Management control systems jsb 606 part1
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The document outlines the foundational principles and components of management control systems (MCS), including the design, purpose, and effectiveness of both formal and informal systems. It emphasizes the importance of organizational structures, stakeholder interactions, and adaptive controls in achieving organizational goals and enhancing competitiveness. Additionally, the document covers key themes like performance measurement, management audits, and the role of managerial style and corporate culture in the control processes.
Management control systems jsb 606 part1
- 1. Management Control Systems Part 1 Debasis Das Exemplar Consultancy
- 2. Syllabus-1 1. Introduction to MCS 2. Design of Control Process & Management Controls 3. Key success variables and measures of performance 4. Design, Style and Culture of Control Systems 5. Organization structures for adaptive control Debasis Das JSB 606 2
- 3. Syllabus-2 6. Autonomy, Responsibility and Performance measurement 7. Tools for Management Control 8. Management Control in Multinational Corporations 9. Management Control in Service Organizations 10.Management Control in Projects 11.Management Audit Debasis Das JSB 606 3
- 4. Recommended Books 1. Maciariello, J.A. & Kirby, C.J.: Management Control Systems: Using Adaptive Systems to Attain Control, PHI 2. Anthony, R.N. & Govindarajan, Vijay, J.: Management Control Systems, McGraw Hill 3. Management Control Systems, Text and Cases, Dutta, Abhijit, Jaico Publishers Debasis Das JSB 606 4
- 5. Introduction Debasis Das JSB 606 5
- 6. Purpose of Management Control Systems Unity of diverse activity Management Steers Organization Departments/units Objectives Purpose Goals Debasis Das JSB 606 6
- 7. Domain of Management Control System • Different views – Anthony, Dearden & Govindrajan: “the process by which managers influence other members of the organization to implement the organizations strategy” (strategic planning, management control, task control are independent but interrelated processes of planning & control) – William Newman: “control is one of the basic phases of managing, along with planning, organizing and leading” ( control function of management) – ***Macieriello , Kirby: control of strategy and control of operations and include aspects of planning, organizing and leading functions of management. Debasis Das JSB 606 7
- 8. Coverage • Domain of control as defined by Macieriello , Kirby • Borrow concepts from the other two approaches • Leads to a management framework that – Enhances organizational adaptability • Accelerates productivity • Improves quality – Resolves inadequacies in current control systems • Coaxing organizations to optimal performance • Enhances competitiveness Debasis Das JSB 606 8
- 9. Organizational Context of MCS Reference: Chester Bernard, Functions of the Executive Debasis Das JSB 606 9
- 10. Organizations • Sub units • Effectiveness & efficiency • Internal & External Stakeholders Debasis Das JSB 606 10
- 11. Organization Sub-unit Sub-unit Sub-unit Sub-unit Sub-unit Sub-unit Sub-unit Sub-unit Sub-unit Sub-unit Sub-unit Sub-unit Debasis Das JSB 606 11
- 12. Sub-units • Perform portions of the organization purpose • Grouped by specialization, division of labor Challenges – Efficient coordination (transaction costs, keeping it minimal) – Managing excessive transaction costs – Autonomy needed for specialized sub-units – given objectives as part of the overall objectives Debasis Das JSB 606 12
- 13. Effectiveness & Efficiency • Effective – Meets overall purpose – Fulfills a genuine need of society • Efficient – Minimum waste of resources – competitive ROI on stakeholders’ investments – Competitive wages for the worker – Satisfaction for customers Debasis Das JSB 606 13
- 14. Internal & External Stakeholders • Organizations are open systems and includes internal & external resources • Make situations – Buy resources in the external market – Control systems must coordinate the external exchanges, internal activities • Buy situations – Control systems must integrate efforts of external stakeholders and the external activities • Must quickly adapt to the market changes Debasis Das JSB 606 14
- 15. Executive Functions • Essential managerial functions – Securing essential efforts – Provide system for organizational communication – Formulating and defining purpose Debasis Das JSB 606 15
- 16. Securing Essential Efforts • Motivate participation & performance – Recruit the right people – Inducements that are equivalent or better – Encourage contributions from participants that generate income – Participants include customers, employees, executives, owner s, distributors, suppliers Debasis Das JSB 606 16
- 17. Provide System for Organizational communication • Design & refine formal organization or the organization chart (define the sub-units & the structure) • Define purposes, proper sequence of steps to be maintained • Define management positions and fill them • Relevant communications are the communications that coordinate the activities of the organization Debasis Das JSB 606 17
- 18. Provide System for Organizational communication • Formal organization – Relatively permanent systems of communications for a common purpose • Informal organization – Not part of the org chart – “aggregate of personal contacts and interactions and the groupings of people. …though common or joint purposes are excluded by definition, common or joint results of important character nevertheless come from such organizations” – Develops by design and spontaneously – Helps personalize the organization Debasis Das JSB 606 18
- 19. Establish purpose, goals and Objectives • Job for the entire management team • Delegate responsibilities to sub-units • Overall purposes (ends) are redefined in terms of sub-purposes(means) of sub-units • Each sub-unit purpose becomes the means to the purpose of the higher unit Debasis Das JSB 606 19
- 20. Organizational Survival & Control Systems-1 • Conditions for survival – Sufficient inducements to attract essential contributions form stakeholders • Capital from investors • Labor from employees • Material resources form suppliers • Product purchases from customers – Inducements are effective if stakeholders prefer them to those offered by comparable competing organizations – Internal production processes need to convert contributions into sufficient inducements that sustains stakeholder participation & cooperation and achieve organizational purpose Debasis Das JSB 606 20
- 21. Organizational Survival & Control Systems-2 • On-going survival requires – Management must process and act upon information in all the stakeholder markets as efficiently as other entities in the same market – Managerial controls that monitor the inducement- contribution balance for each stakeholder – Decision processes agile enough to react to changes – Control systems must facilitate innovation, adaptation and change – Ability to convert contributions of main stakeholders to meet current needs and have resources left over for continuing innovation processes to meet competitive challenges Debasis Das JSB 606 21
- 22. Assumptions about Human Drive • Rationality: basically rational, able to reason, make plans and control behavior • Creativity: basic instinct to be creative • Mastery: desire to control, innate desire to be “in control” • Morality: usual strong moral instincts, may not always dominate behavior • Community: strong desire for human association Debasis Das JSB 606 22
- 23. Adaptive Control Systems Two Sets of Mutually Supportive System From the perspective of Control System Designer Debasis Das JSB 606 23
- 24. Control System Designer • May be a – System analyst – A controller – A manager • People who are most concerned with the design & operation of a control system. Usually are the people who are responsible for it. Debasis Das JSB 606 24
- 25. Control System Characteristics • Effectiveness is strongly related to the leadership characteristics of the management • Control systems function within the dynamics of the organizations • Actions taken in MCS influence people, control in organization is accomplished by people through people Debasis Das JSB 606 25
- 26. Mutually Supportive Systems • Formal/informal systems help an organization to be steered towards its purpose by bringing unity of diverse efforts of the sub-units and individuals • These are two distinct yet interrelated (often indistinguishable) sub divisions • Considered adaptive when they are internally consistent, consistent with one another and designed to permit learning Debasis Das JSB 606 26
- 27. The Formal Systems Debasis Das JSB 606 27
- 28. Formal System Characteristics Mutually Supportive Management System Model (MSSM) • Focuses on needs of customers & markets • Consistent with informal system • Mutually supportive of the formal & informal • Each subsystem must support managing short term concerns as well as innovations necessary for the long- term survival Debasis Das JSB 606 28
- 29. Formal Control Systems Management Infrastructure Style & Culture Formal Control Process Coordination & Rewards Integration Debasis Das JSB 606 29
- 30. Management Style & Culture • Prevailing Style – External/internal/mixed • Principal values – Norms & beliefs Debasis Das JSB 606 30
- 31. Infrastructure • Organization Structure – Strategy – Operations • Patterns of autonomy • Measurement methods – Responsibility centers – Transfer pricing Debasis Das JSB 606 31
- 32. Rewards • Individual & groups • Short term & long term • Promotion policy Debasis Das JSB 606 32
- 33. Coordination & Integration • Standing committees – Strategy – Operations • Formal conferences • Involvement techniques Debasis Das JSB 606 33
- 34. Formal Control Process • Strategic planning – Capital budgeting • Operations planning – Cost accounting – Budgeting • Reporting systems – Strategy/project management – Operations/variance analysis Debasis Das JSB 606 34
- 35. The Informal System Debasis Das JSB 606 35
- 36. Informal System Characteristics • Aggregate of personal contacts and interactions and the associated groupings of people • Activities of members outside the formal control process when dealing with non- routine decision making 9realignment of goals or seeking new information to increase understanding of a problem area) • Supplements formal system, increases adaptability Debasis Das JSB 606 36
- 37. Informal Control Systems Management Infrastructure Style & Culture Informal Control Process Coordination & Informal Rewards Integration Debasis Das JSB 606 37
- 38. Management Style & Culture • Prevailing Style – External/internal/mixed • Principal values – Norms & beliefs Debasis Das JSB 606 38
- 39. Infrastructure • Personal • Networks – Expertise oriented – Minimal structure • Emergent roles Debasis Das JSB 606 39
- 40. Informal Rewards • Recognition • Status oriented • Intrinsic – Performance oriented – Stature oriented • Personal contact Debasis Das JSB 606 40
- 41. Coordination & Integration • Based upon trust • Simple/direct/personal • Telephone conversations • Personal memos Debasis Das JSB 606 41
- 42. Informal Control Process • Search/alternative generation – Ad-hoc as needed • Uncertainty coping • Rationalization/dialog Debasis Das JSB 606 42
- 43. Control Systems Actions Formal system If action refer to Infrastructure Chartering or appointing Establishing management support Setting a direction or mission Style & culture Training in beliefs, values, or social dynamics Planning & Control Establishing procedures process Clarifying procedures Documenting procedures Developing measurement metrics Reporting/providing feedback Reward system Giving a merit increase Coordinating Establishing communications among organizational mechanisms units Debasis Das JSB 606 43
- 44. Control Systems Actions Informal system If actions refer to Emergent roles Becoming the expert Assuming new responsibilities Style & culture Training in values, beliefs or social dynamics Planning & control Searching and gathering information Investigating & brain-storming Discussing developments regarding problems Reward system Showing appreciation Giving thanks, recognizing accomplishments Coordinating Members checking with others in other units mechanisms Debasis Das JSB 606 44
- 45. The Subsystem & Components of Control Systems Debasis Das JSB 606 45
- 46. Style & Culture • Methods of “doing things” • Style of top management • Decides how to implement control systems • Ranges from highly dictatorial to highly participative • Systems need to fit the style & culture Debasis Das JSB 606 46
- 47. What is Corporate Culture? • Consists of shared values, common perceptions, common decision making premises • Develops over time • Strength of the culture depends on the number of key premises shared, how extensively, and how deep commitments to these premises are Debasis Das JSB 606 47
- 48. Corporate Culture as Coordination and Control Mechanism • Facilitates control by – Internalizing in individuals key decision premises and decisions – Developing a sense of group loyalty – Reducing dissonance and friction – Most effective system as long as the values are the right values – “self control” through acceptance of common values is the best method of control Debasis Das JSB 606 48
- 49. Effectiveness of Corporate Culture as a Control mechanism • Corporate culture must be consistent with the environment and widely accepted • Sub-units may develop its own sub- culture due to differences in specializations, perspectives, etc. • Spreading a uniform corporate identity is essential Debasis Das JSB 606 49
- 50. Managerial Indoctrination and Skill Training • Formal indoctrination & training helps instill the common attitudes & skills • Indoctrination involves socializing members to values, policies, procedures of the organization • Skill development methods to perform tasks in the organization Debasis Das JSB 606 50
- 51. Formal Control Process in planning and reporting dimensions Debasis Das JSB 606 51
- 52. Formal Planning Process • Strategic and operational aspects • Budget, formal planning& control, reporting has these two components • Infrastructure, rewards and communication systems must cater to both • Cost accounting systems provide crucial measurements for both strategic and operational planning processes Debasis Das JSB 606 52
- 53. Formal Reporting Process • Progress is measured against the plans • Monthly/quarterly/year to date reports on both strategic and operational plans are made to measure variances • Strategic plans are measured by treating each strategic thrust as a project and looking at its progress Debasis Das JSB 606 53
- 54. Integrated Planning & Reporting Process Debasis Das JSB 606 54
- 55. Integration of Strategic & Operational • Fair amount of integration exist between the two • Need for strategic thrust arise out of operational needs • Strategic projects are funded out of operations • Strategic plans & programs impact operations and need be monitored for this impact continually Debasis Das JSB 606 55
- 56. Infrastructure • Formal control system infrastructure consists of – Organizational structure – Patterns of autonomy • Infrastructure must cater for both the strategic and the operational • Common organization for strategic planning is to organize strategic business units (SBU) • Then, organize profit centers Debasis Das JSB 606 56
- 57. Rewards • Inducements needed to motivate individuals to contribute more • These need to have components that are comparable in the environment and meets individual needs • Materialistic and non materialistic • Rewards cannot exceed the value added by individual, obviously Debasis Das JSB 606 57
- 58. Individual Rewards • Strategic, operations, individual and group are the four reward dimensions • Individual rewards include – Compensation – Linked to performance – Short term as well as long term – Comparable to what the market offers Debasis Das JSB 606 58
- 59. Group Rewards • Most effective is tied to organization’s performance • Short as well as long term • ESOP for example, could be linked to the organization meeting specified earnings per share target each year for a number of years from now Debasis Das JSB 606 59
- 60. Coordination and Integration Mechanism • Specific communication schemes are needed – Coordination – Resource allocation decision making – Conflict resolution – Building identification with organizational purpose – Developing commitment and trust in the organization • Timely and accurate flow of information Debasis Das JSB 606 60
- 61. Committees • Two committees with overlapping memberships for resource allocation • Manage conflict resolution( short and long term needs) in resource allocation Debasis Das JSB 606 61
- 62. Strategy Committee • Top officers and managers, top level staff are members • Monitor strategy periodically, as needed by market developments • Decide actions, resources, all aspects Debasis Das JSB 606 62
- 63. The Operating Management Committee • Same composition as the strategy committee • Looks at operational issues • Conflicts between strategic and operational resources Debasis Das JSB 606 63
- 64. Formal Conferences • Periodic conference of managers down to profit center level • Formalize planning process • Improve communications • Keep organization together • Public commitment by managers on next year’s targets Debasis Das JSB 606 64
- 65. Informal Organization Structure & Emergent Roles • Difficult to define “soft structure”, hard to define, but exists in all organizations • Person to person contacts, networks, ad hoc teams, available expert resources • Help increase adaptability of organization • Temporary grouping s can form for coping with uncertainties Debasis Das JSB 606 65
- 66. Informal Control Processes • An adaptive system needs to – Exact information from environment – Form and adopt goals – Select and emit goal-directed behavior – Learn to adapt • In a situation when fast environmental changes are happening it is the informal system that usually takes over Debasis Das JSB 606 66
- 67. Informal Recognition & Rewards • Informal rewards contribute significantly to organization success • Stature oriented • Respect being shown for capability of an individual to operate in t5he informal set up • Formal rewards should be appropriate Debasis Das JSB 606 67
- 68. Informal Coordinating Mechanisms • Communication/coordination develops as people develop working relationships • Communications are less guarded, more effective • Necessary for effective adaptive control Debasis Das JSB 606 68
- 69. Interaction Between Formal & Informal Systems • In stable environments the formal system dominates • At times of changes the informal system dominates • Formal and informal overlap • Management must ensure each system as well as both systems are supportable Debasis Das JSB 606 69
- 70. Adaptive Controls & Individual Actions • By observing actions and identifying where they come out from, the designer can asses if the system is formal or informal • What needs to be done to increase adaptability Debasis Das JSB 606 70