Management Control Systems_Session1

7/29/2019 Management Control Systems_Session1

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Management Control Systems

Session 1


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Syllabus

University paper 100 marks

Portion

Introduction to MCS

Financial Goal setting

Organizational Growth ( Responsibility centers / profit

centers)

Mechanics of determining profit objectives of profit

centers

MCS in special sectors

Performance measurement of assets employed


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Syllabus

Paper pattern

1 question compulsory (case study 10 mks)

8 or 5 questions ( each of 12/10/7/6 mks)

At least 4/5 questions will be sums

Types of Sums from the following chapters Financial Goal Setting (EVA/ ROI/ROE/EPS/PE)

Transfer pricing (purchasing from internal subsidiary or frommarket)

Responsibility centers (review of performance of depts etc.)

Profit center (review of performance of profit center)

Measuring & controlling of profit/ assets (ROI/EVA/RI/FCF etc.)

Performance measurement & control ( EPS/NPV etc.)


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Syllabus

Theory questions from the following chapters

MCS in service and non-profit organizations

Audit

Strategy

MCS

Organization Hierarchies and behavior

Responsibility center

Transfer pricing

Balance scorecard/ interactive control


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Session 1

Nature of management control systems

Understanding strategies

Organization Hierarchies and Behavior


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Basic concepts Control

Control Device

Detector(information about

what is happening)

Entity being

controlled

Effector

(behavior alteration,

if needed)

Assessor

(comparison with

standard)


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Basic concepts Management

Led by hierarchy of managers

The complexity of the organization determines

the number of layers

All managers other than the CEO are both

supervisors and subordinates


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Compare

Simple control process

The standard is preset

This is automatic

A function performed by a

single individual The connection from

perceiving the need foraction to obtaining thedesired result is clear

Control is maintained by anexternal regulating device

Management control process

The standard is not preset

This is not automatic

Co-ordination among

individuals The connection from

perceiving the need foraction to obtaining thedesired result may not beclear

This is self control


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Basic concepts Systems

A prescribed and usually repetitious way of

carrying out an activity or a set of activities

However many management actions are

unsystematic.


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What is management control systems Is a process by which management influences other members of

the organization to implement the strategies effectively andefficiently

MCS is necessary in any organization that practices decentralization.

MCS shall fit in the firms strategy. This can affect the developmentof strategies of an organization.

The CEO has the responsibility to formulate the companysstrategies that are expected to attain the organization objectives .MCS is used by the management to exercise control over theimplementation of strategies.

MCS begins after the formulation of the organizations goals andstrategies

MCS encompass both financial and non financial performancemeasures.

There is a focus on strategy execution


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What is MCS an effective system

should include

Strategic plan should be communicated

Profit plan budget provided direction to the

organization. Sets forth the standards of

measurement.

Motivation employees should be motivated

Effective management information system

to control the activities of an organization


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Management control boundaries

Planning what the organization should do

Co-ordinating the activities of several parts of

the organisation

Communicating information

Evaluating information

Deciding what if any action should be taken Influencing people to change their behavior


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Management control boundaries/

Perspective

Strategy

formulation

Managementcontrol

(operational &financial)

Task control

Goals, Strategies and policies

Implementation of strategies

Efficient and effective

performance of individual

tasks


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Strategy formulation

Process of deciding on the goals of the

organisation and the strategies for attaining

the same.

Goals are overall aims of the organisation

Once a firm has formulated the strategies, it

operates in accordance with the strategies.


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Strategy formulation involves

Framing a mission and objectives

Analysis of internal environment

Analysis of external environment GAP analysis

Framing alternative strategies

Choice of strategy


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Cocacola The world is changing all around us. To continue to thrive as a business over the

next ten years and beyond, we must look ahead, understand the trends and forces

that will shape our business in the future and move swiftly to prepare for what's to

come. We must get ready for tomorrow today. That's what our 2020 Vision is all

about. It creates a long-term destination for our business and provides us with a

"Roadmap" for winning together with our bottling partners.

Our Mission

Our Roadmap starts with our mission, which is enduring. It declares our purpose as

a company and serves as the standard against which we weigh our actions anddecisions.

To refresh the world...

To inspire moments of optimism and happiness...

To create value and make a difference.

Our VisionOur vision serves as the framework for our Roadmap and guides every aspect of our business by describing what we needto accomplish in order to continue achieving sustainable, quality growth.

People: Be a great place to work where people are inspired to be the best they can be.

Portfolio: Bring to the world a portfolio ofquality beverage brands that anticipate and satisfy people's desires and

needs.

Partners: Nurture a winning network of customers and suppliers, together we create mutual, enduring value. Planet:

Be a responsible citizen that makes a difference by helping build and support sustainable communities.

Profit: Maximize long-term return to shareowners while being mindful of our overall responsibilities.

Productivity: Be a highly effective, lean and fast-moving organization.
http://www.coca-colacompany.com/stories/qualityhttp://www.coca-colacompany.com/stories/qualityhttp://www.coca-colacompany.com/brands/allhttp://www.coca-colacompany.com/brands/allhttp://www.coca-colacompany.com/stories/qualityhttp://www.coca-colacompany.com/stories/quality


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Management control

Process of implementing strategies.

There is generally a fixed time table and series of

steps in accordance with which management control

takes place. Management control involves the behavior of

managers and this cannot be shown in the form of

equations.


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Task control

Process of ensuring that specified tasks are

carried out effectively and efficiently

This is transaction oriented

Performance of individual tasks according to

the rules established in the management

control process.

This is a focus of many management science

and operations research techniques.


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Task control Operational

Process used for ensuring the tasks which are

specified are carried out efficiently and effectively

Involves the control of individual tasks.

This can be achieved through a medium of humanbeings or machines.

They are scientific in nature


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Task control Financial

Process by which the management ensures

that an organization carries out its financial

plans effectively.

The focus is on short term plans

The control includes control of direct wages,

direct expenses, manufacturing overheads etc.


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Distinction between Strategy/

Management/ task

Strategy formulation

Deciding on new

strategies Unsystematic

Analysis involves

few people

Management control

Implementing of

strategies Systematic

This involves

managers and

staff at all levels Focus is on

organization units

Task control

Consists of seeing

that rules arefollowed

Is a science

There limited

interactionbetween manager

and subordinate

Focus is on

specific tasks


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Strategy

Derived from Greek word strategos which

means general

It is the determination of the basic long term

goals & objectives of an enterprise and the

adoption of the course of action and the

allocation of resources necessary for carrying

out these goals.


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Understanding strategies

Strategy is the determination of the basic long term goals andobjectives of an enterprise and the adoption of the course of actionand the allocation of resources necessary for carrying out thesegoals

To formulate strategies, one has to know the objectives and policiesthat should be followed.

This is a future oriented plan

This is universally applicable to businesses as well as non-businessorganizations.

A company develops its strategies by matching its corecompetencies with industry opportunities

Strategies can be found at two levels i.e whole organization and forbusiness units within an organization.


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Role of strategies in business

Minimize risks

Decision making

To achieve objectives

Facilitate organizing

Control

Motivation

Optimum use of resources


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Strategies/ Policies

Strategy

Major courses of action or plans

which help in achievement of

organizational goals

Rule for decision making

Cannot be delegated downward

This is concerned with

uncertainties, risks etc.

It is a specific statement. Can be

written in explicit terms

Policy

A policy is typically described as a

principle or rule to guide

decisions and achieve rational

outcomes

Statements or guidelines for

decision making

It is a contingent decision

Guidelines for decisions which

can be delegated downwards It is an overall guide that governs

and controls the managerial

action

It is a general statement which

can be expressed or implied


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Strategies/ tactics

Strategy

Major plans that are to be

undertaken and allocated the

resources to achieve these plans

Developed at top management

For a long period of time

Higher uncertainty in case of

strategy formulation and

implementation

Important for the entireorganisation

Affected by the personal values of

the person involved in the

strategy formulation process.

tactics

Means by which previously

determined plans are executed

Employed at lower levels of

management to implement the

plans

Framed for a short period of time

Fewer elements of uncertainty

and risks

They are concerned with specificpart of the organization

May be free from personal values

of those who take tactical

decisions.


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Types of strategy

Corporate level

Business level


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Corporate level strategy

Is about being in the right mix of businesses

The issues are

The definition of businesses in which the firm will

participate

Deployment of resources among those

businesses.


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Low

Degree ofrelatedness

High

HighExtend ofdiversification

Single industry

Related diversification

Unrelated diversification


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details

Features

examples

Single industry

Only one

industry

Macdonals

Relateddiversification

Sharing of core

competencies/

resources

acrossbusinesses

P&G

J&J

Unrelateddiversification

Totally

autonomous

business in

very differentmarkets

GE


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Stability

Growth

Retrenchment Combination


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ITC (vision & mission)

VisionSustain ITC's position as one of India's most valuable corporations through world class

performance, creating growing value for the Indian economy and the Companys

stakeholders

MissionTo enhance the wealth generating capability of the enterprise in a globalising

environment, delivering superior and sustainable stakeholder value


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ITC corporate strategy

Create multiple drivers of growth by developing a portfolio of world class businesses that

best matches organisational capability with opportunities in domestic and export markets.

Continue to focus on the chosen portfolio of FMCG, Hotels, Paper, Paperboards & Packaging,

Agri Business and Information Technology.

Benchmark the health of each business comprehensively across the criteria of Market

Standing, Profitability and Internal Vitality.

Ensure that each of its businesses is world class and internationally competitive.

Enhance the competitive power of the portfolio through synergies derived by blending the

diverse skills and capabilities residing in ITCs various businesses.

Create distributed leadership within the organisation by nurturing talented and focused top

management teams for each of the businesses.

Continuously strengthen and refine Corporate Governance processes and systems to catalyse

the entrepreneurial energies of management by striking the golden balance between

executive freedom and the need for effective control and accountability.


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Business level strategy

How to create and maintain competitive

advantage in each of the industries in which

the company has chosen to participate

Depends upon the mission and the

competitive advantage

The corporate office and the business unit

general manager are involved in identifying

the mission of the individual business units.


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Planning models used

BCG two by two growth share matrix

GE three by three industry attractiveness business strength

matrix

There is a need to choose from the following

Build

Hold

Harvest

Divest


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BCG


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Analyze your portfolio using BCG

Oliver is the market leader in handsaws with 40% of the market. Manor

Way has only 25%. There is little house building and nowadays many

amateurs use power tools. However it is still quite profitable.

Manor way still make a range of barbed fish hooks which are now banned

in some markets.

Both Oliver and Manor Way have invested heavily in gardening tools and

expect sales to increase in the future since people have more leisure time

and a larger disposable income. Maner Way has 10% of the new market,

and Oliver has 15%.

Manor Way has a high share in the new market for sandpaper

replacement products. Their Wayplate is a steel sandpaper replacement

for which they have sole rights. They have 5% of this growing market.

What about the javelins?


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As you can see, each of the products is positioned upon the Matrix. You'll noticethat the Javelins do not appear - they were thrown away long ago.Manor way still make a range of barbed fish hooks which are now banned insome markets.Both Oliver and Manor Way have invested heavily in gardening tools and expectsales to increase in the future since people have more leisure time and a largerdisposable income. Maner Way has 10% of the new market, and Oliver has

15%.


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GE planning model


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Business unit competitive

advantage

What is the structure of the industry in which

the business unit operates

How should the business unit exploit the

industry structure

What will be the basis of the business unit

competitive advantage

Use the Porters five forces model


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Five force model


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Behavior in organization's

This is a study of human behavior in organizational settings,

the interface between human behavior & the organization.

It is for the purpose of applying the above knowledge towards

improving an organizations effectiveness

The determinants of organizational behavior

people

Structure

Technology

I f MCS O i i l


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Impact of MCS on Organizational

Behavior

Good MCS influence behavior in a goal

congruent manner.

They ensure that individual members actions

taken to achieve personal goals also helps to

achieve the goals of the organization.


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The managers jobs

Applying different functions and duties to the various

organizational resources

They have to assist in executing the strategies

Most important function is controlling the process of

monitoring and correcting the actions of the organization and

its people to keep them headed towards their goals.

Receiving & transmitting information are integral aspects

There are different skills required in order to get success in

performing the task.


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The organizational Hierarchies

Top levelmanagement

Middle levelmanagement

Lower level management

Employees

BOD/ CEO

Departmental

heads/ Junior

executives

Foreman/ first line

supervisors

workers


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Importance of goal congruence

The goals of an organization's individual

members should be consistent with the goals

of the organization itself.

The MCS should be designed and operated

with the principal of goal congruence in mind.

The system motivates people to take actions

for their self interest, but the same is in theinterest of the organization.


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Factors affecting goal congruence

Formal Rules

Manuals

System safeguards

Task control systems

Physical controls

Informal Work ethic

Work culture Management style

Perception and communication

Informal organization

Co-operation and conflict


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Types of organization

Functional

Business

Matrix

Network


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Functional organisation

Functional organization has been divided to put the specialists in the top position

throughout the enterprise. This is an organization in which we can define as a

system in which functional department are created to deal with the problems of

business at various levels. Functional authority remains confined to functional

guidance to different departments. This helps in maintaining quality and

uniformity of performance of different functions throughout the enterprise.

The concept of Functional organization was suggested by F.W. Taylor who

recommended the appointment of specialists at important positions. For example,

the functional head and Marketing Director directs the subordinates throughout

the organization in his particular area. This means that subordinates receives

orders from several specialists, managers working above them.


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Features of Functional


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Features of Functional

Organization

The entire organizational activities are divided into specific functions such

as operations, finance, marketing and personal relations.

Complex form of administrative organization compared to the other two.

Three authorities exist- Line, staff and function.

Each functional area is put under the charge of functional specialists andhe has got the authority to give all decisions regarding the function

whenever the function is performed throughout the enterprise.

Principle of unity of command does not apply to such organization as it is

present in line organization.

Merits of F nctional Organi ation


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Merits of Functional Organization

Specialization- Better division of labour takes place which results in

specialization of function and its consequent benefit.

Effective Control- Management control is simplified as the mental

functions are separated from manual functions. Checks and balances keep

the authority within certain limits. Specialists may be asked to judge the

performance of various sections.

Efficiency- Greater efficiency is achieved because of every function

performing a limited number of functions.

Economy- Specialization compiled with standardization facilitates

maximum production and economical costs.

Expansion- Expert knowledge of functional manager facilitates better

control and supervision.

Demerits of Functional


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Demerits of Functional

Organization Confusion- The functional system is quite complicated to put into

operation, especially when it is carried out at low levels. Therefore, co-

ordination becomes difficult.

Lack of Co- ordination- Disciplinary control becomes weak as a worker is

commanded not by one person but a large number of people. Thus, there

is no unity of command.

Difficulty in fixing responsibility- Because of multiple authority, it is

difficult to fix responsibility.

Conflicts- There may be conflicts among the supervisory staff of equal

ranks. They may not agree on certain issues.

Costly-Maintainance of specialists staff of the highest order is expensive

for a concern.


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Business unit


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Features of a business unit Strategic Business Unit or SBU is understood as a business unit within the overall corporate

identity which is distinguishable from other business .

These organizational entities are large enough and homogeneous enough to exercise control

over most strategic factors affecting their performance. They are managed as self contained

planning units for which discrete business strategies can be developed.

The SBU has its own business strategy, objectives and competitors

As the number, size, and diversity of divisions in an organization increase, controlling and

evaluating divisional operations become increasingly difficult for strategists. Increases in

sales often are not accompanied by similar increases in profitability. The span of control

becomes too large at top levels of the firm.

The SBU structure groups similar divisions into strategic business units and delegates

authority and responsibility for each unit to a senior executive who reports directly to the

chief executive officer.

This change in structure can facilitate strategy implementation by improving coordinationbetween similar divisions and channeling accountability to distinct business units.

Two disadvantages of an SBU structure are that it requires an additional layer of

management, which increases salary expenses, and the role of the group vice president is

often ambiguous.


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Matrix organization

The matrix structure groups employees by both function and product. This structure cancombine the best of both separate structures. A matrix organization frequently uses teams of

employees to accomplish work, in order to take advantage of the strengths, as well as make

up for the weaknesses, of functional and decentralized forms. An example would be a

company that produces two products, "product a" and "product b". Using the matrix

structure, this company would organize functions within the company as follows: "product a"

sales department, "product a" customer service department, "product a" accounting,"product b" sales department, "product b" customer service department, "product b"

accounting department. Matrix structure is amongst the purest of organizational structures, a

simple lattice emulating order and regularity demonstrated in nature.

Weak/Functional Matrix: A project manager with only limited authority is assigned to

oversee the cross- functional aspects of the project. The functional managers maintain

control over their resources and project areas.

Balanced/Functional Matrix: A project manager is assigned to oversee the project. Power is

shared equally between the project manager and the functional managers. It brings the best

aspects of functional and projectized organizations. However, this is the most difficult system

to maintain as the sharing power is delicate proposition.

Strong/Project Matrix: A project manager is primarily responsible for the project. Functional

managers provide technical expertise and assign resources as needed.
http://en.wikipedia.org/wiki/Matrix_managementhttp://en.wikipedia.org/wiki/Projecthttp://en.wikipedia.org/wiki/Project_managerhttp://en.wikipedia.org/wiki/Project_managerhttp://en.wikipedia.org/wiki/Projecthttp://en.wikipedia.org/wiki/Matrix_management


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Network organization

Another modern structure is network. While business giants risk becomingtoo clumsy to proact (such as), act and react efficiently,the new network

organizations contract out any business function, that can be done better

or more cheaply. In essence, managers in network structures spend most

of their time coordinating and controlling external relations, usually by

electronic means. H&M is outsourcing its clothing to a network of 700suppliers, more than two-thirds of which are based in low-cost Asian

countries. Not owning any factories, H&M can be more flexible than many

other retailers in lowering its costs, which aligns with its low-cost strategy.

The potential management opportunities offered by recent advances in

complex networks theory have been demonstrated including applicationsto product design and development, and innovation problem in markets

and industries.
http://en.wiktionary.org/wiki/networkhttp://en.wikipedia.org/wiki/H%26Mhttp://en.wikipedia.org/wiki/H%26Mhttp://en.wiktionary.org/wiki/network


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Formal control process

Strategic

planning BudgetingResponsibility

centre

performance

Report

actual

versus

plan

Was

performance

satisfactory

Goals &

strategiesRules

Other

information

Revise Revise

Corrective action

Feedback communication

Reward

measurement


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Functions of a controller

Designing & operating information & control

systems in an organization

Developing personnel in the organization &

participating in the training & development ofthe personnel to carry out their functions

effectively .

Supervise internal audit & accounting controlprocedures

Prepare & analyze performance reports


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Business unit controller

As a head of an organizational unit, he has to

do planning, organizing, co-ordinating and

controlling functions.

He has divided loyalty


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Questions 2012

What is strategy ? Explain the concept of corporate strategy?

Explain the perspective of management control system

What is goal congruence. What is its importance in

management control

Explain the formal control system in the organization

Short note strategic business unit

Distinguish ( Strategy formulation/ task control) & (

management control/ task control)

Goal congruence throws its impact upon management control

systems. Comment upon this statement, explaining the

meaning, significance of and factors influencing goal

congruence


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Questions 2011 Define MCS. Which level of managers are

involved in it. How does MCS differ from

simpler control processes.

Briefly describe functional, divisional and

matrix organization. which is the most

appropriate from the point of control. Where

are the other two suitable

What are organization structure and

management control implications of corporate

level strategies.


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Questions 2010

Explain briefly the various stages of management control process citingsalient features of each.

Short note on MCS in a matrix organization

What do you understand by goal congruence. What are the informal

factors that influence goal congruence.

Briefly describe overall framework of management control. How does it

relate to strategic planning & operations control

What is an SBU. What are the conditions required for creating an SBU.

How is the performance measured. What are the merits/ demerits of

creating SBUs

How does corporate level strategies differ from business unit level

strategies. How is budgeting done at SBU under different strategic mission.


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Questions 2009

Explain briefly the various stages of management control

process citing salient features of each.

Organizations with business divisions format have observed

that divisional controllers experience divided loyalty in

carrying out their functions, causing a possible dysfunction.How should such a situation be resolved. Define the role of

controller which suits your suggestion.

What do you understand by goal congruence. What are the

informal factors that influence goal congruence. Short note on MCS in a matrix organization.


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Questions 2008

Differences of strategy formulation and task

control

Differences of management control and task

control

Management Control Systems_Session1

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