Management Control System Unit

Characteristics of management control system

Management Control SystemUNIT - I

11Unit I

Characteristics of Management Control System Evolution of control systems in an organization Relating system to organizational objectives - Strategic Planning, Management Control and Operational Control - Goal Congruence - Cybernetic Paradigm of Grissinger Functions of the Controller

2Management Control system(MCS)MCS is a set of interrelated communication structures that facilitates the processing of information to assist managers in coordinating the parts and attaining the purpose of an organization as a continuous basis.

MCS is an interdisciplinary subject as it requires contributions from all branches concerned with the management in achieving a high level of quality, productivity, and innovation.

In the absence or deliberate malfunctioning of control systems, causing huge losses and ultimately bankruptcy. Besides, defective products and services, poor coordination between sections, departments and subsidiaries also have arise due to lacunae(gap / silence) in the control systems. 3DefinitionsAccording to Simons (1995), Management Control Systems are the formal, information-based routines and procedures managers use to maintain or alter patterns in organizational activities

Anthony & Young (1999) showed management control system as a black box. The term black box is used to describe an operation whose exact nature cannot be observed.

The term management control was given of its current connotations by Robert N. Anthony

Robert N. Anthony (2007) defined Management Control as the process by which managers influence other members of the organization to implement the organizations strategies.

4One of the first authors to define management control systems was Ernest Anthony Lowe, Professor of Accounting and Financial Management at the University of Sheffield, in his 1972 article "On the idea of a management control system." Reasons for the need for a planning and control system:

The enterprise has (by definition) organizational objectives, as distinct from the separable and individual ones of the members constituting the 'managerial coalition';The managers of the sub-units of the enterprise must necessarily be ambivalent in view of their own personal goals, as well as have a good deal of discretion in deciding how they should behave and in formulating their part of any overall plan to achieve organizational objectives;Business situations (and people's behaviour) are full of uncertainty, internally as well as externally to the business enterprise.There is a necessity to economize, in human endeavours we are invariably concerned with an allocation of effort and resources so as to achieve a given set of objectives...

5Purpose of MCSTo assist the management in coordinating the activities of the firm and in steering those activities towards achievement of the firms overall purposes , goals and objectivesTo compare the actual results with the set standards in order to ensure that the work of each section of the firm is harmoniously accomplished with the works of other sectionsTo bring about unity of purpose in an organizationTo ensure that appropriate strategies are implemented to attain its goals.To ensure that prompt actions are taken in case of emergency and uncertainty as wellTo help the management in decision makingFUNCTIONS OF MCSTo Plan the activities of the firmTo coordinate the activities of the firmTo Communicate the information to various levels of organization structure.To evaluate information and deciding the course of action.To influence people to change to change their style of functioning.

61.Management control system focuses on programs and responsibility centres. A programs is a product, product line, research and development project or similar activity that the organization undertakes in order to achieve its goals.2. The information in a management control system is of two types :Planned data - programs, budgets and standards.Actual data - information on what is actually happening, both inside the organization and in the external environment.3. Management Control System is a total system in the sense that it embraces all aspects of a companys operation.4. The Management Control System is usually built around a financial structure.5. The Management Control process tends to be rhythmic; it follows a definite pattern and time table. 6. Management Control System should be a co-ordinated and integrated.Characteristics of Management Control System7Evolution of Management Control System in an OrganisationMeaning of Evolution Evolution is not an automatic affair, it is a contest for survival. The move ahead, companies must consciously introduce planned structures that not only are solutions to correct a crisis.

Five phases of Evolution of Management Control System:

Phase I Creativity

The companys founders are usually, technically or entrepreneurially oriented, and they disclaim management activities; their physical and mental energies are absorbed entirely on making and selling a new product.

Communication among employees is frequent and informal.Long hours of work are rewarded by modest salaries and promise of ownership benefits.Control of activities comes from immediate marketplace feedback.

8Phase II Direction

Functional organization structure is introduced to separate manufacturing from marketing activities and job assignments become more specializedAccounting systems for inventory and purchasing are introduced.Incentives, budgets and works standards are adoptedCommunication becomes more formal and impersonal.The new manager and his key supervisor take most of the responsibilities for instituting directing, while lower level supervisors functions as specialist.

Phase III Delegation

Much greater responsibility is given to the managers of plans and market territories. Profit centers and bonuses are used to stimulate motivation.The top executives at headquarters restrain themselves to managing by exception, based on periodic reports from different units.Managers often concentrates on making new acquisition, which can be lined up besides other decentralized units.Communication from the top is infrequent usually by correspondence, telephone or brief visits to decentralized units.

9 Phase IV Co-ordination

Decentralized units are merged into product groups.Formal planning procedures are established and intensively reviewed .No. of staff persons are hired to initiate programs of control and review for line managers .Capital expenditure are carefully pruned across the organization .Each product group is treated as an investment centre based on ROI concept.

Phase V Collaboration

The focus is on solving problems quickly through team action. Teams are combined across functions for task - group activity.Staff experts are reduced, reassigned and combined in interdisciplinary teams.A matrix structure is used in solving appropriate problems. Previous formal systems are simplified and combined into single multipurpose systems.Conferences of key managers are held frequently to focus on major problem issues. T&D programs are given to managers in behavioral skills, teamwork and conflict resolution.Real - time information systems are integrated into daily decision - making.Economic rewards are geared more to team performance rather than to individual achievement.Experiments in new practices are encouraged throughout the organization.10MCS & Organizational Objectives

GOALS are defined as broad statements of what the organization wants to achieve in the long run on a permanent basis OBJECTIVE are defined as specific statement of ends, the achievement of which is contemplated within a specified time. Many times these terms are also used interchangeably. However, both are subsumed under the term mission, which is indicative of the strategic intent and strategic direction of the organization. Mission is articulated on the basis of the vision of the founders or the chief executive. Mission is achieved through a properly formulated strategy and action plan with appropriately in - built mid - course correction system. Mission, vision and action indicate the interactive relationship between strategy and management control system.

11Goal Congruence

Although systematic, the management control process is by no means mechanical; it involves interactions among individuals, which cannot be described as mechanical. Managers have personal as well as organizational goals. The central control process is to induce managers to act in pursuit of their personal in ways that will help attain the organization's goals as well. Goal congruence means that as far as feasible, the goals of an organizations individual members should be consistent with goals of the organization itself. The management control system should be designed and operated with the principles of goal congruence in mind.

12Differences - Strategic Planning, Management Control & Operational control

CharacteristicsStrategic PlanningManagement Control Operational ControlLevel Top management All level - top to front lineSupervision.SupervisoryScopeTotal Overall, consisting of related subsystemOperating unitTime frameLong rangeShort to intermediate (1 to 5)Short periods day today, weekly, monthlyEnvironment External, towards developing internalInternal, adjusting to external factorsInternal onlyGoals and objectivesBasic objectivesTangible goals, with in framework of overall objectivesShort - term, tangible to operating unitStructuring Relatively unstructured Fairly highly structured but flexibleQuite rigid pre - establishedActivity patternsIrregular Rhythmic, Regular Highly repetitiveCharacter of activity Creative Administrative, persuasiveFollowing directions little initiativesFocal point Entire organization All operations, line management Operating unit13Cybernetic Paradigm Of GrissingerThis is also referred to as micro control framework, since it helps it helps to establish control or performance measures for a particular problem area in specific situation. Cybernetics is derived from the Greek work Kybernatics which means Steersman. Cybernetics has been defined as the service of communication and control. Cybernetics was coined by Norbert Weiner and it aims at the study of entire field of control and communication theory. Cybernetics as a biological phenomenon has been defined as how systems regulate themselves, explore and learn. The fundamental concern of cybernetics is with negative feedback and role of negative feedback mechanism to explain purposive and adoptive behavior. This aspect of cybernetics has relevance for the financial and economic control of business and other organizational ethics.14The particular version of the paradigm developed by Grissinger (1979) (Grissinger, Donald W. Management Theory - A Cybernetic Perspective, Graduate Management Centre Jan. 86) captures all the elements of the control process, which may be enumerated as follows:

Set goals and performanceMeasure achievement Compare achievement with goals Compute the variances as the result of the proceeding comparisonReporting the variances Determine the cause of variances Take action to eliminate the variances Follow up to ensure that goals are met

15The Cybernetic Paradigm of the Control Process

16Functions of the Controller To ensure that data are controlled from all the input centers in time.To see that data are processed speedily and expeditiously for developing performance reportsTo review reports at successive levels to identify remedial actionsTo analyze the reports with a view to identify trends and highlighting the areas requiring follow up actionTo assist in formulating corrective actionsThe Financial Executive Institute of United States of America lists the functions of controller as follows:-Planning for controlReporting and interpretingEvaluation and consulting Tax administrationGovernment reportingProtecting of assets through internal control, internal auditInsurance coverageEconomic appraisal 17