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Influencing people to change Leading
their behavior
Management control systems can be framed in terms of following three types of controls.
Action controls involve ensuring that employees perform (or do not perform) certain
actions known to be beneficial (or harmful) to the organization
Results controls focus on results that involve rewarding individuals (and sometimes
groups of individuals) for generating good results or punishing for poor results.
Personnel & cultural controls ensure that employees control their own behavior or
control each others behaviors. Such controls aim at helping employees to do a good job
and are based on employees natural tendencies to control themselves.
Action
Controls
Personaland cultural
control
Result
Control
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Management control system can be viewed from functional perspective
Control System framework
Objective
Setting/
StrategyFormulation
Management
Control
Task Control
Marketing
Finance
HRD
Manufacturing
R & D
*
*
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Elements of Control Systems
Planning
Strategic MeasurementUncertainties
Reporting
Planning includes the projects, ideas, programmes and activities
that organization intends to take up over its planning horizon.
It articulates the strategic intent (Prahalad and Hammel) in an environment of strategic
uncertainties created by technology, consumer preferences, competitors strategies etc.
M easurementprocess involves measurement of the actual performance against targets.
Reporting involves achievement reporting by comparing the actual achievement
with the desired achievement.
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Hierarchy of control (Strategy, Management control and operational/ Task control)
Old Framework New Framework
(Anthony & Dearden) ( Anthony & Govindarajan)
Strategic planning Strategy Formulation
Management control Management Control
Operation control Task Control
Management control and strategic planning and control
Strategic planning focuses on a single aspect of the corporate life at a timewhereas management control focuses on all the operations of differentsubdivisions or units of an organization.
The domain of strategic planning comprises unstructured or unprogrammeddecisions whereas management control is rhythmic and regular.
Nature of information required for strategic planning tends to be tailor made forthe problem, largely external, futuristic and less accurate whereas management
control requires integrated, largely internal, historical and accurate information.
Strategic Planning often uses techniques like SWOT analysis (Strengths,weaknesses, opportunities and threats analysis) whereas management control
relies on budgeting.
Time frame of strategic plans tends to be long, say beyond one year whereas the
management control operates by a year, quarter or even smaller timeframes.
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Strategic planning is a creative and analytical activity whereas managementcontrol is largely administrative and persuasive in nature.
Appraisal of strategic plan is extremely difficult compared to management controlwhich is relatively easy to evaluate.
Management control and operational control
Management control focuses on all the operations of a subdivision or unit of an
organization whereas operational control is limited to a single task or transaction
The domain of operational control involves little judgment and greater reliance on
rules whereas in management control there is greater degree of judgment anddecision making.
Information needed for operational control is often tailor made to the operation,
nonfinancial, precise and real time whereas management control often uses
integrated, financial, futuristic and historical information.
Time horizon of operational planning and controls tends to be day to day where as
management control works with weekly monthly or yearly time frame.
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Organization Structure and Control process
Functional Structure
Divisional structure
Matrix structure
Network structure
Functional Structure: Production, Marketing, Finance, HRD etc.
Divisional Structure
Structure based on a product lime or a group of product lines that constituted division.
Matrix Organization
Structured along product/projects and functions
Network structure or horizontal structure
Common in IT structured on the basis of network requirements. Various parts of
organization are interdependent, interwoven
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NEW MANAGEMENT TECHNIQUES FOR MANNAGEMENT CONTROL
Integrating TQM and MCS
Fundamental idea in TQM is PDCA. Plan, DO, Check and Act. The focus was on total
quality and to gain control through quality. TQM has focused on customer through defect
free service. Manufacturing and Marketing has come closer. Kaizan continuous
improvement PDCA cycle is modification of planning coordinating, communicating,Information Evaluation of information Deciding the action influencing people.
Top Mgmt. Middle Mgmt. Supervisors and
Workers
TQM Innovation Kaizan Maintenance
MCS Strategy Formulation Mgmt. Control Task Control
Integral Visioning Decision-action Task Performance
View
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J I T & M C S
JIT aims at eliminating waste
Two approaches:
1. Produce, hold inventories and wait for customer orders
2. Get the customer orders, then produce
In JIT the following are considered important
Reduction in production cycle time
Production flow smoothening
Quality focus
JIT can be considered important operational control mechanism with reduced cycle time
leading to better efficiency and productivity. The goal of the JIT is to have Zero
inventory wherein the optimum lot size is one-- goods are produced or ordered when theyare.
Anthony and Govindarajan (1994) observe that the better phrase would be Minimum
Inventory driven system (MIDS)
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Benchmarking and MCS
Initially developed by Xerox to achieve Leadership through quality
benchmarking is the process of continuously comparing and measuring an organizationagainst business leaders anywhere in the world to gain information which will help the
organization take action to improve its performance.
Benchmarking
Identification and implementation of best practices to achieve customers result and
business performance.
Benchmarking is a process. Benchmarking by itself does not improve performance; it
provides information you can use to improve. It is a discovery process aimed at
exceeding customer expectation.
Benchmarking is broadly classified in following three categories:
Competitive benchmarking:
Attempts to determine what competition is doing with respect to product design.
Focuses on benchmarking product cost.
Process benchmarking
Scope of the process to be benchmarked
How does the process work? How do we measure it?
What do we want to learn about the process from the benchmarking partners?
Strategic benchmarking
Idea is to create and implement a new strategy---either to create a shift in strategy oradoption of new business practice.
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Activity Based costing (ABC) and Management Control
Activity Based Costing is essentially a system of allocation of overheads on the basis of
activity caused by the product. In this system, the word activity is often used instead of
cost centre, and cost driver instead of basis of allocation, and the cost system is called anactivity-based-cost system.
ABC has important implications for management control.
It yields better picture of the product costs facilitating decision making relating to pricing,
product mix, make or buy decisions etc.
Responsibility Centre
Introduction
As the organization grows and becomes larger the business complexities arise and it
becomes necessary to share the authority of decision making and responsibility with
others through delegation .The mangers to whom the authority and responsibility isdelegated have to be held responsible for the consequences of their decision making. This
necessitates evaluation of the performance of the managers.
Responsibility Centre:
A responsibility centre may be defined as an area of responsibility which is controlled
by an individual. Anthony and Govindarajan defined responsibility centre as an
organization unit that is headed by a responsible manger.
Expense Centre
A Cost or expense centre is a segment and division of an organization in which the
managers are held responsible for the cost incurred in that segment.
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In a manufacturing organization, production and service department is the cost centre.
In a marking department, a sales region or a single sales representative may be taken
as expense centre.
Two general types of expense centre
1) Engineered expense centre - Those elements of costs which can be predicted with fairdegree of accuracy e.g. cost of raw materials, direct labor, water and electricity etc.
2) Discretionary costs are costs for which output cant be measured in monetary terms
e.g. the costs incurred for administrative and support units like accounts department, legalDepartment, public relations department research and development departments, most of
the marketing departments.
Revenue Centre
Primarily responsible for generating sales revenue.
Revenue centre manger has no control over cost or the investment in assets.
The performance can be evaluated by comparing the actual revenues with the budgeted
revenue.
Profit Centre
Segment of business often called a division that is responsible both for revenue and
expenses.
The main purpose of profit centre is to earn targeted profit.
Profit centre mangers are more concerned with increasing centers is to earn targeted
profit
Profit centre mangers are more concerned with increasing centers revenue by
increasing production or improving distribution methods. The performance is evaluatedby the variance between actual and budget profits.
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Advantages of profit centre
Quality of decision improves as the mangers are aware of the ground realities
Higher management can focus on macro issues leaving the micro issue to be
talked by operational mangers
Profit consciousness is enhanced
Mangers are free from micro restraints and use their creativity and initiative
Profit centers train the mangers to take responsibility for higher position
Profit centers create a reservoir of managerial talent which the company can use.
Difficulties with Profit center
Managers may be lacking competence
There may be unhealthy competition among various profit centers
There may be disagreement among different profit centers regarding transfer
price sharing of common cost ,sharing of revenues generated by joint efforts
Profit centre mangers might lay emphasis on short term profits by neglectingcrucial areas like man power training and development, maintenance and
research and development effects.
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Investment Centre
An investment centre is responsible for the profits and investment
If a manger controls investment, that area of responsibility can be called as
investment centre.
He is responsible for the returns on investment.
The manger of the investment centre has more authority than the mangers of
revenue centre, cost centre and profit centre.
Performance Measurement of Profit centers
The concept of profit is to be made clear the goal of the organization-- whether
short term or long term profit, current profit or future profit.
Emphasis on current profit may hamper future growth
Again if we emphasize on R & D it will affect the current profit.
Cost of training and development may adversely affect current profit
Cost of training and development may adversely affect current profit
Concept of profit
Book profit --- As per books of account
Real Profit calculated after taking the economic value of resources.
Profit contribution Profit contribution directly by the division. It may also be
Described as additional or incremental profit earned solely as a result ofoperations of the division.
Question of expression of profit
Absolute amount or a margin on sales? Or as a return on investment?
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Transfer price and Profit centers
When internal exchange of goods and services takes place between different
divisions of the firm that requires their valuation in terms of money.
Problem of analysis of profit centre results
Usual practice is to evaluate the performance against budgets. But the varianceoccurs due to the combined effect of a host of factors, unless these influences can be
segregated and understood the major objective of control would not be achieved.
Investment Centre
Investment centre is a responsibility centre in which inputs are measured in terms ofcost expenses and outputs are measured in terms of revenue and the assets employed.
An investment centre manager is responsible for the production, marketing and
investment in the assets employed on that division or segment of the organization. He hasto take decisions related to credit policy inventory policy as well as investments in
equipment to be used for production and Marking
Investment Base
Investment on asset responsibility implies the authority to buy sell and use assets. This
Involves taking decisions related to identification of the assets and liabilities for
determining the base of the investment centre.
Meaning Investment centre performance
Return on InvestmentProfit before Interest andTax
ROI = Net operating Investment
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Residual Income
An alternative measure of financial performance of an investment centre is residual
income. It is an amount that remains after deducting on implied interest charge from
the operating income.
Performance Measurement
Performance measurement is a value adding process, which has a direct impact on the
competitiveness and improvement
Metrics: Metrics are the methods to quantify the measured information
Prioritize indicators:
A clear purpose helps to prioritize the indicators to identify the most important ones.
Choose appropriate measurement methods:
Important purpose of performance measurement
a) Decision support
b) Monitor effects of strategic planc) Performance
d) Diagnosis
e) Manage a continuous improvement processf) Motivation
g) Comparison
h) Record development
Types of Metrics
A. Hard metrics: Facts those are possible to measure directly e.g. input, production, netprofit etc.
Soft Metrics:Used to measure intangible e.g. customer satisfaction, brand loyalty, employee
satisfaction etc.
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B. Financial vs. Non-Financial Metrics:
Financial performance metrics Non-financial performance metrics
Budget vs. Actual variance
Product / Inventory TurnoverProduct group
Labor efficiency
Profitability Capacity Utilization
Cash flow Defect ratio
Return on total capital Lead-time
Overhead absorption Delivery precisian
Bad debts
EBIT, Market penetration
Current Assets turner New product sales
EPS
Three basic types of financial performance targets are:
1) Model Based vs. Historical vs. Negotiated Targets
Model based targets are used in the situation where stable deterministic causal
relationship like input output exists
Historical
Historical targets are derived from the previous year performance and the
managements view of the superiors and subordinates
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2) Internally versus externally externally derived targets
Internally derived performance targets are totally internally focused.
In recent years, two types of externally focused target setting have become common
a) Target Costing
b) Bench marking
In target costing cost targets are price driven e.g. Tata motors introduced a family carcosting 1 lakh. The price and cost are set in such a fashion that on selling of product or
service the company will earn a preset price.
Bench marking is a process in which on organization studies other organizations bestpractices and implement process and systems to entrance its own performance
c) Achievement versus process Metrics:
Achievement metrics lays emphasis on achievement whereas in the process metricsemphasis is on important characteristics of the process that has an impact on the output.
Business performance model based on three performance dimensions
Achievement metrics - direct metrics for business achievement.These are hard facts and
can be measured directly and require little or no interpretation e.g. net profit, return oninvestment, market share, export share etc.
Diagnostics metrics:
Diagnostic metrics are indirect metrics for business achievement
Explain the trends in achievement
Based on trends provide an early warning based on which remedial action can be
taken.
Competence Metrics
These metrics described how well the company is prepared for the future.
Investment level in product and service development
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Time to market new product.
Relationship between achievement diagnostic and competence metrics:
A good measurement system should contain a balance mix of the above three metrics.
Fixed vs. flexible targets
Fixed targets do not vary over a given period
Flexible targets are changed according to the business conditions prevailing
Balanced score card
Traditional method financial parameters
BSC takes into account all parameters- financial, nonfinancial performance
factors
Advantages:
1) It brings strategy and vision at the centre of management focus.
2) It brings together in a single management report many of the seemingly disparate
elements like customer orientation, shortening response time, improving quality etc.
3) BSC provides the management with a comprehensive picture of business operation
4) BSC provides strategic feedback and learning
Major components:
1. Customer Perspective
2. Internal Perspective
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3. Innovation & Learning Perspective
4. Financial perspective
Thus, the scorecard provides a view of organizations overall performance by
integrating financial measures with key performance indicators.
Learning and growth-- People and learning
Internal perspective- performance of key internal processes.
Customer perspective- customer satisfaction
Financial perspective - the results the organization delivers to its shareholders.
Process of creating a balanced scorecard:
Identify vision
Identify Strategy
Identify critical success factors
Identify measures
Evaluate
Create action Plan
Follow up and mange
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Internal failure costs
External failure costs
Framework for TQM Process
Problem identification
Ranking
Analysis
Innovation
Solution
Evaluation
Management by Objective
MBO is a comprehensive management approach focused on objective or expected results
for providing a framework for managerial decisions
In MBO, objectives should be the central focus. Objectives are based on outputs or
results
MBO emphasizes on the development of the systems capability as well as individual
managers competence.
In order to be effective MBO process should be integrated with key activities of the
management process, e.g. planning, organizing, staffing directing, and controlling.
MBO is said to have gone through three phases over the past twenty years:
1) Performance appraisal
2) Planning and control method3) Method of managing producing by objective
Implementation process1) The manager and his key executives study the systems and processes
2) The top manger and subordinates set up measures of organizations performance
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3) Objective setting methods extended up to first line of supervisory level goals are set
through discussions and meetings between members of organizational units and their
superiors coals are mutually agreed upon
4) The required changes are undertaken in appraisal system, reward and compensation
system, delegation of authority and responsibility undertaken.
Activity Based costing
Meaning of ABC
ABC or activity based costing is an accounting methodology that assigns the costs,both overhead and direct, to various products and services on some scientific basis
ABC assigns cost to activities based on their use of resources. It then assigns cost to
cost objects, such as products or customers, based on their use of activities.In traditional costing overhead are first related to cost centers (Production & service
centers) and then to cost objects i.e. products .In ABC overheads are related to activities
or grouped into cost pools. Then they are related to cost objects.
Purpose and benefits of activity based costing
ABC is particularly needed by organizations for product costing where:
Production overheads are high in relation to direct cost
There is great diversity in the product range.
Products use very different amounts overhead resources
Consumption of overhead resources is not primarily driven volume.
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Enterprise Resources planning
ERP solutions peek to streamline and integrate operation processes and information flows
in the company to synergies the resources of an organization. men, material, money andmachine through information.
Meaning of ERP
ERP software attempts to integrate all department and functions across a company into asingle computer system that can serve all those departments particular needs. ERP
combines all computerized departments together with the help at a single integratedsoftware programmed that runs on a single database so that various developments can
easily share information and communicate with each other.
Benefits of Enterprise Resource Planning
1) Product costing
2) Inventory Management
3) Distribution and delivery Reasons for implementation of ERP by companies
1. Improve companys business performance
2. Standardize manufacturing process
3. Integrate financial data
4. To standardize HR information
Value added Analysis
As per porter strategies to create competitive advantage three strategic
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a)Cost leadership b) Differentiation c) Focusing are relevant. To follow any of the
strategic one has to follow value chain.
The process involves certain activity and each activity consumers resources and
influence the cost structure of the company. The value chain shows the total value, value
activities and margin
Emphasis of value chain is to segregate a firm into strategically relevant activities in
order to understand the behavior of cost and the existing potential