Chapter 1

Understanding Strategies, Perspective on MCS

Controlling Elements of Control Management Control Elements of Management Control Simpler Controlling Process V/S. Management Control Process Boundaries of Management Control Process of Management Control Features of Management Control Controlling:

Controlling is the measurement and correction of the performance of activities in order to ensure that the planned objectives are accomplished
Elements of Control: Press the accelerator, and your car goes faster. Rotate the steering wheel, and it changes direction. Press the brake pedal, and the car slows or stops. With these devices, you control speed and direction, if any of them is inoperative, the car does not do what you want it to. In other words it is out of control. An organization must also be controlled, that is, device must be in place to ensure that its strategies intentions are achieved, but controlling an organization is much more complicated process than controlling a car Any control system has four important elements. They are: (i) (ii) (iii) (IV)

Detector or Sensor: The detector analyzes the situation that is being controlled Assessor: Helps in comparing the actual results with the standard or expected results. Effector: An effector is used to reduce the gap between the actual and the
Communications network: Transmits information between the detector, the assessor and the effector.

These elements of control can be better understood with the help of example: Assume you are driving on a highway where the legal speed is 65 mph. Your control system acts as follows:

(i) (ii) (iii) (iv)

Your eyes (Sensor) measures actual speed by observing the speedometer, Your Brain (Assessor) compares actual speed with desire speed and, upon directing a deviation from the standard, Directs your foot (Effector) to ease up or press down on the accelerator, Your nerves form the communication system that transmit the information from eyes to brain and brain to foot.

Management Control:

Management control is the process by which managers influence other members of the organization to implement the organizations strategy.
Elements of Management Control: (i) Detector or Sensor:- Reports what is happening throughout the organization, (ii) An assessor:- Compares this information with desired state. (iii) An effector:- Take corrective action once a difference is observed. (iv) A communication network:- Tells managers what is happening and how that compares to the desired state. Boundaries of Management Control

1. Strategy Formulation/ Strategic Planning Strategy formulation is the process of deciding on the goals of the organization and the strategies for attaining these goals. The process analyses the changes that take place in the environment and helps to ascertain the related adjustments needed in the organizational goals. In order to attain goals through optimum resources utilization it is important to have well define polices and control procedures. The process of strategic planning relates to formulation of plans dealing with: Determination of the goals of the organization Evolving managerial policies and procedures Identifying markets and distribution channels required to serve the market Planning and initiating research and development activities Ascertaining the amount and sources of finance Acquiring or disposing facilities Ascertaining employee capabilities and skills needed to attain the goals 2. Management Control: Management control is the process by which managers influence other members of the organization to implement the organizations strategies. It involves variety of activities, including: Planning, coordinating, communicating, evaluating, deciding & influencing. Management control is all about ensuring that the necessary resources are mobilized and are deployed efficiently so that the planned objectives are met without much difficulty. It is all about the organization, methods and procedures adopted by management to provide reasonable assurance that available resources and assets are properly deployed and safeguarded against waste and mismanagement and frauds.

Strategy Formulation
Strategy formulation is the process of deciding new strategy Require information about environmental development Irregular and infrequent in nature Responsibility and task of top management external

Management Control
Management control is relates implementation of those strategies. with

Management control follows a system to achieve the organizational goals It is systematic and continuous activity In management control other managers also participate besides the top and senior managers Management control involves total organization Less complex Short term focus Large number of persons is involved Aim and result is to take corrective actions to get the planned or desired results

Focus on specific problem at a time More complex compare to Management control Aimed for long term period Number of persons involve are small Aim and result is to making policies and programmes

3. Task Control/ Operational Control: Task control is the process of assuring that specific tasks are carried out effectively and efficcently. It is a mechanism that deals with individuals tasks or transactions such as: Scheduling and controlling individual jobs Procuring specific item for inventory Specific personnel actions
Task control is helpful in establishing a relationship between the levels of activity and the cost incurred.

Stages of Management Control Process The system has following four components 1) Programming Programming is defined as making programs by top/ senior management in terms of organizational goals and strategies and deciding the funds and resources needed to accomplish the programs. Programs can be made about development of new products, research and development of activities merger, takeover and other activities that are not related much with the existing product lines. In service organizations such as hotel chain management may draw programs for each hotel or each region where hotels are to be set up. Programming is long range plan, covering period of approximately five future years. The reason is that it programming is made for shorter period, the results and benefits of programming can not be realized within this period. some organization like public utilities prepare long range plans for even a period of twenty years .because of the relatively long time plan, only rough estimates are possible revenues ,expenses and capital expenditure. Programming is time consuming and expensive. The most significant expense is the time devoted to it by management, but it also involves a special programming staff and considerable paperwork. A formal programming process is not worthwhile in some organization. it is desirable in organization that have the following characteristics Its top management is convinced that programming is important .otherwise programming is likely to be or to become, a staff exercise that has little impact on actual decision making. It is relatively large and complex in small, simple organizations, an informal understanding of the organizations future directions for making decision about resource allocations, which is principal purpose of preparing programs. If the future is so uncertain that reasonably estimates cannot be made preparation of a formal program is a waste of time. 2) Budgeting Budget is formal financial plan for each year .a budget ,known as shorter angel plans ,is a technique of expressing revenues ,expenses ,physical targets like production and sales ,profit ,assets and liabilities usually for a period of one future year . 1. Budget has the functions of motivating managers, coordinating activities, communicating to persons within organization, providing standards for judging actual performance s and acting as control tool. 2. Budgeting involves operating managers as well as senior manager. Staff personnel have considerable input to the programming process, but relatively less input to the budgeting process 3. The program structure consists of program and major project. It includes both capital expenditure and operating items and it covers a period of several years. The budged is structured by responsibility centre (which may or may not cut across program) the focus is on operating revenues and expenses and it typically is for a single year. 4. Budget preparation is done under greater time pressure and is more hectic than programming 5. A program is abroad brush sketch of the future. A budget has more details both because it is a fairly specific guide to operating decisions and also because it will be used subsequently to evaluate the performance of individual manager. 6. Programming decision can have consequences of great magnitude. Budgeting decision are typically much less significant, because they are made within the context of the current level of operating activities, except as those activities will be affected by program decision. 7. Behavioral consideration is much more important in the budget preparation process than in the programming process. The approved project is a bilateral commitment; the program is not a commitment, because the budget will be used to evaluate performance. 3. Executing:After the budget preparation, budgeting is used as a tool for coordinating the actions of individual and department within the organization. In fact within the execution phase task control is done to ensure that actions and performance match with the planned or desired result. While performing the mangers goal is to achieve budgeted targets. However compliance to budget is not necessary if the plans given in the budget are found as not the best way of achieving the objective. After execution actual performance and result are compared with the budgeted plans and targets and variance reports are prepared which highlight the variance between the 2 and the causes for such variances. Variance reports should separate controllable item from non-controllable item, determine the effects of changes in volume on revenues and cost and if possible, should mention changes in other circumstances affecting the variances.

4. Evaluation:Management control Process ends with the evaluation phase in which the performances of managers are evaluated. Since it is an after- event exercise, the evaluation does not affect what has happened. However, evaluation phase acts like a powerful stimulus as employees know that their performances will be subsequently evaluated. Also on the basis of performance evaluation, the future budget and plans are revised. Features of Management Control System 1. A Total System:A management control system is a total system as it covers all aspects of the companys operations. It is an overall process of the enterprise which aims to fit together the separate plans for various segments so as to assure that each harmonizes with the others, and that the aggregate effect of all of them on the whole enterprise is satisfactory. 2. Monetary Standards:Barring some exceptions, the management control system is built around a financial structure and all the resources and outputs are expressed in terms of money. The results of each responsibility center in respect to production and resources are expressed in terms of the common denominator of money. 3. Definite pattern:the management control system follows a definite pattern and time table. The whole operational activity is regular and rhythmic. It is a continuous process even if the plans are changed in the light of experience or change in technology. 4. Coordinated system: A management control system is a fully coordinated and integrated system. Even if the information for one purpose varied from that collected for another purpose, the data reconciles with one another. It is, therefore, more plausible to consider the interlocking sub processes as a single set for achieving the objectives of the enterprise.

5. Line manager:Information collected from varioussources is organized by the line managers. The line managers are the focal points in the management control system. Line managers motivate the employees to improve their performance and thereby achieve the organizational goal. Business budgets are prepared based on their advice and suggestions. 6. Effective Planning: Organization function on the basis of plans, policies and standards. These are communicated to managers who have performance responsibility. Thus control depends on effective planning without which organization never succeed in analyzing their accomplishments. 7. Involvement of top management: The attitudes and involvement of the top management determines the effectiveness and efficiency of the management control system. The involvement of top management imposes confidence in the system and ensure timely action for removing the cause of poor performance. 8. Motivation of employee: Motivation represents an urge to performeanf excel. In the absence of motivation, goals often remain unachieved. 9. Establishing proper communication mechanism: Effective communication facilitates timely flow of information across all level of management. Communication is useful in communicating organizational goals, practicing control and facilitating reporting.

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