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R e n d e l l C o m p a n y Management Control System C A S E 04/12/11 By AviroopBanik RIMSR, Bandra(W),Mumbai Management Control Systems

R e n d e l l C o m p a n y 7 operating divisions. Smallest div.annual sales= $50 millionLargest div.annual sales= $500 million Profitable for 50 years, but growth rate slowedconsiderably. 04/12/11

Mr.Fred Bevins (Controller) What would be the organizational status of my divisionalcontrollers??? 04/12/11 He had joined co. as Asst.Controller in 1981

Person responsible for designing and operating the management control system, strategicplans and budgets. 1.Preparing financial statements and reports for shareholders. 2.Preparingand analyzing performance reports. 3.Supervising internal audit. Management ControlSystem 04/12/11 CONTROLLER (CFO)

J a m e s H o d g k i n Controller President He thought that corporate controller play a moreactive role in the process of establishing budgets and analyzing performance. So he tookactive role in reviewing budgets and studying divisional Performance. Likewise,Mr.Bevinshad done the same thing. 04/12/11

Corporate Controller Divisional GM Divisional Controller ----------------------------------Dotted line relationship Divisional controllers reported directly to the div. general managers,but the corporate controller always was consulted prior to the appointment of a newdivisional controller. act as staff assistant to R E N D E L L Divisional Controller DivisionalGM 04/12/11

Divisional GM Corporate Controller Meeting with Corporate controller, but in Presence ofDiv.controller Divisional Controller Technical aid Technical aid R E N D E L L 04/12/11

Corporate Controller Divisional Controller R E N D E L L Divisional Controller Turmoilin relationship Corporate Controller Is providing biased information to Corporate controller ------------------------ 04/12/11

Corporate Controller Divisional Controller Divisional Controller Relationship according to

Mr.Bevins Corporate Controller Mr.Bevins want Divisional controller to directly Report himrather than to Divisional general manager Divisional GM -------------------- 04/12/11

Mr.Fred Bevins (Controller) Should we go in the direction of controllership practiced byMartex Company? 04/12/11

Corporate Controller Divisional Controller Martex Organogram Divisional GM -------------------- 04/12/11 M A R T E X Control structure

Mr.Bevins (Corporate controller) Mr.Harrigan (Asst. controller) 25 years in RendellMr.Bevins respect Mr.Harrigans knowledge about the company and his opinion on

organizational matters. Mr.Harrigan speaks very frankly with Mr.Bevins. 04/12/11

Q&A What is the organizational philosophy of Martex w.r.t the controller function?Should Rendell adopt this philosophy? 04/12/11

Corporate Controller Divisional Controller Martex Organogram Divisional GM -------------------- 04/12/11 M A R T E X Control structure

04/12/11 Rendells business unit setup Strengths Weaknesses Divisional controller istrusted by divisional GM, thus internal information is shared. Ability of Divisional GM toconceal financial flaws. Divisional controller shares a common goal with his/her assigneddivision hence part of the team. Lack of empowerment to Divisional controllers. Thereliability of information provided by divisional controller to corporate controller may be inquestion.

04/12/11 Martexs functional setup Strengths Weaknesses Divisional controller isempowered to perform intended functions Goal incongruence between Divisional controller

and divisional GM may hamper divisions objectives. The decrease of asymmetric informationbetween corporate controller and divisional controller Divisional controllers maybe regarded

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as a spy rather than a part of the team.. Promoting goals congruence since it reduces conflictof interest level between division and its headquarter

Corporate Controller Divisional GM Divisional Controller Solid line relationshipDivisional controllers in Martex reported directly to the corporate controller, but thedisadvantage is that the Divisional GM may treat Divisional controller like a spy from the

front office rather than as a trusted aide. M A R T E X -------------------- 04/12/11 Corporate Controller Divisional GM Divisional Controller Solid line relationship Based onthe above diagram, it is clear that controllership role can only be accomplished through theMartex method. Goal congruence between divisional controller and corporate controller willonly be achieved if Rendell co. follow Martex structure. Yes , Rendell should adopt theMartex philosophy. M A R T E X -------------------- 04/12/11

What are organizational goals? Goals of division 1 + Goals of Division2 + Goals ofDivision 3 + Goals of Division 4 is equal to organizational goals. 04/12/11 We need to

concentrate on each divisional goals to achieve organizational goals. Rendell needs goalcongruence not only between corporate controller and divisional controller but also betweencorporate controller and divisional managers and Divisional controller and Divisionalmanagers. So, in this point of time Martex structure is applicable in Rendell but if we wantfuture growth perspective of Rendell with its several units, divisional or business unitstructure should be applied with high loyalty factor.

Q&A What should be the relationship between the corporate controller and the Divisionalcontrollers? What steps would you take to establish the relationship on a sound footing?Divisional Controller Solid line relationship Corporate Controller 04/12/11

Goal Congruence Central purpose of MCS Individual employee / Divisional goal RendellCompany Rendells corporate goal Organizational goal should support and provide shade tothe individual goal of employee. Dont hit your employees to attain your goal. We need to asktwo imp questions for generating goal congruence- 1.What actions does it motivate people to

take their own self-interest? 2.Are these actions in the best interest of the organization?04/12/11

Q&A To whom the divisional controllers report in the Rendell company? Why? DivisionalController Divisional GM report to with a dotted line relationship with Corporate controller04/12/11

Divisional GM Divisional Controller 04/12/11 1. Rendell company has 7 operatingdivisions. So, to maintain the production and marketing of divisional products, they requireindependent divisions with designated Divisional GM. Reporting to Divisional manager asDivisional manager has complete responsibility for the Division. 2. 2. Immediate boss 3.F orlong term perspective Divisional manager can become organizational head in the future aseach div. act like independent company. So, Divisional manager should get good corporate

involvement. 4.As the division is closer to the market for its products than HQ is, its managermay make sounder production and market decisions than HQ might. Can react to new threatsand opportunities quickly. 5. Dotted line relationship with corporate controllerThecorporate controller should hire the Divisional controller and should have right to removethese people ,if necessary.

Q&A Would you recommend any major changes in the Basic responsibilities of either thecorporate controller or divisional controller? 04/12/11 We think the most importantresponsibility that a divisional controller need to hold is high end loyalty towards corporatecontroller and divisional GM regarding any report that he/she submits to both of them. Majorchange in the responsibility of corporate controller is to enforce management decisions andtake initiative to implement suitable organizational culture where divisional controllers playan important role in achieving organizational goals along with divisional GM.

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04/12/11

Adopting a single and integrated financial accounting system across all divisions. Authorizing division controllers to pursue the role of internal auditor of the division. Empowering the division controllers to provide recommendations based on its

analysis of capital budgeting requests.

Applying bonuses based on the value of the company instead of the related division. Enhance the relationship between the divisional controller and its division by

providing team-based activities such as out bounds periodically.

If possible, the divisional controller should consist of people who have a previousrelationship and experience dealing with the divisional manager to ensure that theyare more welcomed at the site.

Recommendations

Conclusion 04/12/11 Divisional managers are prone to protect their own individual ordivisional interests by putting more importance in meeting Divisional targets than meetingthe common goals. To achieve goal congruence , divisional controller should report tocorporate controller ,instead of divisional manager at this point of time.

04/12/11 Communicate the new organizational structure and roles , responsibilities of eachdivisions through a formal document. Highlight changes in position and the new relationship

between the corporate controller, Divisional controller and divisional GM. Formalize the new

tasks of the divisional controllers through a PPM (Process, Procedures and Methods) manualthat will be available across all depts. Initiate a common code of conduct manual for allemployees . This manual should also include how employees should conduct themselveswhen submitting information . Recommendations

04/12/11 Now Rendell should adopt Martex set-up but for future growth with several units,Rendell should adopt Dotted line relationship

Corporate controller should pick people of Divisional controller and should have aright to warn them for any unethical practice or any biased report is submitted tocorporate controller.

2. Corporate controller should give rights to Divisional controller to speak about themanagement practices(good or bad) followed by the Divisional GM . 3. Corporate controller

should provide opportunity and situation to Divisional controller to express his/her views in

Divisional budget or monthly reports. He should encourage and praise the Divisional

controller for his/her work. 4.These certain activities would help in creating an environment

where the Divisional controller not only become loyal to his immediate boss i.e Divisional

GM but also to the Corporate controller. 5The relationship should enhance the loyalty of

Divisional controller towards Corporate controller. Divisional GM and Corporate controller

need to treat him/her like a trusted assistant