly market oriented, conglomerates needed to
become more agile to respond quickly to changing economic or market
situations
In 1970, GE pioneered the introduction of a new, different
approach based on strategic business units.SBUs are essentially
autonomous division or organizational unit, small enough to be
flexible and large enough to exercise control over most of the
factors affecting its long-term performance
Once a firm sets up SBUs, they develop their own strategies.
They analyze their competitive position in their market, they
develop products that respond to the needs of their customers and
they evaluate their performance. They still report back to company
headquarters but operate as independent businesses (or mini
companies) organized according to their target markets. They are
organizationally complete and separate units. Functional
departments come under the operational control of the business unit
manager.
Both thefreedom to innovate and management control are enhanced
by granting autonomy limited by clearly stated laws and an
effective justice /reward system.
Business Process Outsourcing:A more recent trend is that of
assigning allNon-coreactivities to outside agencies for execution
(and control). Business Process outsourcing is an attempt on these
lines. The company seeks to achieve maximum efficiency in
accomplishing its strategic objectives while at the same time save
on its control efforts on functions that have been identified as
non-core and thus assignable.
Control Sytems and the External environment:In addition to the
internal demands of an ever-larger and more complex organization,
control systems must also reflect the changing external
environment. As the external environment becomes more complex and
dynamic,uncertainty increases, and the appropriate organizational
structure and control strategy changes. As task uncertainty
increased, coordination by programming and hierarchical means are
substituted byhorizontal communication channels.Dynamic
environments tend to lead to adaptation facilitated by less formal
controls. Govindarajan concludes that "as tasks vary in
uncertainty, the behaviours necessary for effective performance
also vary; further, since different control systems induce
different behaviours, superior performance can best be achieved
bytailoring control systems to task uncertainty". The effectiveness
of formal controls may be limited in situations of uncertainty,
while the use of social orinformal mechanisms becomes more
appropriate
Domain of Management Control Systems:Many different definitions
surround the idea of management control or organizational control
as earlier researchers had chosen to call it. The theme, however,
has remained fairly common. That is Goal Achievement.Earlier on
Anthony viewed control as a process by which management ensures
that an organization carries out its strategies effectively and
efficiently. This view has found agreement with many researchers on
the subject.Expanding Domain:The fact that there are multiple ways
of approaching the control concept has lent it a certain ambiguity,
with the literature offering alternative definitions and completely
different approaches. There are numerous definitions of the control
concept, each adding newviewpoints as new elements are seen to be
relevant.Earlier on, management accounting and management control
have long been viewed as practically synonymous concepts, since
accounting provides a language capable of including all areas of
organisation and it has always been attributed with a considerable
decision-making orientation, which is especially true in the case
of management accounting. This mechanistic and formal control fits
the goal achievement objective of managerial control.In order to
surpass the limitations of mechanistic systems, approaches have to
be developed in which the passive, rational behaviour of
individuals is substituted by a greater consideration for the
organisational and motivational factors that influence behaviour,
accepting that the crucial aspects for the design and
implementation of the control systems are not limited solely to
those of a formal nature.By 1988, Anthonys definition of management
control as the process by which managers influence other members of
the organization to implement the organisations strategies included
behavioural overtones having sociologic impact.
Subsequently, while organization theorists have focussed on
information flows, the cybernetic school stressedfeedback and
measurement. Independent environmental and company variables and
their influence on control tools used by managers have also been
researched as distinctive features of control systems.Divergence in
Views:There appears to be some divergence in the views adopted by
prominent experts in this field. Joseph A. Maciariello and Calvin
Kirby defines Management Control both as Control of Strategy and
Control of Operations. This is contrary to the position taken by
Robert N. Anthony who tried to demarcate the boundaries of task
control, operational control, and management control.Maciariello
and Kirby also held that as it is concerned with the design
ofManagement systemsused to steer the organization towards its
purpose, it includes aspects of planning organizing and leading
functions of management. This is in divergence to the views implied
in William Newmans definition. Newman considers the domain of
control systems to be the control function of management and
believes Control is one of the basic phases of Managing along with
planning organizing and leading. Each phase is thus viewed as being
distinctConclusion:There are multiple frameworks to look at the
management control process depending on the areas from which
researchers have explored management control.What is MCS ? Why do
we needit?However Laudable strategic intentions may be, if they do
not become a reality, they usually are not worth the paper on which
they are written.The statement points to the significance
ofimplementationof these strategies by theManagement. Effective
& efficient implementation is achieved by the management
through the introduction ofcontrolsthat aresystematic.In order to
have a proper understanding of the nature of MCS, we then need to
have a closer look, at the individual concepts of Management,
Systems & Control .Management:An old but very popular
definition refers to the termmanagementas theart of getting things
done through others.This has become a very popular definition of
management for several reasons. Mostly it is because of the fact
that, this definition is very simple and easy to understand. Also,
it highlights the indirect nature of a manager's job.A manager does
not operate a machine or sell a product himself. Rather he guides
others in producing and selling goods and services.The above
definition is, however, inadequate for the present day concept of
management. It suffers from many drawbacks. Since the days of F.W
Taylor management has become a science based on certain fundamental
principles. . Apart from other inadequacies in this definition,it
fails to reveal the functions of a manager and the skills used for
getting things done.The Functions of Management, such as Planning,
organization, Directing, co-ordinating, Motivating and controlling
etc are all aimed at achieving organizational goals effectively and
efficiently. This also involves the influencing of behaviour of its
people and also ensures optimum utilizationof its
resources.Management may have different hierarchies, each level
responsible for different tasks. Senior Management (Board of
directors) are responsible for Strategic planning, Goal setting and
laying down Policy matters. Middle management are involved in
strategy implementation, setting objectives, monitoring and
analyzing performance and providing feedback to senior management.
Junior management on the other hand are associated with supervision
& execution of operations. These hierarchies may be identified
within any structureof the firm or its Strategic Business Units
where additional strategies or sub-strategiesare formulated and
implemented.System:A common feature of any system is that it
represents a holistic or complete entity comprising of a number of
components working together towards a common objective. The
components are arranged and interact in a systematic manner so as
to give almost the same result in every execution turn of the
system. For most structured problems system provides an assured
solution.In business a system is a prescribed way of doing
somethingCharacteristics of a Control System:The term control is
used in management parlance in a cybernetic sense, that is to say,
as a self-regulating mechanism with the following sequence of
actions, which are essentially the elements of the
repetitivecontrol processas follows:1.Setting Goals and performance
measures2.Measure Achievement3.Compare achievement with
goals4.Compute the variances as a result of the preceding
comparison5.Report the variances6.Determine the cause of the
variances7.Take action to eliminate the variances.8.Follow up to
ensure that goals are met.Control ObjectA control object is the
variable of the systems behaviour chosen for monitoring and
control. The choice of the control object is the most important
consideration in studying and designing a control system.
Variations in the status of control object i.e., its behaviour
become the stimuli which trigger the functioning of the control
system. Without these variations the system has no reasons for
existence.DetectorThe detector tracks the performance and can be
visualised as a scanning system and it feeds on information. In
fact the detector is another name for Management Information System
(MIS).Comparator/AssessorThe output of the scanning system
constitutes the energizing input of the comparator. Its function is
to compare deviation of the control object from the pre-determined
standard or norm the deviation become input to the activating
system.EffecterThe effecter is a true decision maker. It evaluates
alternative course of corrective action in the light of the signifi
cance of the deviations transmitted by the comparator. On the basis
of this comparison, the systems output is classifi ed as being in
control. If out of control it initiates corrective
action.Communication NetworkThese are devices that transmit
information between the detector and the assessor and between the
assessor and the effecter.A pressure cooker is a good example of
self-regulatory control system. When the pressure in the cooking
vessel rises above the set limit, the weight lifts up to let out
the extra pressure out of the vents on the top of the lid till the
pressure stabilizes at the set limit. Thus in the pressure cooker
control is automatic.Organisations function by and through people.
Hence, unlike mechanistic systems, control system in organization
have to contend with behavior of diverse personalities and thus
management control is not automatic. Further goal congruence
requires the coordination of groups of people in the
organization.The Cybernetic Paradigm:Mr. Stafford Beer has given
three principles governing control functions in cybernetic
system.1. In implicit controllers there is CONTINUOUS AND AUTOMATIC
COMPARISON of some behavioural characteristic of the system against
a standard. Further there is CONTINUOUS AND AUTOMATIC FEEDBACK of
corrective action.2. In implicit controllers control is SYNONYMOUS
WITH COMMUNICATION. Control is achieved as a result of transmission
of information. Thus to be in control is to communicate. Control
and communication are two sides of the same coin.3. In implicit
controllers, variables are brought back into control IN THE ACT OF
AND BY THE ACT of going out of control.Example:The cybernetic
paradigm of the control process can be diagrammatically represented
as under. The term cybernetics is derived from the Greek word
Kybernetes which means steersman. A steersman is a person who
directs a ship and corrects deviations from planned course of
action as they occur.
An adaptive cybernetic system is structured to i) To exact
information from the environment ii) Form and adopt Goals iii)
Select and emit Goal directed behaviour iv) and learn to adapt.Scan
Process:Each manager scans the environment, formally or informally,
to absorb information or feedback pertaining to its condition. The
environment include the outside world (The External environment as
well as the organizational units internal to the firm. These would
include Goals, strategies, policies decisions and Management styles
of its superior responsibility center.The Manager comes into
contact with the environment through the sensors. Sensors are
mechanisms used by the managers to collect data. The include
structuredreports ( Formal)and informal reports, that come to his
attention through his sense of hearing and seeing.Construct Factual
Premises:By passing data through a cognitive process, referred to
asperception,the manager is able toextract information from data
and interpret the meaning of that information. Thus the manager
constructs certain beliefs orfactual premisesconcerning its
performance and the state of the external environment. However due
to cognitive limitations t decision makers are not able to
asimilateall datainthe environment. So the decision maker uses past
experience, organizational goals, and personal aspirations to
arrive at these beliefs about the actual state of the
environment.Compare & Determine Gap (if any):The manager
compares the factual premise with the organizational goals.
TheComparatorrepresents the comparative process. The goals
themselves are the result of past learning concerning performance
and achievements. They represent the decision makers desire, that
isValue Premise.When there is a difference between the factual
premise and the Value premise, they are motivated to search for
courses of action to close the gap.Behavioral Choice:The choice of
the course of action leads from amongst a set of alternatives is
referred to asBehavioural Choice.A set of alternatives, which have
been successful in solving similar problems in the past,is
suggested from the decision makersbehavioural repertoirewhich is a
function of the organizational goals, past experience, and the
decision makersfactual premise.Satisficing:Ifno alternative is
expected to reduce or close the gap, the decision maker will expand
the search process. The search process ,which is motivated by the
presence of a gap,will stop when afeasible alternative is found
that will close the gap. This decision-making procedure is referred
to as satisficingEffector (Implementor):Amanager activates the
decision, thus serving as a change agent. Control is brought about
by this manager who next seeks to determine the effects of his
action. This new information is referred to as feedback. If the new
behaviour leads to reduction or closure of gap, the behaviour is
likely to be repeated .Effect of Feedback:It has the long term
effect of producing learning in the organization.Goals and
performance measures adapt to actual performance.Search and
decision rules adapt to experienceoThose found effective in the
past being used under similar circumstances in the futureoThose
found least effective being droppedfrom the behaviour
repertoireUltimate Gap closure:The process is repeated if the goals
are not achieved. If after repeated attempts the goals are not
achived, the manager will either alter the performance measures and
thereby the factual Premise or reduce his goals. In either case the
performance gap is ultimately closed.
Robert Anthony & Vijay Govindarajans view of Management
Control:
The learned authors have,in 2007, defined Management Control
asRobert N. Anthony 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 aid management for
steering an organization toward its strategic objectives.
Management controls are only one of the tools which managers use in
implementing desired strategies.
Relating system to organizational objectivesManagement Control
System (MCS)Joseph Maciariello & Calvin Kirby have defined
M.C.S. as followsMCS is a set of inter-related communication
structures that facilitates the processing of information for the
purpose of assisting managers in coordinating the parts and
attaining the purpose of an organization on a continuous basis.
They view the entire organization as a control system. Control is
seen as a characteristic of a control system; it occurs when the
organization is attaining its purpose. Purpose and attainment of
purpose are central to the work of control system.Thus Maciareillo
and Kirby include both Control of strategy and Control of
operations in the definition of M.C.S. A good management control
framework, implemented properly, will enhance organizational
adaptability, accelerate productivity and enhance
competitiveness.Purposes of MCS, according to them are1.
Coordination of parts of organization2. Steering those parts to
achieve organizational goals.3. Bring along unity out of the
diverse activities of an organization.
Informal Control Systems
1.2.1 Management Style & CultureManagement Style may be
summarized as a continuum between highly autocratic or external
style or Theory X Style and highly participative or internal style
or Theory Y style.In the external style there is:a) Centralisation
of authority and decision making and lower levels of management
have to strictly comply with the formal procedures laid.b) The
organization structure is pyramidal in naturec) Detailed formal
planning and control systems are formulated which are rigid in
natured) There is strict supervision and guided tight control.e)
There is no freedom given and no empowerment at lower level.f)
Rewards and incentives are used effectively to motivate
employeeThis system does produce results, but it may demotivate
employees who like to have more freedom in the works environment.
Further it may thwart the innovative spirit. The intense
competition amongst employee may even create a tense atmosphere in
the organization which may not be conducive to long term
growth.However in case the employee are very subservient and not
enterprising, this style may suit such organization.The classic
illustration of this external style was the one practiced by Harold
Geneen of ITT in U.S. with a highly centralized tight central
system. He personally made detailed evaluations of the performance
of business units instead of monitoring the overall performance
only, leaving the details to the unit managers.Internal Style: The
internal style is participative in nature and employees are given
the freedom to offer suggestions, come out with innovations and
take part in the decision making process.There is thus:a)
Decentralization of authority i.e., bottom-up approachb) The
organization structure is flatc) Rules and procedures are
flexibled) There is empowerment of employee which may encourage
their creative spirit to blossome) The organization promotes
commitment and self-control rather than thrusting a stifl ing
control on employeesIn this style of management there may be a
tendency on the part of some employees, who are not self motivated,
to be passengers, without making any positive contribution to the
organization.There is also the danger of each employee going his
own way resulting in chaos, and to avoid such eventuality suitable
coordinating mechanism must be in places. Moreover, the individual
behavior must be goal-congruent with that of the organization.John
Chambers of CISCO practiced a participatory approach and encouraged
his employees to lead, make good decision and take risks
willinglyJack Welch the legendary CEO of General Electric was an
autocratic leader in his early career, inviting the nickname of
Newtron Jack. From 1990s he transformed his style into one of
involving people in decision-making and making use of the brain of
every worker. His ambitions goal was to remove the boss element for
G.E and to make it a boundary less organization. Jeff Immelt who
succeeded Jack Welch in 2001 is adored by everyone in G.E. for
being a friendly likeable leader, with a proven track record.In
India, Infosys is a typical example of a company practicing a
democratic approach in management.Toyota is well-known for its
philosophy of encouraging employees to come out with suggestions
for improvement and rewarding them.Mixed Style This is a composite
of both the above styles, blending the advantages of each, without
their drawbacks. Human nature being what it is, proper functioning
of any organization requires suitable checks and balances. A
control style based exclusively on intrinsic motivation seems to be
nave. A rigid authoritarian style, cast in a rule-bound framework,
may be a noose round the organization Murugappa group is a good
example of this modified style of management. While the Board lays
down the major policies and broad guidelines the professional
divisional managers are given total freedom to attain the
organizations goals.Management CultureCulture consists of shared
values, beliefs and norms of organization which grew over time
based upon the assumptions of what it takes to be successful. While
management style is associated with individual managers, corporate
culture is pervasive and is an organizational concept.Culture
facilitates cooperation & communication within the
organization; however, if the beliefs are not consistent with the
needs of business, dysfunctional consequences may follow. A shared
belief also ensures greater commitment of the employee to the
organization. BSNLs complacent culture in a monopolized environment
had to undergo a radical shift to a market oriented approach when
the telecom sector was de-regulated.Key themes or dominant values
shape the organization culturea) A belief in the importance of
people as individuals and in their ability to makea strong and
effective contribution ( Eg. Infosys &Intel)b) A belief in
superior quality and service (eg. I.B.M)c) A belief in cleanliness
& quality (eg M.T.R &McDonald)d) Belief in innovation (eg
3M)Infrastructure:It is necessary to design a proper control system
infrastructure encompassing organization structure, responsibility
centers, performance measures and rewards. A formal organization
structure is a communication structure that is established to
process information for the purpose of attaining the goals of the
organization. An organizations ability to achieve and maintain
control is directly proportional to its information processing and
communication capability. The development in the information
processing field have accelerated this capability..Organization
StructureA fi rms strategy has a major influence on its structure.
The type of structure in turn infl uences the design of the
organizations management control system. Organization structure can
be grouped into three general categories.1. Functional Structure2.
Divisional Structure3. Matrix StructureFunctional Structure:In this
structure, each manager is responsible for a specifi ed function as
Finance or Marketing. The diagrammatic representation of this
structure is as follows
The rationale for the functional form of organization involves
the notion of a manager who brings specialized knowledge to bear on
the decisions related to a specific function, as contrasted with
the general-purpose manager who lacks specialized knowledge. A
skilled marketing manager and a skilled production manager are
likely to make better decisions in their respective fields than
would a manager responsible for both functions.Advantage:A
specialist manager should be able to better supervise his
subordinate manager & workers. Thus this structure brings
aboutefficiencyin its operations.Disadvantages:1.There is no way of
ascertaining without a shadow of doubt, what fraction of profit was
contributed by each function, and thereby determining the
effectiveness thereof.2.Similarly, at lower levels, there is also
no way of arriving at the profit contributed by the several
production departments, for instance.3.Disputes at the very lowest
level between personnel attached to different functions can be
resolved only at the top. For example, marketing manager may want
to satisfy the requirement of an important customer, which involves
extra costs in terms of overtime, re-scheduling costs etc which the
manufacturing department may be unwilling to incur. Dispute
resolution thus becomes costly and time consuming.4.Functional
structures are inadequate for a firm with diversified products, as
the notion of amanagerbringing in specialized knowledgeto bear on
the decisions related to a specific function, is not applicable
Diversified products, would imply diverse specialized
knowledge.5.Functional organizations tend to createsilosfor each
function ,thereby preventing cross-functional co-ordination in
areas such as new product development.(This problem can be
mitigatedby supplementing the vertical functional structure with
lateral cross-functional processes such as job rotation and team
based rewards)Divisional StructureIn this structure each of the
decentralized division operates as a complete business unit in
itself, like a semi-independent part of the company. The
diagrammatic representation of this structure is as follows:
This structure helps the firms to be more
market/customer-focused when the fi rm is engaged in unrelated
product businesses. Full authority and accountability is given to
the head of divisions as a separate profi and/or investment
responsibility center.Structure produces greater managerial
motivation to run their own business within broad company policies,
thus acting as a good training ground for leadership.Matrix
StructureMatrix Organisation Structure combines the coordination
and control of the decentralized structure with the technical
excellence economies of scale of the functional structures to reap
the benefits of both. While managing complex programs as in large
high-technology programs, complex products and services and
multinational business, organization face several coordination
problems. A matrix avoids such problems as the total responsibility
for achieving the goals and objective of the program lies with
Program Manager but must share resources from the various
functional heads. The functional managers assigned to the projects
are administratively reporting to the Project Manager but
functionally to the Function Head.The distinguishing feature of the
matrix structure is thus the dual dimensions ofmanagement embodied
in it.The structure of a Matrix Organization is given below:
The outputs produced by the organization may be identifi ed in
the rows of the matrix while functional inputs utilized by each
project may be identifi ed in the columns of the matrix. The total
outputs of the functions are found in the last column of the
matrix.Though the Project Manager assumes full responsibility for
delivery of a product which meets performance specifi cations he
does not have direct authority over the functional organization
that actually performs the work. The functional personnel thus
operate under the knowledge-based authority of the function and the
resource-based authority of the Project Manager. This may create a
friction in the course of the work but it is up to the Project
Manager to use it as a creative friction to further the goals of
the program.b) The matrix organization structure is suitable for
projects which are not large enough to warrant a fully
decentralized set-up, with all functional managers under each
project. Decentralization may result in loss of scale economics, by
way of duplication of functional services for several projects. The
matrix structure is suitable for projects of short duration.c) (i)
Advantages:1. Ensures better coordination and control of the
decentralized structure along with achieving technical excellence
and economies of scale of the functional organization.2. Fosters
creativity and multiple sources of diversity3. Broader
middle-management exposure to strategic issues of the business4.
Acts as a good training ground for future leaders.(ii)
Disadvantages:1. Dual accountability as explained above, which may
create confusion2. Necessitates tremendous horizontal and vertical
coordination3. Difference in orientation between Program and
Functional personnel. The functional person may aim for high
technical performance not warranted by project requirement4.
Diffuse responsibility As responsibility is distributed between
program and functional personnel becomes diffi cult to administer
system of accountability, leading to potential conflict5. Program
personnel may have a sense of insecurity as soon as a project is
completed and this may lower their morale6. The design of the
reward structure for program and functional personnel is a ticklish
issue which should be worked out in a fair and transparent manner
to satisfy all.The main consideration in design of organization
structure areFunctional DimensionProduct DimensionGeographical Area
DimensionThe basic problems in design of organization structure
areEnsuring functional excellenceEnsuring coordinationEnsuring
controlRecognizing behavioural issuesThe evolution of different
structures associated with corporate stages of development are
noted below:
Controls for Differentiated StrategiesRobert Anthony & Vijay
Govindarajan have given controls appropriate under different
strategies which are reproduced below:
Different Corporate Strategies: Organisational Structure
Implications:
Control ProcessThis covers the management accounting tools such
as capital and operational budgets and reporting systems which are
covered under other Study Material/s.Coordination &
IntegrationTo ensure that all the sub-units of an organization work
in sync with each other it is imperative to have institutional
mechanism for coordination. This is done through constitution of
Committees for strategies & operational issues. There can be no
substitute for face-to-face interaction amongst members of an
organization. There could also be contacts with each other through
e-mail & telephone.RewardsRewards are a major motivational tool
to secure the participation of individuals to achieve
organizational goals. They are also an important source of
communication and feedback. They communicate just what the fi rm
values and just how valued an individual is to the fi rm. The
feedback or rewards may be positive, seeking to reinforce and
encourage certain behaviors or negative, seeking to alter behaviour
to a more desirable pattern.Reward system should blend the interest
of individuals with that of the institution to ensure goal
congruence. The system should be transparent and be perceived as
fair.An effective reward system requires Establishment of goals
Performance measurements, fi nancial and non-fi nancial Rewards
criteriaThe rewards can be monetary or non-monetary.Monetary
rewards are salary, benefi ts and incentives. The incentives may be
individual or group incentives.It could be short-term based on
excellent performance in the current year or long-term through
Equity Stock option plans. Such plans boost the morale of the
employee and fosters a sense of belonging to the organization.Apart
from the foregoing factors, the reward system must be designed
differently for the different levels of management. The
compensation plan of Nucor Corporation, USA, serves as a good
illustration.CompensationNucor provided employees with a
performance-related compensation system. All employees were covered
under one of four compensation plans, each featuring incentives for
meeting specifi c goals and targets.1. Production Incentive
PlanThis covered most Nucor workers. Under this plan, employees
directly involved in manufacturing were paid weekly bonuses based
on actual output in relation to anticipated production tonnages
produced. The bonuses were paid only for work that met quality
standards and were pegged to work group, rather than individual
output. (Each work group contained 25 to 40 workers.). Once the
standard output was determined, it was not revised unless there was
a signifi cant change in the way a production process was performed
due to a source other than the workers in the bonus group.Bonuses
were tied to attendance and tardiness standards. If one workers
tardiness or attendance problems caused the group to miss its
weekly output target, every member of the group was denied a bonus
for that week. This bonus system is very tough, said Iverson. If
you are late, even only five minutes, you lose your bonus for the
day. If you are thirty minutes late or you are absent for sickness
or anything else, you lose your bonus for the week. Now, we have
four forgiveness days per year when you might need to close on a
house or your wife is having a baby, but only four.Maintenance
personnel were assigned to each shift, and they participated in the
bonus along with other members operating on that shift; no bonus
was paid if equipment was not operating. Production supervisors
were also a part of the bonus group and received the same bonus as
the employees they supervised. The weekly output by, and bonus for,
each work group were displayed at the front entrance to the
factory. While there were no upper caps the production incentive
bonus, in general averaged 80 to 150 percent of the base
wage.Iverson gave an example of how this plan worked: In the steel
mills, there are nine bonus groups: three in melting and casting,
three in rolling, and three in fi nishing and shipping. Take
melting and casting, for example. We start with a base of 12 tons
of good billets per hour: Above that, the people in the group get a
4 percent bonus for every ton per hour. So if they have a week in
which they run, say, 32 tons per hour and that would be low thats
an 80 percent bonus. Take the regular pay, the overtime pay,
everything, multiply it by an additional 80 percent and we give
them that check along with their regular check the next week.2.
Department Manager Incentive Plan:Nucors department managers
oversaw the production supervisors and, in turn, reported directly
to the general manager of their plant. They earned an annual
incentive bonus based on the performance of the entire plant to
which they belonged. The target performance criterion here was
return on asserts.Every plant operated as a stand-alone business
unit. All the plants had the same performance target:A return of 25
percent or better on the assets employed within that plant. In
recent years, bonuses averaged 82 percent of base salary.
3. Senior Officers Incentive Plan:The designation senior
officers included all corporate executives and plant general
managers Nucor senior officers did not have employment contracts,
nor did they participate in any profi t sharing, pension, or
retirement plans, their base salaries were lower than those
received by executives in comparable companies. Senior offi cers
had only one incentive compensation system, based on Nucors return
on stockholders equity above certain minimum earnings. A portion of
pretax earnings was placed into a pool that was divided among the
offi cers. If Nucor did well, the offi cers bonuses, in the form of
stock (about 60 percent) and cash (about 40 percent), could amount
to several times their base salaries. If Nucor did poorly, an offi
cers compensation was only base salary and, therefore,signifi
cantly below the average pay for this level of
responsibility.During a slack period in the 1980s, Iverson was
named the Fortune 500 CEO with the lowestcompensation. He saw this
as an honor. When I walked through a plant during that period of
time when we had to cut back to a four-day work week, or even
three-and-a-half days. I never heard an employee who complained, he
said. His pay may have been cut 25 percent, but he knew that his
department head was cut even more and that the offi cers were cut,
percentage wise, even more than that. I call it our share-the-pain
program. I think in 1980 I earned $ 430,000. In 1982, I earned $
108,000.Management should take the biggest drop in pay because they
have the most responsibility.Behavioural Implications of Control
System:Control system exerts considerable influence on the
behaviour of individual in an organization.We have already seen the
impact of managerial style on behaviour The impact of control
system on human behaviour is best illustrated with the help of
examining one type of control, say, budgetary control. The budget
process affects behaviour in three aspectsa) Formulation of
budgetsThe budgeting process may be top down, determined wholly by
top management. This may engender a feeling of budgets being thrust
upon employees who perceive them as pressure devices; as a result
their full enthusiasm may not be forthcoming in implementing it. In
case the budget is formulated with a bottom-up approach, involving
employees, commitment for meeting the budget can be assured.b)
Fixing targetsSales production and other targets that are fixed
should be challenging but attainable so as to bring out the best
efforts of individuals. If targets are so high, as to be
unattainable, it may be de-motivate employees: in some cases it may
also lead to manipulation of data to ensure conformity with
budget.However such manipulations will have adverse effects in the
long run. A common practice is far sales manager to dump stocks on
their dealers at the year end to meet sales targets, perhaps giving
unduly long credit.c) Evaluation of performanceThe evaluation of
performance should be done in a constructive manner and not in
vindictive style. While variances may be thrown up by the system,
the causative factors may not be known readily. Hence it is
necessary to analyze the reasons for variance and ensure proper
accountability.Budget as tool for coordinationBudget is not only a
tool for planning in control but more importantly a means of
ensuring coordination between the different departments of
organizations. Thus if marketing demand is more than production
capacity, ways for increasing production by working more shifts or
sub-contracting may be explored. After looking at several scenarios
the best option is chosen, reconciling the conflicting interest of
all concerned and the entire organization operates on the same
wavelength. Inter departmental conflicts are avoided.RewardsRewards
are powerful motivational tools. However if the reward is perceived
to be unfair or not transparent, it may have a demoralizing effect.
The history of companies like Worldcom, Enron, Tyco etc have shown
how CEOS actuated by greed, manipulated and artificially boosted
profits and share prices by resorting to dubious accounting
practices to maximize their individual earnings, which ultimately
led to the collapse of the companies.Budgets may lead to wasteWaste
may arise as managers adopt the view we had better spend it or we
will lose it. This is often coupled with empire building in order
to enhance the prestige of a department.