Class of 2012 Section A Management Control System

Welcome
Prof. Venkataraman J

Section A

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Thursdays 8.30 am to 11.15 am

ALL THE BEST TO ALL OF YOU !!

Class of 2012 Section B Management Control System

Welcome
Prof. Venkataraman J

Section B

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Wednesdays 8.30 am to 11.15 am

ALL THE BEST TO ALL OF YOU !!

Class of 2012 Section C Management Control System

Welcome
Prof. Venkataraman J

Section C

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Tuesdays 8.30 am to 11.15 am

ALL THE BEST TO ALL OF YOU !!

Management Control System

Reference Books : A. Management Control Systems ----- Robert N. Anthony & Vijay Govindarajan, Tata McGraw-Hill, 2010 B. Management Control Systems ---- Joseph Maciariello & Calvin J. Kirby Prentice-Hall of India Limited, 1997 C. Principles of Management Control Systems --- IUP

Continuous Internal Evaluation

Home Assignment Class Test Quiz >>>> >>>> >>>> 15 marks 15 marks 10 marks 10 marks

Participation in case discussion >>>> and written case analysis

50 marks

Section A
Assignment
Capture whatever management control systems you have seen in your SIP organization and relate them to the : a. Day to day operations of the firm b. Business performance of the firm c. Employee morale of the firm Note: 1. To be neatly handwritten 2. Number of pages not to exceed seven 3. Strictly no folders 3. Write-up to bring out your understanding of management controls

To submit before

>>> 28 July 2011

Section B
Assignment
Capture whatever management control systems you have seen in your SIP organization and relate them to the : a. Day to day operations of the firm b. Business performance of the firm c. Employee morale of the firm Note: 1. To be neatly handwritten 2. Number of pages not to exceed seven 3. Strictly no folders 3. Write-up to bring out your understanding of management controls

To submit before

>>> 27 July 2011

Section C
Assignment
Capture whatever management control systems you have seen in your SIP organization and relate them to the : a. Day to day operations of the firm b. Business performance of the firm c. Employee morale of the firm Note: 1. To be neatly handwritten 2. Number of pages not to exceed seven 3. Strictly no folders 3. Write-up to bring out your understanding of management controls

To submit before

>>> 26 July 2011

Overview of chapters
1. Introduction to Management Control Systems 2. Designing the control process and managerial controls 3. Behavior in organizations 4. Key success variables and measures of performance 5. Responsibility centers 6. Budget preparation and financial reporting 7. MCS in Service and non-profit organizations 8. MCS in Multi National Corporations 9. MCS in Projects 10. Management Audit

Cases identified for discussion and analysis

1. Jack Welch and Jeffrey Immelt Continuity and Change in Strategy, Style and culture at GE. 2. Hollinger International The Lord Black Saga 3. Infosys Global Delivery Model 4. Balanced Score Card Implementation at Philips 5. EVA and Compensation Management System at TCS 6. Mid-Atlantic University 7. City Hospital 8. EMC Transfer Pricing 9. The Millau Viaduct Project 10. Governance and Control at AXA >>> ICMR >>> ICMR >>> ICMR >>> ICMR >>> ICMR >>> Other >>> Other >>> Other >>> ICMR >>> ICMR

Management :

The process of integrating resources and tasks toward the achievement of stated organisational goals.

Management : Management is both art and science. ART: It is the art of making people more effective than they would have been without you

SCIENCE : The science is how you do that

BASIC TOOLS : Planning Organising Directing Monitoring

CONTROL :
Control is the process of ensuring that a firms activities / operations proceed and confirm to its plans Objectives are met Reduce difference between plan and reality No control without plan and objectives Control exercised only for components internal to the system Not possible to control the external environment

SYSTEM :
A group of interactions, interrelated or independent elements forming a complex whole.

Feedback control system

Input Process Output

Feedback control

Feedback control system

Output is measured against desired results Variance is fed to the feed back control system Corrective signal goes back to input mechanism to modify input.

EXAMPLES :

# Parallel parking of your vehicle # Temperature control in an air conditioned room # Temperature control in an electroplating bath # Management interference in firms performance.

CONTROLS Vs CONTROL

( Peter Drucker )

CONTROLS Measurement & Information Means to an end Info provided to take control action

CONTROL

Direction End To do actual work.

Examples :
Material costs have exceeded budget Action to ensure purchase prices are monitored & controlled. Quality of material not okay Action taken to ensure quality.

Essence of Management Control System

I recommend you take care of the minutes, for the hours will take care of themselves. -- Lord of Chesterfield

Purpose of Management Control System : Assist management in the co-ordination of all sections of an organisation Steer these sections towards achievement of its overall purpose / goal / objectives Bring unity out of the diverse activities of an organisation Meet both short term and long term objectives

CONTROL SYSTEM : A set of formal and informal systems to assist management

Levels in an organisation :

A. Strategic level :

Vision / Mission Direction setting Long term planning

B. Management :

Resource utilisation Achieve unit objectives Competitiveness

C. Operational :

Functional goals Section level goals Cost Utilization Waste

Important features of Management Control System

Decisions : Management control decisions are based on the framework established by organizations strategy Considers quantity and quality of reserves Implementation at different levels

Systematic and Rhythmic : In tune with strategies and procedures laid down by top management Balance among all functions Eg; Operations and distribution should be balanced with the sales programme.

Strategy implementation tool : A vehicle for strategy execution Interlinks organisation structure / Human resources management / organisation culture

Behavioral considerations : Proper direction or lack of it Motivation or lack of it Personal limitations of employees.

Frame work for strategy implementation

Management controls

Strategy

Orgn. Culture

HR mgt.

Performance

Implementation mechanism

Strategy : A process by which a companys strengths and weakness are evaluated in the light of prevailing environment and decide on an approach, providing required resources.

DEFINITION :

Management Control Systems are the formal, information based routines and procedures that managers use to maintain or alter patterns in organisational activities.

FOCUS of Control

A. Output control B. Process Control C. Input control

Examples of MCS
Budgeting system Performance measurement system Variance analysis and reporting Incentive / Reward system Capital budgeting system Standard operating procedures Internal control system

Elements of a control system

# # # # Detector Assessor Effector Communication network

Analysis of situation being controlled Comparison of actual results with standards Action to reduce the gap Connectivity among detector / assessor / effector

Control device

Assessor (Comparison)

Detector ( Observation)

Effector (Action)

Entity being controlled

The three elements of MCS:

A. Communication B. Motivation C. Evaluation

Characteristics of a good MCS :

1. Future oriented 2. Clear objective 3. Minimum control losses

MCS Hierarchy Activity Result

Strategy formulation

Goals / Policies / Objectives

Management Control

Implementation of strategies

Task control

Effective performance of individual tasks

Activities in MCS Planning the future course Coordinating and communicating Evaluation of information and decisions Influencing people towards organisation goals

Features of MCS Possess a defined framework Systematic and rhythmic Implementation

Behavioral considerations Provides needed direction Motivate the employees

Types of Management Control Systems

Formal Controls Laid out in writing by management Plans / Budgets / Regulations etc; Framed by managers Informal controls

Originates from empl. Behaviour Group norms / Orgn. Culture Originate with employees

Formal Control System This is the basis for management intervention

A. Input controls : Actions by company before a planned activity is undertaken Eg; Manpower selection / Material selection / Resource allocation

B. Process control : Track certain variables and take corrective action Eg; Inventory control / Production control

C. Output controls : Planned vs Achieved

Informal Control System

Self control :

Pertains to individuals Personal goal setting and monitoring

Social Control :

Prevailing social perspectives Inter-personal interactions Internalisation of values Shared goal

Cultural control :

Based on broader values Normative patterns Unforced behaviour of group.

Control Processes
Formal control process Informal control process

Formal planning $ Strategic $ Operations

Based on experience / feeling intuition. Evolves from interactions

Formal reporting Monthly / Quarterly Sales / Production Inventory reports

Formation of informal teams Informal communication Informal rewards and recognition.

Structure of a control system

Infrastructure Management style and culture

Control process

Rewards

Coordination and Integration

Mutually Supporting Management Systems Model

Infrastructure # Strategic # Operational # Autonomous # Resp.centres # Transfer pricing Formal Control process # Strategic planning # Capital budgeting # Operations planning Rewards # Individual & Group # Short & Long term # Promotion policy

MGT. Style & Culture # External / Internal # Principal values # Norms & Beliefs

Coordination & Integration # Standing committee # Formal conferences # Involvement

FORMAL CONTROL SYSTEM

Infrastructure # Personal contacts # Networks # Minimal Structure # Emergent Role Informal Control process # # # # Rewards # Recognition # Performance based # Personal contact # Position oriented Adhoc as needed Dialogue Generate alternatives Teams for problem solving

MGT. Style & Culture # External / Internal # Principal values # Norms & Beliefs

Coordination & Integration # Based on trust # Simple / Direct # Personal Memo # Telephone INFORMAL CONTROL SYSTEM

Mutually Supportive Management Systems Model

Discussion point :

Control systems play an important role in service as well as manufacturing organisations. Do control system play an important role in a hospital ? What steps should the hospital management take to ensure the effective implementation of Management Control Systems ?

Control Systems in Hospital

>> Admission procedure and systems >> Routing control >> Access control >> Communication systems >> Visual control >> Appointments control >> Reports control >> Regulations for OPD >> Systems for Laboratory >> Planning control >> Reward system for admin. Staff

Components of a Feedback Control System

# Input # Feedback control # Output Feedback

Input

Output

Feedback : Information about the transformation / result is sent back to the input of the system through a controller.

Two types of feedback controls >> Positive feedback >> Negative feedback Positive feedback :
If the new information facilitate and accelerate the transformation process in the same direction, it is positive feedback. The effects are cumulative. Exponential growth or exponential decline. Behaviour >>> Divergent

Positive feedback

o Explosi

No intermediate situation
Block ing

Time

Positive feedback:
Infinite expansion Running away towards infinity ( or ) Total Blocking of activities

Examples :
# Chain reaction # Industrial Expansion # Capital on compound interest

Positive Feedback : Interest compounded + Capital >> Plus leading to Plus Spiraling effect

Cost of living

Prices

Wages

Cost of Production Economic Depression ] Bankruptcy Debt trap ] ] >>>> Minus leading to Minus

Negative feedback :
If new information produces a result in the opposite direction, it is negative feedback. The effect stabilises the system. Equilibrium maintained.

Negative feedback

GOAL

Equilibrium Stabilisation

TIME

Negative feedback:
# Adaptive # Goal seeking # Sustaining at target level # Maintaining nature # Tight control

Characteristic :
# Every variation towards a plus triggers a correction towards minus # Every variation toward a minus triggers a correction toward plus

Examples : Negative feedback

$ $ $ $ $ Voltage control >> Servo stabiliser Temperature control >> Thermostat Speed control >> Governor Water tank with a float Adaptive Organisation >> Management Control System

Review of learning so far

>> Concept of a system >> Formal and Informal systems >> Nature of positive / negative feedback mechanism >> MSSM Model

Discussion Point :

While organizations cannot predict disasters, they can take steps to minimize the magnitude of the disaster. Any example of an organization that faced a disastrous situation and managed it effectively ?

Chrysler automobiles
Disconnected odometers Driven around / Sold as new automobiles Severe negative public image

Lee Iacocca
Extension of warranties Actual number of such incidents

Good MCS for

Disaster forecasting Disaster preparedness Post disaster actions

Designing Management Controls

# A constructive exercise and not a punitive one. Should be viewed fair. # Objectives be measurable. # Number of objectives should be restricted. # Balance among various aspects being controlled. # Accountability to every individual. # Compare projected performance to desired results. # Identify early warning predictors # Take a sample of variables to be controlled # Establish an acceptable range of variation for each variable. # Generate exception reports. # Conduct root cause analysis. # Apply judgment while establishing controls.

Case let :

Racy Jones

Approaches to Management Control Systems

1. Cybernetic approach 2. Contingency approach 3. Strategy and Control system approach

Cybernetic approach
(based on Feedback mechanism)

Original word >> Kybernetes >> Greek origin Meaning >> Steersman Navigator Helmsman

A steersman directs the movement of the ship along the planned course of direction.

Cybernetics deals with the self-regulating principles in a variety of systems.

Examples : Human Biological system Machine System Organisations

Human brain regulates different body functions. Organisations are also complex systems requiring command and control.

CYBERNETICS >> Unifying theory of Self-regulation

Cybernetics - Definitions :
CYBERNETICS >> Unifying theory of Self-regulation

The science of control and communication in the animal and the machine. - Norbert Wiener

The science and art of understanding H. Maturana The art of securing efficient operation L.Couffignal The science of effective organisation Stafford Beer

Study of organisation, communication and control in complex systems by focusing on feedback mechanism.

Cybernetics Definitions: $ is the study of systems which can be mapped using loops. $ Word derived from greek word PILOT $ Minimum of one loop providing feedback $ Study of control and communication in animal and machine $ Systems showing self-regulation $ A theory of control systems based on communication (Transfer of information) between system and environment and within the system and control (feedback) of the systems function with regard to environment.

Why Cybernetics? When we try to pick up anything by itself, we find it is attached to everything in the universe PARADIGM : One that serves as a pattern or model.

Characteristics of a cybernetic system

A. Complex structures : $ Heterogeneous components interacting with each other. B. Mutual Interaction : $ Multiple interactions $ Multiple processes C. Complementary : $ Need for multiple levels of analysis which complement each other. D. Evolvability : $ Tend to evolve and grow in an opportunistic manner rather than in a designed / optimal way. E. Constructivity : $ They increase in size and complexity by building on their existing characteristics and also developing new traits.

Organisation Process
Competition Sales & Mktg Technology R&D Obsolescence

Customer Purchase

Supplier

Regulatory Production

Cash Flow

Company Goal

Safety / Health HR

Taxes

Audit

Finance Compliance

Complaints Public Relations Union

Cybernetics paradigm and the Control process C.P captures all the elements in the control process C.P is a repetitive control process

Essential elements of Cybernetics:

1. Set goals and performance measures 2. Measure achievement 3. Compare achievement with goals 4. Compute the variance 5. Report the variance 6. Determine the cause of the variances 7. Take action to eliminate the variances 8. Follow up to ensure that goals are met.

You are the Financial Controller of a company. Enumerate the steps you would take for ensuring control in line with the essential elements of Cybernetics.

C.P The working model

1. Manager / decision maker scans the environment, both external and internal Tries to get formal / informal information or feedback. Sensors are the mechanisms used for collecting data. 2. Constructs certain beliefs concerning performance and state of external environment . These are Factual Premises 3. Compares Factual premises with organisational goals with what is desired , which is the Value premises This is done by a comparator. 4. When a gap is observed, manager initiates action to close the gap. While doing this he relies on his previous experience called Behavioral Choice 5. Decisions taken require implementation. Manager plays the role of effector. 6. Effects of action are checked out thro Feedback mechanism. 7. Manager repeats the process.

Control Process / Hierarchy / Communication structure

Hierarchy : Relationship between the superior and the subordinates. Goal Congruency : Goals of the subordinate should be congruent to the goals of the superior. Achieving goals : Goals and congruency can be achieved thro negotiation , and depends on the style of management and the communication process in the organisation.

A. Superior and subordinate meet and negotiate goals, targets & objectives B. Tracking of performance periodically C. Reasons for gaps D. Implement corrective actions E. Review results.

Communication :
>> Communication structure need to be open and effective two way. >> Both formal and informal communication systems are essential.

Contingency approach
# Appropriateness of any control system depends on the business setting. # Structure and Process are contingent on various internal and external factors. # Focuses on the interaction between the organisation and its environment NEED for contingency approach : 1. Technology : Better utilisation of resources Faster response to changes in environment. Eg; Computers / Internet / Mobile telephony etc; 2. Orgn.Structure: Complex Organic keep changing Uncertainty in operating environment. 3. Environment : Need for a fit between external factor and the internal factors Need to change with the environment.

Control variables in Contingency approach

1. Uncertainty 2. Technology & Interdependence 3. Industry / Firm / Unit variables

4. Competitive strategy
5. Mission & Observability factors

Strategy and Control System Approach

Management Control system is a tool for implementing companys strategy. $ Draw up corporate strategies $ Design controls to successfully implement the strategies.

Control System for Different strategies

A. Strategic Planning : Vertical strategic plan >> For conglomerates Horizontal B. Budgeting : Single business firm >> Chief executive directly controls Conglomerates >> Business Unit Manager controls >> for diversified business

C. Incentive and Compensation ; Formula based >> For conglomerates Subjective >> Single business

Alternative Generic strategies Low cost : Relative to competitors Cost leadership Economy of scales with volumes

Differentiation : Different product from others Unique features Product design

Focus: On particular buyer group (market segment) Particular product Geographic market

Types of Companies Single Business Firm : Related diversification : Focuses on one business Uses common set of core competencies

Unrelated diversification : Operates in different areas of business

Business Unit Strategies Build : Increase market share High investments Hold : Protect market share Protect competitive position Harvest : Focus on short term earnings Maximise cash flow Divest : Strategically withdraw from business

Impact of Information technology and Control System

# Management of large data with ease and efficiency # Cost benefit advantages # Linking of various departments, thus goal congruence # Data collection and sharing # Faster budgeting process # Production / Quality control # Running and upkeep of machines # Inventory management systems # Finished products distribution and tracking system # Efficient costing tools

Challenges in MCS design

$ Ensuring adequate control while leveraging potential for innovation and learning. $ Balancing profit / growth / control / risk $ Delivering short term results while building long-term capabilities. $ Balancing the interests of various stake-holders. $ Minimizing control losses