Dr.P.

Madhusoodanan Pillai

S3 MBA Management Control Systems Unit 1

MCS- University Syllabi Unit 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

Management Control System- MCS

MCS is the process of evaluating, monitoring and controlling the various sub-units of the organization, so that, there is effective and efficient allocation and utilization of resources in achieving the predetermined goals

Meaning of Management Control

Management control is a systematic effort to set performance standards with planning objectives to design information feedback with these pre determined standards and to measure their significance and to take any action required to assure that all corporate resources are being used in the most effective and efficient way possible in achieving corporate objectives - Mockler Management control involves extensive measurement and it is therefore related to and requires contributions from accounting especially management accounting. Second, it involves resource allocation decisions and is therefore related to and requires contribution from economics especially managerial economics. Third, it involves communication, and motivation which means it is related to and must draw contributions from social psychology especially organizational behavior

Definition of Management Control Systems

A management control system (MCS) is a system which gathers and uses information to evaluate the performance of different organizational resources like human, physical, financial and also the organization as a whole considering the organizational strategies. Finally, MCS influences the behavior of organizational resources to implement organizational strategies. MCS might be formal or informal. Robert N. 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 and competitive advantage. Management controls are only one of the tools which managers use in implementing desired strategies. However strategies get implemented through management controls, organizational structure, human resources management and culture. [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. MCS involves the behavior of managers and these behaviors cannot be expressed by equations. Anthony & Young (1999) showed that management accounting has three major subdivisions: full cost accounting, differential accounting and management control or responsibility accounting.

 According to Horngren et al. (2005), management control system is an integrated technique for collecting and using information to motivate employee behavior and to evaluate performance. Chenhall (2003) mentioned that the terms Management Accounting (MA), Management Accounting Systems (MAS), management control systems (MCS), and organizational controls (OC) are sometimes used interchangeably. In this case, MA refers to a collection of practices such as budgeting or product costing. But MAS refers to the systematic use of MA to achieve some goal and MCS is a broader term that encompasses MAS and also includes other controls such as personal or clan controls. Finally OC is sometimes used to refer to controls built into activities and processes such as statistical quality control, just-in-time management.

 According to Simons (1995), Management Control Systems are the formal, information-based routines and procedures managers use to maintain or alter patterns in organizational activities. Management controls, in the broadest sense, include the plan of organization, methods and procedures adopted by management to ensure that its goals are met. Management controls include processes for planning, organizing, directing, and controlling program operations. A subset of management controls are the internal controls used to assure that there is prevention or timely detection of unauthorized acquisition, use, or disposition of the entity's assets.

Characteristics of Control System in Organization Involvement of people Information about the actual state of the organization is compiled by people. It is compared by people. With the desired state decided by people. For significant difference, a course of action is recommended by people Action taken by people

 The management decides the desired state or standards against which performance is compared. It decides what the organization plans to achieve in a given time framework which is known as Planning Process. Actual Performance is compared to Planned Performance in control, so planning and controlling are interlinked and are known as P&C systems

Information Systems for Managerial Control and Decision Making

Corporate Databases
Information for decision Making Information for control

MIS DSS EIS

Feedback Control Systems Mgt Control Systems

Balanced Scorecard

Objectives of MCS
Relationship with organizational goals Identification of critical processes that affect goals Identify key success factors Identify responsibilities Accountability Financial Vs non financial performance Improvement of collective decision making

Why Management Control system fail??

Most control systems are past action oriented Precision Leave little margin for error Controls do not change with missions, strategies, objectives and plan Behavioral and human side of the control system overlooked Standards are not modified as per the situation at hand Importance of speedy and reliable feedback

Management Control Systems

Actual Performance Reason For Deviation

Measure Performance

Deviations Comparison

Desired performance

Corrective Actions

Feedback Loop

Feedback Loop of Management Control

Desired Performance

Actual Performance

Measurement Performance

Analysis Deviations

Identification Of deviations

Comparison Against Standards

Corrective Action

Implementation Of correction

Cont..
Management Control helps in.. 1. Coping with uncertainty 2. Detecting irregularities 3. Identifying opportunities 4. Handling complex situations 5. Minimizing costs

Basic Concepts
Elements of a control system consists of: 1. A detector 2. An assessor 3. An effector 4. A communication network

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1. A detector or sensor is a device that measure what is actually happening in the process being controlled. 2. An assessor is a device that determines the significance of what is actually happening by comparing it with some standards or expectations of what should happen. 3. An effector (feedback) is a device that alters behavior if the assessor indicates the need to do so. 4. A communications network consist of devices that transmit information between the detector and the assessor and between the assessor and the effector.
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Example: You are driving a car

Detectors= Your eyes Assessor= Your brain Effector= Your foot Communication network= Your nerves system

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 Your eyes (detectors) measure actual speed by observing the speedometer. Your brain (assessor) compares actual speed with desired speed (standard: the highest speed is 80 km/hour) to detect a deviation from standard. Your brain (assessor) directs your foot (effector) to ease up the accelerator if actual speed (90 km/hour) is faster than the standard speed (80 km/hour), press down the accelerator if the actual speed (70 km/hour) is slower than standard speed (80 km/hour). And, your nerves (communication network) form the communication system that transmits information from eyes (detectors) to brain (assessor) and brain (assessor) to foot (effector).
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Boundaries of Management Control

Strategy formulation is the process of deciding on the goals of the organization and the strategies for attaining these goals. Management control (Anthony and Govindarajan, 2004): is the process by which managers influence other members of organization to implement the organizations strategies. Task control is the process of ensuring that specified tasks are carried out effectively and efficiently.

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Distinctions between strategy formulation and management control:

Characteristics
System design

Strategy Formulation
Unsystematic, Strategic decision may be made any time Tailored-made to faced problems, more external and predictive, less accurate Simple Top management and staffs

Nature of information

Communication of information Involved people

Control Management Rhythmic, predetermined procedures Integrated, more internal and historical, more accurate Difficult
Top management and line managers 21

Distinctions between strategy formulation and management control:

Characteristics Number of involved people Mental activity Discipline Time horizon End products Strategy Formulation Few people Creative and analytic Economics Tend to long-term Goals, strategies Control Management Many people Administrative and persuasive Social psychology Tend to short-term Strategy implementation
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Distinctions between management and task controls:

Characteristics Control Management Task Control

Focus of activity Nature of information

The whole of operation

Integrated, many financial data

Involved people Management Mental activity Administrative and persuasive

Individual task or transaction Tailored-made to individual task, more non-financial data Supervisor or none
Follow direction or none

End products

Strategy implementation

Tasks are carried out effectively and efficiently

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Distinctions between management and task controls:

Characteristics Control Management Task Control

Mental activity

Administrative and persuasive

Social psychology

Follow direction or none

Economics, physics

Discipline

Time horizon
Type of cost

Weekly, monthly, annually Discretionary costs

Daily
Engineered costs

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Examples of decisions in planning and control function:

Strategy Formulation Management Control Task Control Schedule production Manage cash flows Book TV commercials

Enter a new business Expand a plant Change debt to Issue new debt equity ratio Add direct mail selling Determine advertising budget

Decide magnitude and direction of research Acquire an unrelated business

Control of research organization Introduce new product or brand within product line

Run individual research project Coordinate order entry

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Functions of MCS
1. Planning activities of an organization 2. Coordinating activities of an organization 3. Communication information to different levels of the hierarchical structure 4. Evaluating information and deciding the actions to be taken 5. Influencing people to change their behavior.

Effectiveness of Contemporary Control Systems

1. Focus on constantly changing information that has potential strategic importance. 2. The information is important enough to demand frequent and regular attention from all levels of the organization. 3. The data and information generated are best interpreted and discussed in face-to-face meetings. 4. The control system is a key catalyst for an ongoing debate about underlying data, assumptions, and action plans.

Behavioral Control
Behavioral control is focused on implementationdoing things right Three key control levers
Culture Rewards Boundaries

Reasons for an increased emphasis on culture and rewards

1. The competitive environment is increasingly complex and unpredictable, demanding both flexibility and quick response to its challenges. 2. The implicit longterm contract between the organization and its key employees has been eroded.

Building a Strong and Effective Culture

Organizational culture
a system of shared values and beliefs that shape a companys people, organizational structures, and control systems to produce behavioral norms.

Building a Strong and Effective Culture

Culture sets implicit boundaries (unwritten standards of acceptable behavior)
Dress Ethical matters The way an organization conducts its business

Example: Wal-Mart
A lot of Wal-Mart's success was attributed to the strong and pervasive culture at the company, which was developed and nurtured by founder Sam Walton. In over four decades of operation, Wal-Mart managed to retain most of the elements of culture it had when it first started out, as well as the entrepreneurial spirit which often drives startup companies to success.

Sustaining an Effective Culture

Effective culture must be
Cultivated Encouraged Fertilized

Maintaining an effective culture

Storytelling Rallies or pep talks by top executives

Motivating with Rewards and Incentives

Rewards and incentive systems
Powerful means of influencing an organizations culture Focuses efforts on high-priority tasks Motivates individual and collective task performance Can be an effective motivator and control mechanism

Motivating with Rewards and Incentives

Potential downside
Subcultures may arise in different business units with multiple reward systems May reflect differences among functional areas, products, services and divisions

Characteristics of Effective Reward and Evaluation Systems

Setting Boundaries and Constraints

Focus efforts on strategic priorities Provide short-term objectives and action plans
Specific and measurable Specific time horizon for attainment Achievable, but challenging

Setting Boundaries and Constraints

Improve operational efficiency and effectiveness Minimize improper and unethical conduct

Question
Effective boundaries and constraints:
A.Tend to inhibit efficiency and effectiveness B.Distract employees who are trying to focus on organizational priorities C.Minimize improper and unethical conduct D.Tend to limit organizational growth

Organizational Control: Alternative Approaches

Evolving from Boundaries to Rewards and Culture

System of rewards and incentives coupled with a strong culture
Hire the right people Training plays a key role Managerial role models are vital Reward systems clearly aligned with organizational goals and objectives

Role of Corporate Governance

Corporate governance
the relationship among various participants in determining the direction and performance of corporations. primary participants are the shareholders, the management, and the board of directors.

The Modern Corporation

Corporation
A mechanism created to allow different parties to contribute capital, expertise, and labor for the maximum benefit of each party.

Agency Theory
Deals with the relationship between
Principals who are owners of the firm (stockholders) Agents who are the people paid by principals to perform a job on their behalf (management)

Agency Theory: Two Problems

1. The conflicting goals of principals and agents, along with the difficulty of principals to monitor the agents, and 2. The different attitudes and preferences towards risk of principals and agents.

Governance Mechanisms
Board of directors
a group that has a fiduciary duty to ensure that the company is run consistently with the long-term interests of the owners, or shareholders, of a corporation and that acts as an intermediary between the shareholders and management.

The New Rules for Directors

Governance Mechanisms
Shareholder activism
actions by large shareholders, both institutions and individuals, to protect their interests when they feel that managerial actions diverge from shareholder value maximization.

TIAA-CREFs Principles on the Role of Stock in Executive Compensation

External Governance Control Mechanisms

External governance control mechanisms
methods that ensure that managerial actions lead to shareholder value maximization and do not harm other stakeholder groups and that are outside the control of the corporate governance system.

External Governance Control Mechanisms

Market for corporate control Auditors Banks and analysts Regulatory bodies Media and public activists

Sarbanes-Oxley Act
Auditors
Barred from certain types of non-audit work Not allowed to destroy records for five years Lead partners auditing a firm should be changed at least every five years

Sarbanes-Oxley Act
CEOs and CFOs
Must fully reveal off-balance sheet finances Vouch for the accuracy of information revealed

Executives
Must promptly reveal the sale of shares in firms they manage Are not allowed to sell shares when other employees cannot

THE PURPOSE OF MANAGEMENT CONTROL SYSTEMS

The purpose of a management control system is to assist management in the coordination of the parts of

an organization and the steering of those parts toward

the achievement of its overall purposes, goals and objectives. A control system is designed to bring unity

out of the diverse activities of an organization as it

seeks to fulfill its overall purpose.

The Organizational Context of Managerial Control Systems

Organizations:
a. Subunits b. Effectiveness and Efficiency
Effectiveness relates to the social purpose of the organization, whereas efficiency relates to the personal motives of the stakeholders of the organization.

c. Internal and External Stakeholders d. Executive Functions i) Securing essential efforts: inducing participation of stakeholders
into the organization. ii) Provide the system of organizational communication. a) Formal and informal organization

e.

Organizational Survival and Control Systems The organization must provide inducements that are sufficient to attract the essential contributions from stakeholders, such as capital from investors, labor from employees, materials resources from suppliers, and product purchases from customers. The real bottom line of the firm is to be able to convert the contributions of the principal stakeholders into potential inducements efficiently enough to meet present stakeholder requirements and also to provide sufficient resources to continue the innovation process so that the competitive challenges of the future will be met.

f.

Assumptions about Human Behavior Control systems are designed to favorably influence human behavior as organizations pursue their goals and objectives.

Five assumptions about human drives are:

1. Basic rationality. Human beings are basically rational and as such are able to reason, make plans, and control behavior. CONTD

2. 3. 4. 5.

Creativity.

A basic human instinct is the desire to be creative.

Mastery. Humans desire to manage; therefore, the desire to be in control is innate. Morality. Human beings have strong moral instincts, although these instincts may not always dominate behavior. Community. Human beings have strong needs and desires for human associations.

Elements of a Control System

Detector Measuring device SELECTOR Comparing device EFFECTOR Correcting device COMMUNICATION NETWORK Transmitting device

Nature of MCS
Activity Strategy Formulations Nature of end product Goals, Strategies, Policies

Management Control

Implementation of strategies

Task Control Interdependence & Relationships

Effective Performance

Important feature of MCS

Nature of decision Decisions are systematic & rhythmic Strategy implementation tool

Behaviour considerations

Characteristics of a good MCS

Future oriented Clear objective Minimum Control losses

Input Control Selection, recruitment, training, strategic plan etc. Process Control Inventory Control, Budgetary Control etc. Output Control Setting standards, monitoring, evaluating

Formal Control Process

Infrastructure Organisation Structure Operations Patterns of autonomy Management Methods Management, Style & Culture Style Principles & Values

Formal Control Process Strategic planning Capital budgeting Operation planning management Accounting Budgeting Reporting Systems Project Management Variance Analysis Rewards Coordination & Integration

Informal Control Systems

INFRASTRUCTURE Personal contacts Networks Expertise oriented Minimal structure Emergent roles INFORMAL CONTROL PROCESS Search/alternative generation Ad hoc as needed Uncertainty coping Rationalization/dialogue MANAGEMENT STYLE & CULTURE Prevailing style External/Internal/mixed Principal values Norms and beliefs

INFORMAL REWARDS Recognition Status oriented Intrinsic Performance oriented Stature oriented Personal contact

COORDINATION & INTEGRATION Based upon trust Simple/direct/personal Telephone conversations Personal memos

Formal Control Systems General Electric under Welch

INFRASTRUCTURE Very Decentralized Eliminated Sectors Wider Span of Control Role of Staff Reduced Strong Inter SBU Relations Drastic Reductions in Personnel Flattened Organization STYLE & CULTURE Hands on/Strategic operators More Informal Speed in Adaptation Loyalty-Performance Based Hard Headed/Soft Hearted Focus on the Truth

FORMAL CONTROL PROCESS Goals: #1 or #2 in Each SBU Simplified Strategic Planning Systems Global Orientation Strong Financial Systems Work Simplifications Procedures Improved Quality and Speed of Information COORDINATION & INTEGRATION Strong Corporate Executive Council SBU Executive and Operating Councils Strong Training Programs

REWARDS Candid Perf. Evaluations Drastic Increase in use of Stock Options Risk Taking Encouraged

Informal Control Systems General Electric under Welch

INFRASTRUCTURE Non Bureaucratic Behaviour in Relationships Boundaryless Organization Inside Outside Cross Functional Teams Blur Distinctions between Management and Employees STYLE & CULTURE Hands on/Strategic operators More Informal Speed in Adaptation Loyalty-Performance Based Hard Headed/Soft Hearted Focus on the Truth

INFORMAL CONTROL PROCESS Emphasis on Creating Vision & Providing Leaderships Frank Assessment of Operations & Strategy Speed and Agility in Decision Making Best Practices Shared Among SBUs INFORMAL COORDINATION & INTEGRATION Candor is Emphasized Realism is Valued Constructive Conflict is Emphasized Problem Identification Encouraged Teamwork is Endorsed

INFORMAL REWARDS Team Achievement Pride in Accomplishment Recognition Programs Pride of Accomplishment Winning

Strategic Planning

Strategic Control

Tactical Planning

Tactical Control

Operational Planning

Operational Control

Framework for planning and control: Anthony and Deardens framework

Consistent with the three levels of management and three levels of decisionmaking, the total planning and control system could be subdivided into three categories. (i) Strategic planning (ii) Management control (iii) Operational control

Corporate management

Institutional level

Strategic planning

Divisional management

Managerial level

Corporate management

Operating management

Technical level

Operational control

The Cybernetic Paradigm

The cybernetic paradigm allows us to capture the essential elements of the repetitive control process:
1. 2. 3. Set goals and performance measures. Measure achievement. Compare achievement with goals.

4.
5. 6. 7. 8.

Compute the variances as the result of the preceding comparison.

Report the variances. Determine cause (s) of the variances. Take action to eliminate the variances. Follow up to ensure that goals are met.

The Cybernetic Paradigm of the Control Process

Environment Decision Maker Goals Value Premises

Feedback

Perception

Factual Premises

Comparator

Behavior Choice Effector

Behavioral Repertoire

The Cybernetic Paradigm .

ASSUMPTIONS
Decisions are explained as the result of the interaction between the manager / decision maker and the environment. The manager constructs from these data certain beliefs concerning performance and the state of the external environment. These beliefs are referred to as factual premises. Factual premises are formed by passing these data through a cognitive process referred to as perception. Goals are themselves a result of past learning concerning performance and accomplishments and represent the desired state for the manager. When a difference is determined to exist between what decision makers desire (that is, value premises) and their beliefs about the environment (that is, factual premises), they are motivated to seek to close the gap. The comparator represents the comparison process that takes between performance measures and performance information.

The Cybernetic Paradigm When a performance gap exists, decision makers are motivated to search for courses of action that will move them closer to their goals. This choice is referred to as behavioural choice and is made by evoking from experiences a limited set of alternatives that have been successful in solving similar problems in the past. The content of the set of alternatives evoked from the decision makers behavioural repertoire is itself a function of goals, past experience, and the decision makers perception as to the state of the environment. Decisions require implementation. The effector, a manager, activates the decision, thus serving as a change agent.

Control is brought about by action taken by the manager, who next seeks to determine the effects of the action. This new information is referred to as feedback.

KEY SUCCESS VARIABLES AS CONTROL INDICATORS

Concept of Key Variables:
A key variable is a significant indicator of business activity. Any change in its value is expected to have an impact on the performance of the organization. Key variables require examination and in-depth evaluation. At the stage of in-depth evaluation, the manager has to make a subjective judgement as to whether each factor identified is important in explaining the success or failure of attaining management goals.

Contd.

They must be measurably, either directly or via a surrogate or substitute. Key variables are volatile; they can change rapidly for reasons often beyond the control of the manager. Changes in key variables are not easily predictable. The choice of key variables requires the manager to make a subjective judgement. Management action is required when a significant change occurs in any key variable. The manager should select as many key variables as required to run the business, possibly two or three, but no more than six.

Predictable variables are of little use as key variables. Obviously, if an event can be predicted with a degree of certainty, then appropriate management action can easily be taken.

SOURCE OF KEY SUCCESS VARIABLES

Key variables come from five sources. They are:
1. Industry Characteristics 2. Competitive Strategy 3. Environmental Forces

4. Significant Problems
5. Functional Issues

Input Variables:
Raw material availability Raw material quality Raw material costs

Production Variables:

Capacity utilization
Losses Quality control

Maintenance
Costs Delivery

Marketing Variables:
Order book position Market share Institutional sales

Asset Management Variables:

Asset turnover
Working capital turnover

PERFORMANCE BUDGETING
Important Features: That object-wise or function wise budgeting is almost always likely to cut across departmental boundaries. In planning and budgeting for such programs inter departmental cross walks are indispensable. Budgeting should start with the main output areas, or end-result points. Objective-wise budgets should flow in the second sage from such budgets. Physical accomplishment should be budgeted comparisons with actual achievements made. for and

a)

b)

c) d) e)

A constant search for meaningful, measurable assessment criteria, even for apparently non-quantifiable areas, should be made. The underlying logic of PB is fairly universal. It can, therefore, be easily adapted to help budgeting and review.

PERFORMANCE BUDGETING
BASIC STEPS:

a) Establishing a meaningful program & activity classification. b) Bringing the system of Accounting & Financial management in accord with this classification; and c) Evolving suitable norms, yardsticks, work units of performance and unit costs, wherever possible under each program and activity for their reporting and evaluation.

Understanding Risk Management

No universally accepted definition of risk exists. Risk is commonly used to refer to insured items, to causes of loss and to the chance of loss. Statisticians and economist associate risk with variability A situation is risky if a range of outcomes exists and the actual outcome is not known in advance, - Harold Skipper .

Risk management guides us over a vast range of decision-making, from allocating wealth to safeguarding public health, from aging war to planning a family, from paying insurance premiums to wearing a seat belt, from planting corn to marketing cornflakes, Bernstein.

Enterprise Risk Management (ERM)

Addresses some fundamental questions:

What are the various risks faced by the company?

What is the magnitude of each of these risks? What is the frequency of each of these risks?

What is the relationship between the different risks?

How can the risks be managed to maximise shareholders wealth?

Strategic Cost Management

Strategic Cost Management combines three strategic management themes. The three themes are:
Value Chain Analysis Cost Driver Analysis Strategic Positioning Analysis

Value chain analysis is a strategic analysis tool that can be used to identify areas in which value can be enhanced for customers or costs can be reduced. Value chain analysis thus helps a firm gain competitive advantage. The value chain of a company is the linked set of value-creating activities, all the way from basic raw material sources for component suppliers through to the ultimate end product delivered into the final consumers hands.

Value chain analysis consists of three steps:

Step 1: Identifying value chain activities Step 2: Identifying the cost driver(s) at each value activity

Step 3: Developing a competitive advantage by reducing

cost or adding value.

Cost driver analysis is used to quantify the cost of poor quality and determining the root causes of poor quality or high costs.

Structural Cost Drivers

Cost Driver
Scale

Implications

Controlling structural cost drivers

economies to

Take decisions concerning Develop Scale investments in manufacturing, R&D control costs and marketing

Scope

Decide on the degree of vertical Enhance vertical integration needed otherwise outsource
Identify the repetitive tasks

integration;

Experience

Enhance employee learning and experience

Complexity

Decide about product line and Find sharing opportunities with number of products other business units in the enterprise
Take decisions pertaining to Optimize the use of technology technologies to be used at every between value chain activities stage of value chain

Technology

Executional Cost Drivers

Commitment improvement of workforce to continuous

Managements attitudes towards quality

Cycle time for getting new products to market

Firms utilization of existing capacity

Proper design of internal business processes

Managements ability to work efficiently with suppliers and/or customers to reduce costs.

Strategic Positioning Analysis

A firm can choose to compete in the market either on the basis of cost or differentiation.

Managerial Styles and the Design of Control Systems

Managerial Style is important to the design of control systems because:
1. Control systems influence the behavior of those controlled in that the controlee focuses his or her energies on the maters that count because this is the manner in which performance is evaluated. 2. The precise manner in which the control system influences behavior depends on how the systems are used by managers.

3. Managers differ in their use of control systems; that is, they have different styles of control.

1. The external control style

2. The internal control style 3. The mixed control style Under the external style the decision-making mechanism is maintained by top executives after data are gathered at lower levels in the organization. The internal style is more participative and attempts to capitalize upon the internal needs and motivations of the subordinate, such as the need for accomplishment, mastery, socialization, power, and self-esteem in an attempt to build internal commitment for organizational goals.

Decentralization versus Centralization

The very fact that conditions exist which create the need for a decentralized organization structure indicates that the complex organization will not make decisions through a central decision-making process but rather through a diffuse one.
Organization units are not normally part of a given corporation unless they share some common characteristics with other organization units. These characteristics include what Porter calls tangible or intangible interrelationships.

Organizational

decentralization

of

profit

and

investment

responsibility has significant benefits. It allows closer control and supervision within the division than does centralization. It facilitates information processing, since it permits analysis of trade-offs among cost, revenue, and investment at lower levels of management closer to the impact of the decision. It produces greater managerial motivation as general managers of divisions run their own business, given only broad constraints in terms of

company goals, objectives, strategies, and policies.

Adaptive Organization Informal Control for Adaptive Organization

INFRASTRUCTURE
Expert emergent roles for local cultures and markets Acceptance assignments of temporary

MANAGEMENT SYLE & CULTURE

Global operating perspective Opportunistic action oriented Change oriented Lifelong learning Agility in new assignments

INFORMAL CONTROL PROCESS

Verbal informal actions Use of multidisciplinary teams for problem solving

REWARDS
Based on peer recognition of the adaptive values of the organization

COORDINATING & INTEGRATION

Use of personal travel for managers to become familiar with worldwide conditions

Formal Control for Adaptive Organization

INFRASTRUCTURE
Organization structure Easily formed and dissolved Use of adhoc Teams

MANAGEMENT SYLE & CULTURE

Global operating perspective Opportunistic action oriented Change oriented Lifelong learning Agility in new assignments

Widespread use of outsourcing Widespread use of teams

FORMAL CONTROL PROCESS

Clear company vision

Integrated information systems

Rapid response times for information flows Accurate worldwide reporting Simple and rapid authorization procedures

REWARDS
Emphasize ability to achieve excellence in uncertain environments

COORDINATING & INTEGRATION

Use of management rotation on a global basis

Use of multidisciplinary teams for accomplishing specific objectives

AUDITING
Audit is the activity of examination and verification of records and other evidence by an individual or a body of persons so as to confirm whether these records and evidence present a true and fair picture of whatever they are supposed to reflect. Audits are most commonly used in the accounting and finance functions

Categories of Audits
Audit category Financial statement audit Internal audit Brief description
Gives an opinion on the accuracy of the financial statements Ensures compliance with the relevant accounting standards and reporting framework An independent appraisal function established within an organization to examine and evaluate its activities as a service to the organization Need not be limited to books of accounts and related records

Fraud auditing and forensic audit Operational audit

Deters, detects, investigates, and reports fraud Forensic: related to the legal system, especially issues of evidence Audits operational aspects of the enterprise Quality audit, R&D audit, etc

Audit category

Brief description
Audit of computer systems Checks whether the computer system safeguards assets, maintains data integrity, and contributes to organizational effectiveness and efficiency Audit of the management, as a tool for evaluation and control of organizational performance Examines the conditions and provides a diagnosis of deficiencies with recommendations for correcting them

Information systems audit

Management audit

Social audit

Audit of the enterprise's reported performance in meeting its declared social , community, or environmental objectives

Environmental audit

Environmental compliance audit: a checking mechanism Environmental management audit: an evaluation mechanism

The Auditing process

Staffing the audit team Creating an audit project plan Laying the ground work Conducting the audit Analyzing audit results Sharing audit results Writing audit reports Dealing with resistance to audit recommendations Building an ongoing audit program

MANAGEMENT AUDIT
An examination of the conditions and a diagnosis of deficiencies with recommendations for correcting them. According to John C Burton, in a management audit, the auditor will see whether management is getting information relevant to the decisions and actions which it must take. This will require a much more intensive analysis of information needs and the efficiency of the existing system in meeting them.

Objective of a Management Audit

to critically analyze performance.

and

evaluate

management

Apart from this, it is conducted to detect and overcome existing managerial deficiencies and resulting operational problems.

Benefits of Management Audits

Management auditing is proactive, it provides an early-warning signal of managerial problems and related operational difficulties. A source of information is assisting the organization to accomplish the desired objectives. Objectively evaluate organizational plans, structure, and the directions that management gives in the form of strategies and management processes in planning, organizing, directing and controlling the organizational resources.

Types of Management Audit

Management audit can be categorized into six types: Complete management audit Compliance management audit Program management audit Functional management audit Efficiency audit Propriety Audit

Internal Auditors ...

The internal audit function operates in staff capacity and reports high in the organization, at least to the controller or financial vice-president. Financial audits External auditors / GAAP Compliance audits External / internal auditors; Compliance with laws and rules / administrative policies. Performance audits External / internal auditors / consultants; Evaluation of the performance of the company, its management, a department, or a specific activity (+ make recommendations).

Audits two benefits

The audit report adds credibility to the information provided to user groups;
Anticipation of the audit increases the motivation of the individuals involved to act in a legal, ethical way and in the best interest of the company and its owners.

Social Audit
The inadequate reflection of the social performance of the

organization has given rise to the concept of social accounting

and social auditing.

Definition of Social Audit

Blake, Fredrick and Myers in their book Social Auditing

define social audit as systematic attempt to identify, analyze,

measure, evaluate and monitor the effect of an organizations operations on society.

Features of Social Audit

Social audits adhere to the specified norms. These

norms may pertain to the governments standards of

social performance, standards established by the organization and norms set by outside agencies.

The aim of conducting a social audit is to influence

the policies, objectives and actions of the concerned organization to improve its social performance.

Social audit is conducted by professionals who have

knowledge about the social area being audited.

Service Organizations
Characteristics

Absence of Inventory Buffer Difficulty in Controlling Quality Labour Intensive Multi-Unit Organizations

Management Control Systems

Pricing Profit Centers and Transfer Pricing

Strategic Planning and Budgeting

Control of Operations Performance Measurement and Appraisal

Nonprofit Organizations

Special Characteristics

Absence of the Profit Measure Contributed Capital Fund Accounting

Governance

Management Control Systems

Product Pricing Strategic Planning and Budget Preparation

Operation and Evaluation

What Is Cybernetics?
Cybernetics began as the science of communication and control in the animal, machine, and society; i.e. special types of systems. It operates on two levels: study of an observed system & study of the people studying a system. Originated from R & D process in the development of the atomic bomb- applied scientific theory & principles in real-world setting.

What Are the Main Points?

Theoretical-sciences of complexity--including AI, neural networks, dynamical systems, chaos, and complex adaptive systems. Practical-Many of the concepts used by system scientists come from the closely related approach of cybernetics: information, control, feedback, communication. There was also a return from the machine to the living organism, which accelerated progress in neurology, perception, the mechanisms of vision In the sixties MIT saw the extension of cybernetics and system theory to industry, society, and ecology.

Who Were the Main People?

Three men can be regarded as the pioneers of great breakthroughs (in cybernetics): the mathematician Norbert Weiner, who died in 1964, the neurophysiologist Warren McCulloch, who died in 1969; Jay Forrester, professor at the Sloan School of Management at MIT.

How It relates to IDD

The fundamental concepts of cybernetics have proven to be enormously powerful in a variety of disciplines: computer science, management, biology, sociology, thermodynamics, etc. Cybernetics and Systems Science combine the abstraction of philosophy and mathematics with the concreteness of dealing with the theory and modeling of "real world" evolving systems.

How It Relates to IDD (Continued)

Although there are many exceptions, researchers in cybernetics and systems science tend to be trained in a traditional specialty (like biology, management, or psychology) and then come to apply themselves to problems in other areas, perhaps a single other area. Thus their exposure to cybernetics and systems science concepts and theory tends to be somewhat ad hoc and specific to the two or three fields they apply themselves to.

Specific Ways Cybernetics Incorporated Into Dick & Carey

Dick & Carey shows evidence of an underlying system and approach to instruction. Dick & Careys model highlights the principle that is applicable to solve any kind of problem. The approach can be broken apart and each part examined. Also, it has a linear structure.

Dick & Carey Continued

If we would uncover those general laws, we would be able to analyze and solve problems in any domain, pertaining to any type of system. Following D & C all steps are incorporated.

Five Websites
1.pespmc1.vub.ac.be/CYBSYSTH.html 2. link.springer.de/link/service/journals/0042 3. cyvision.if.sc.usp.br 4. www.evolutionaryethics.com 5. www.xmission.com/~cyberman

Associated Books
How we became posthuman : virtual bodies in cybernetics, literature, and informatics / N. Katherine Hayles. The computer and the brain / John von Neumann ; with a foreword by Paul M. Churchland and Patricia S. Churchland. The foundations of cybernetics / F. H. George.

Associated Books
The soft machine : cybernetic fiction / David Porush. How colleges work : the cybernetics of academic organization and leadership / Robert Birnbaum

Something New
Cybernetics should be understood as a key tool or cognitive methodology for the observer who would know himself and his world. Understanding Cybernetics is similar to finding ways of navigating between the many islands of discourse that explore relations between disciplines in the sciences and humanities.

Controlling as a Management Function

Controlling
A process of monitoring performance and taking action to ensure desired results. It sees to it that the right things happen, in the right ways, and at the right time.

Controlling as a Management Function

Controlling
Done well, it ensures that the overall directions of individuals and groups are consistent with short and long range plans. It helps ensure that objectives and accomplishments are consistent with one another throughout an organization.

Controlling as a Management Function

Controlling
It helps maintain compliance with essential organizational rules and policies.

The Cybernetic Control System

One that is self-contained in its performance monitoring and correction capabilities. (thermostat) The control process practiced in organizations is not cybernetic, but it does follow similar principles.

The Control Process

Establish objectives and standards. Measure actual performance. Compare results with objectives and standards. Take necessary action.

Establish Objectives and Standards

The control process begins with planning and the establishment of performance objectives. Performance objectives are defined and the standards for measuring them are set.

Establish Objectives and Standards

There are two types of standards:
Output Standards - measures performance results in terms of quantity, quality, cost, or time. Input Standards - measures work efforts that go into a performance task.

Measuring Actual Performance

Measurements must be accurate enough to spot deviations or variances between what really occurs and what is most desired. Without measurement, effective control is not possible.

Comparing Results with Objectives and Standards

The comparison of actual performance with desired performance establishes the need for action. Ways of making such comparisons include: Historical / Relative / Engineering Benchmarking

Taking Corrective Action

Taking any action necessary to correct or improve things. Management-by-Exception focuses managerial attention on substantial differences between actual and desired performance.

Taking Corrective Action

Management-by Exception can save the managers time, energy, and other resources, and concentrates efforts on areas showing the greatest need. There are two types of exceptions: Problems - below standard Opportunities - above standard

Effective Controls
The Best Controls in Organizations are:

1.Strategic and results oriented 2.Understandable 3.Encourage self-control

Effective Controls
The Best Controls in Organizations are: 1. 2. 3. 4. Timely and exception oriented Positive in nature Fair and objective Flexible

Types of Control
Preliminary
Sometimes called the feedforward controls, they are accomplished before a work activity begins. They make sure that proper directions are set and that the right resources are available to accomplish them.

Types of Control
Concurrent
Focus on what happens during the work process. Sometimes called steering controls, they monitor ongoing operations and activities to make sure that things are being done correctly.

Types of Control
Postaction
Sometimes called feedback controls, they take place after an action is completed. They focus on end results, as opposed to inputs and activities.

Types of Controls
Managers have two broad options with respect to control. They can rely on people to exercise selfcontrol (internal) over their own behavior. Alternatively, managers can take direct action (external) to control the behavior of others.

Types of Control
Internal Controls
Allows motivated individuals to exercise self-control in fulfilling job expectations.
The potential for self-control is enhanced when capable people have clear performance objectives and proper resource support.

Types of Control
External Controls
It occurs through personal supervision and the use of formal administrative systems. Performance appraisal systems, compensation and benefit systems, employee discipline systems, and management-by-objectives.

Organizational Control Systems

Management Processes
Strategy and objectives Policies and procedures Selection and training Performance appraisal Job design and work structures Performance modeling, norms, and organization culture

Organizational Control Systems

Compensation and Benefits
Attract talented people and retain them. Motivate people to exert maximum effort in their work. Recognize the value of their performance contributions.

Organizational Control Systems

Employee Discipline
Discipline is defined as influencing behavior through reprimand. Progressive Discipline ties reprimand to the severity and frequency of the employees infractions. Positive Discipline tries to involve people more positively and directly in making decisions to improve their behavior.

The Hot Stove Rule

To be Effective Discipline Should be:
Immediate Focus on activity not personality Consistent Informative Occur in a supportive setting Support realistic rules

Organizational Control Systems

Information and Financial
Activity-based costing - the true cost of all products and services. Economic value added - examine the value added by all activities. Understand the implication of key financial measures of (ratios) organizational performance

Operations Management and Control

Purchasing
Economic Order Quantity
automatic reorder points

Just-In-Time Scheduling

Operations Management and Control

Project Management
Program Evaluation and Review Technique (PERT) - Identifies and controls the many separate events in complex projects.

Operations Management and Control

Statistical Quality Control
Based on the establishment of upper and lower control limits, that can be graphically and statistically monitored to ensure that products meet standards.