Characteristics of Management Control System

# Diagnostic : Formal systems to monitor results and correct deviations from

present performance standards.

# Interactive : Formal systems to personally involve in the decision activities

of subordinates.

# Beliefs : Formal systems to define, communicate and reinforce the basic

values, purpose and direction of the organisation.

# Boundary : Formal systems to establish explicit rules and limits which must

be respected. (code of business conduct)

Factors influencing design of MCS

A. Managerial style

B. Corporate culture

C. Organisation culture

D. Shareholders ‘s control

E. Communication structure

Factors influencing design of management controls:

A. Managerial styles

# External Control :

Premise : Sub-ordinates can be motivated through rewards

An authoritative style

Organisational goals set by top management

# Internal Control :

Premise : Sub-ordinates will be motivated if they are involved in the

decision making process. A Participative style.

Employees experience a sense of achievement,

recognition and self- esteem.

# Mixed Control :

A combination of both.

B. Corporate culture :

$ Respect for the individual

$ Customer service

$ Passion for excellence

$ Decentralised business

$ Total Quality Management

$ Empowerment of people

Management Control system should fit in well with the existing culture of the

organization.

C. Organzation Culture

1. Centralization / Decentralisation :

# Decide on the extent of decentralisation

# Decision making process

# Wider accountability

# Centralisation helps in knitting the sub-units of de-centralisation.

2. Organisational Slack :

Occurs when organisational goals / objectives are achieved without working

at maximum efficiency.

When environmental pressure is not there, slackness sets in.

Slack acts as a cushion against sudden changes in business

environment.

D. Stakeholder Control :

$ Investors

$ Customers

$ Employees

$ Public

Identify the crucial stakeholder variables that influence the control process

E. Communication structure :

Could be Formal or Informal.

Planning stages : Strategic

Business

Long-range

Operational

Above planning process must be linked through proper communication

Across various levels of the organisational hierarchy.

F. Result Controls :

# Controls employee’s behaviour

# Expectations are clearly communicated to the employees.

Eg; Quality level / Productivity / Sales targets

# Performance is measured.

MCS system in a big conglomerate :

>> Shareholder’s interest and expectations

>> Customer expectations

>> Regulatory requirements

>> Safety / Health / Environment

>> Accommodation of appropriate technology as part of controls

>> Multicultural dimensions for multi locations

>> Compatibility of controls in parent unit and subsidiary

>> Active ethics program

>> People dimension

>> Corporate Social Responsibility

Twelve steps for establishing Management Controls :

1. Controls must be constructive and not punitive.

2. Measurable objectives

3. Limited number of controls.

4. Balance among various aspects to be controlled

5. Assign specific responsibility

6. Compare actual performance to desired results

7. Capture early warning predictors eg; Absenteeism / Low marks

8. Sample the variable to be controlled

9. Acceptable range of variation for aspects to be controlled

10.Exception reports to go immediately to concerned person

11.Plans for corrective action and verification of effectiveness

12.Judgment in establishing controls

Control tightness

Tighter controls :

>> Time consuming

>> Costly to implement

>> Information systems need to be robust

>> Proper measurement techniques required

>> But not suitable for unpredictable environment

Best Control :

>> Combination of tight and loose

>> Autonomy / Flexibility / Innovation / Accountability

Elements Internal External Mixed

Infrastructure

Personal participation Rigid / Formal Flexible / Analytical

Rewards

Plan vs Performance High / Specific Parameters identified

Unhealthy Comptn

Coordination &

Integration

Personal Communication Formal meetings / Mix of both

Team based commn. Circulars

Control Process

Informal reports Formal process Less formal reports.

Verbal Integrated info systems

Frequent reports

KEY SUCCESS FACTORS / Key variables

$ Measuring the whole company

$ Measuring whole Department / Division

$ Measuring functional departments

Warrants close monitoring by the management on a continuous

basis.

Some measures of key variables :

1. Short term profitability

2. Market share

3. Productivity

4. Product leadership

5. Personnel development

6. Employee morale

7. Public accountability

Some examples

Hospitals

>> Beds occupied

Hotels

>> Occupancy rate

Electricity Board

>> KWH sold

Restaurant

>> Revenue / Labour cost

Retail store

>> Gross margin

Marketing Key Variables

1. Order book position

Helps in planning procurement and production planning for distribution

2. Market Share :

Performance indicator

Competitive strength

3. Institutional sale :

Orders received from institutional buyers

Asset management variables :

1. Asset turnover :

Relationship between total assets in the organisation and sales volume.

Calls for constant managerial attention.

2. Working capital turnover :

Efficiency in managing working capital is indicated.

3. Inventory turnover :

Relationship between inventory in the organisation and sales volume.

Production Variables

1. Capital utilisation :

Affected by Marketing variables / Procurement variables

Eg; Dairy sector >> Milk sold / Milk procured

Hotels >> Occupancy rate

2. Losses :

Rejection & Wastage during manufacturing

3. Quality :

No. of customer complaints

Assembly line rejections

Warranty returns

4. Maintenance :

Machine availability

Various types of maintenance

5. Costs :

Cost control measures

6. Delivery :

Timely delivery

Schedule adherence

Key Success variables – Characteristics :

# Directly influences the attainment of management goals

# Require in-depth evaluation

# Must be measurable

# They undergo changes suddenly / unpredictably

# Requires immediate management action

# High importance to management

Identifying Key Variables

@ External Variables :

Mostly outside of a firm’s control

Eg; Macroeconomic variables / Behaviour of competitors / Deliveries

of some supplies / Actions of government

@ Internal Variables :

At least partially under control :

Eg; Cost / Product Quality / Demand variables / HR policies

Discussion Point :

What are the key success factors for Restaurants ?

>>> Customer focus

Focus on changing needs and preferences of customers

>>> Excellence in human relations

Hiring and retaining competent stores managers

>>> Adaptability

Ability to reposition itself

>>> Value

Deliver superior value to the customer in comparison to price

Discussion point :

The success of an organisation depends on its key variable.

What are the key variables for a tea industry ?

Key variables of a tea industry :

>> Availability of land to cultivate the raw material for tea

preparation.

>> Cost of transport of raw material to the factory

>> Cost of distribution

>> Cost of production

>> Control over the process time required to manufacture tea

>> Ability to offer the different flavours as required by the

customers

>> Support price offered by the government, if any.

>> Competition from the rival beverage industries

Discussion point :

What could be the key variables for a service oriented company ?

>> Customer needs

Focusing on changing needs and preferences of customers

>> Adaptability :

Repositioning organisational goals and objectives to suit customer needs.

Willingness to reposition.

>> Quality :

Delivering high quality of service to customers

>> Customer service :

Training in providing professional customer service.

Key success factors for the Auto industry :

>> Global sourcing

>> Strong transport network

>> Lean production systems

>> Quality function deployment

>> Supply chain management

>> Access to technology

>> After sales service network

>> Ability to meet strict environmental standards