Chapter-II

Design of Organization Structure and Control Systems

Management Control Systems

Discussion Points

Organization Structure Responsibility Structure

Designing Control Systems

Management Control of International Businesses Management Control of Non-Profit Organizations

Control Systems for Empowerment, Innovation, and

Creativity

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Design and Implementation of Management control

Management creates suitable structures in the organization

and puts in place certain systems, processes, policies, and practices.

Management control is exercised when people their power

or perform their duties as per the organization structure.

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Organization Structure
Refers to the role-responsibility relationships of different

employees in a organization.
Specifies how individual employees should be teamed

together to form sub-groups within the organization.

Facilitates the flow of information both vertically and

Horizontally.
Organization

design should promote communication, cooperation, teamwork, motivation and performance.

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Structural Dimensions of Organization Design

Formalization
Specialization Hierarchy of Authority

Centralization
Professionalism Personnel ratios

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Formalization
Definition

The extent to which written rules and records are maintained in the organization.
Remarks
These are maintained to document the activities of the

employees and

also their behavior.

The number of pages of written records is one of the

indicators of the degree of formalization.

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Specialization
Definition The extent of dividing the organizational activities into sub-groups. Remarks
The higher the number of sub-groups, the fewer the

activities an employee performs and vice versa.

It is also referred to as division of labor.

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Hierarchy of Authority
Definition The reporting relationships prevalent in the organization and the span of control. Remarks
Span of control is defined as the number of sub-ordinates

who report to a supervisor.

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Centralization
Definition The level in the hierarchy which has decision-making authority. Remarks
When the decision-making authority lies with the top

management, the organization is said to be centralized.

When the decision-making authority is distributed

among the lower levels of the hierarchy, the organization is said to be decentralized.

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Professionalism
Definition The level formal education of employees. Remarks
The higher the number of years of education, the higher

the education.

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Personnel Ratios
Definition The distribution of people into different functions and departments .

Remarks
Personnel ratios are calculated as the ratio of the number

of people in a specific function to the total number of people in the organization.

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Types of Organization Structure

Functional Structure Divisional structure Matrix structure Horizontal structure

Hybrid structure

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Functional Structure
It

is characterized by people being grouped based on their expertise and skills. regarding resolution of issues are generally made by the top Management.

It calls for centralization as the decisions

Organization that have a functional structure tend to lay

great emphasis on efficiency.

One significant disadvantage is that the organization

cannot adapt easily to environmental changes.

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Divisional Structure
It is also termed as a product structure or strategic business

unit (SBUs).
Divisions are formed based on an organizations product

range, the specific markets.

Divisional structure fosters higher adaptability to change due

to the small size of the each division.

Authority and responsibility of decision-making for each SBU

is placed with lower-level business unit managers.

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Divisional Structure-Cntd..
Increase in the financial incentives and other rewards can

be directed at individuals and groups who actually deserves them.

Increased

speed of communication, understanding, analysis, processing and acclimatizing to new information.

Negative Impact of some decisions made by a business

unit manager who is responsible for the performance of only his/her division/unit on other divisions.

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Matrix Structure
It tries to integrate the desired features of the functional

structure and Divisional structure.

An employee reports simultaneously to two different

supervisors.
It is commonly used in project-based organizations and for

new product development.

Retention

of the functional aspect helps to retain economies of scale and divisional aspect helps in incorporating customers preferences.
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Matrix Structure-Cntd..
Managers share out the resources economically among

the various department so as organizations goals and objectives.

to

achieve

the

There is greater communication between managers, due

to the presence of dual authority.

Matrix Structure calls for a high degree of cooperation

and coordination among managers.

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Horizontal Structure
Prevents the rigidity and departmentalization existing in a

vertical system by grouping managers and employees.

Organizations

move towards the horizontal structure through process re-engineering.

Emphasis is on teams which direct themselves. People carrying out activities in a single process have

better coordination with other in the same process.

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Horizontal Structure-Cntd..
Emerged in the context of the technological advances that

took place in the business environment, increased expectations of the customers.

It enables the organization to adapt easily to a changing

environment.
More time is taken by the organization to identify core

processes.
Employees also require a great deal of training in varied

areas in order to be effective in a horizontal structure.

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Hybird Structure
It is very difficult to find pure forms of functional, divisional,

or horizontal structures.
Combination of Functional, Divisional and Horizontal

Structures are known as Hybird Structures.

Important characteristic seen in the hybrid structure, also

called the flexible or adaptive organization.

Flexible organizations continuously assess and modify

their structure so that the employees are best aligned to the strategic changes.
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Hybird Structure-Cntd..
There are two types of hybrid structures which are

commonly seen, the first type combines the functional and divisional structures and the second type combines the functional and horizontal structures.
Hybird organizations are that there is a scope for different

ways of thinking and a participative style of management.

Organizations are characterized by quick decision making,

quick adaptability.

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Responsibility Structure
Responsibility structure is a collection of responsibility

centers.
Responsibility center is a function, division, or unit of an

organization under a specified responsibility.

According to ICWAI, responsibility accounting is a system of management accounting under which accountability is determined according to the responsibility allotted to various levels of management
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Responsibility Structure-Cntd..
Technique Controllability Description Controllability principle says that each manger should be assessed and rewarded only for those factors that are under his/her control

Managers while working towards their best self-interest, as Goal perceived by themselves, take decisions that are successful Congruence in attaining the overall goals of the organization. A transfer price is the internal price charged by a selling department, division, or subsidiary of a company for a raw Transfer pricing material, component, or finished good or service which is supplied to a buying department, division, or subsidiary of the same company.

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Responsibility Centers
It is a department, function, or unit of an organization

headed by a manager who is directly answerable for its performance.

Facilitates management control and help in implementing

the strategies chosen to accomplish the organizations goals.

Performance of a responsibility center can be judged

using the effectiveness and efficiency criteria.

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Responsibility Centers-Cntd..

Greater

the contribution of the outputs to the accomplishment of the organizational goals, the more effective is the unit.
centers, Revenue centers, profit centers and investment centers are four types of responsibility centers.

Cost

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Responsibility Centers (Cost centers)

Cost centers are held responsible for the costs incurred but

not for generating revenue.

Cost center can operate in two ways: either the cost budget

is specified and the goal is to maximize the output, or the expected output is specified and the goal is to maximize the cost.
In the control of cost centers, managers often err to by

assessing performance with a view of only minimize costs.

There are two different types of cost centers-standard cost

centers and discretionary expense centers.

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Standard cost center

It is also referred to as an engineered expense center. Manager of this center is responsible for both the direct

costs per unit of output, and the overhead expenses.

The objective of the manager in a standard cost center is to

prevent or reduce unfavorable variance between the actual and budgeted costs.

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Discretionary expense center

It is difficult to measure the outputs in monetary terms

against a given level of inputs.

Managers are expected to maximize the services offered

while keeping within the budgeted limits.

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Revenue center
Managers of the revenue centers are held responsible for

the revenues.
In many organizations, the revenues centers are the closest

points of contact with existing and potential customers.

Main objective of revenue centers is to maximize the net

revenues.

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Profit center
Profit centers are responsible for profits. Manager of a profit center has control over both the input as

well as output.
The objective of a profit center is to achieve targets. Profit center manager cannot afford to reduce quality in

order to reduce cost.

There is a current trend to convert traditional cost centers

into profit centers.

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Investment centers
Investment centers are held responsible for the overall

economic performance.
Performance of investment centers is measured with

respect to Return on Investment (ROI) or Return on Capital Employed (ROCE) and Economic Value Added (EVA).
Managers have the control over inputs, outputs, and

investments.

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Designing Control Systems

Optimal control system is important for the effectiveness

and long-term sustainability of an Organization.

Increased assurance is referred to as the degree of

certainty.
degree of certainty is described in terms of its control

tightness or control looseness.

Understanding of the expectations form the organizational

units.
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Control Alternatives
Controls are classified into action control, results controls

and personnel/cultural control.

Controls are not mutually exclusive substitutes. Single type of control cannot usually address all problem

areas in management.
Definite set of control alternatives to be used involves an

analysis of the structural and contextual factors.

Organizations policies and practices should be framed

and implemented to fit the control alternatives.

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Personnel/Cultural Controls
It is a primary control alternative.

This control incurs lower monetary costs.

Variance between the desired and the likely outcomes can

be restricted by encouraging the employees to monitor themselves and their peers.

Single business organizations find it easier to use tight

personnel/cultural control compared to large multi-business establishments.

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Result Controls
Results controls are directly focused on the output of

actions.
Results controls in order to be tight, require setting of

targets against which performance/output/outcome may be measured.

Costs of results controls include pecuniary costs relating to

performance bonuses.

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Action Controls
Ensures that the activities themselves are in line with the

objectives.
Various sub-classifications of action controls-behavioral

restrictions, pre-action appraisal and action accountability.

Tight

administrative behavioral restrictions can be implemented only if the personnel entrusted with decisionmaking. increases their workload.

Time spent by the managerial staff for pre-action appraisal Action accountability involves rewarding good actions and

penalizing unacceptable ones.

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Management Control of International Business

Designing of organization structure of an MNC entails
taking decisions on three main aspects:

Strategy of International Business

Centralization decision in international Business Division of MNC into subsidiaries.

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Designing of Control systems for International Business

It is more appropriate to use results control for multi-

domestic strategy and international strategy.

For Global strategy and transnational strategy, it is more

appropriate to use action controls and personnel/cultural controls.

Personnel/cultural controls are used in large measure to

enable subsidiaries to imbide the MNCs Value system.

Nature of corporate control may also vary within the MNC

from one subsidiary to another.

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Management Control of Non-profit organizations

Fundamental differences exist between for-profit and non-profit

organizations, it is not sufficient to merely extend controls used in the former to latter.
Types of controls for Non-profit organizations include-

Routine controls
Expert control Trail and error control

Intuitive control
Judgmental control Political control
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Types of Controls
Type of Control Routine Control Expert Control Trail and Error control Intuitive Control Description In Routine control, the objectives are clear, results are quantifiable, interfaces predictable, and activities repetitive. If all criteria are fulfilled expect the criterion that the activities are not repetitive, organizations resort to expert controls. In case the outcome of interfaces is not known even though all the other criteria are fulfilled, a trail and error control is incorporated. Intuitive Control is used when the objectives are clear and results quantifiable but the interfaces are not predictable and activities not repetitive. When the objectives are clear but the results are not quantifiable, it is necessary to see whether other forms of control mechanisms can be put to use. Where the control becomes judgmental.

Judgmental control

Political control

If the objectives of the organization are unclear, the control used is political control.
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Types of Controls-Cntd..
Scenario Clarity of objecives Yes
Yes Yes Yes Yes

Quantifiability of results Yes

Yes Yes Yes No

Predictability of interfaces Yes

Yes No No

Repititiveness of activities Yes

No Yes No

Suggested type of control Routine

Expert Trail and Error Intuitive Judgmental

1
2 3 4 5

No

Political

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Control systems for Empowerment, Innovation, and Creativity

Managers must find ways to encourage employees to be

creative and to initiate process improvements.

Concept of levers was proposed by Robert Simons in 1995. Levers of control include.

Diagnostic control systems Beliefs systems

Boundary systems
Interactive control systems
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Diagnostic control systems

Diagnostic

control systems use quantitative data, statistical analyses, and Variance analyses.

Diagnostic systems work well if the goals are reasonable

and attainable.
Diagnostic control systems relieve managers of the task

of constantly monitoring the employees.

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Belief systems
They are used to communicate the doctrines of the

corporate culture to every employee.

They are generally broad and designed to appeal to

different groups working in different departments.

Beliefs systems to be an effective level of control,

employees must be able to see key values and ethics.

Vision and Mission statements of an organization are

formal expressions of its beliefs systems.

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Boundary systems
The in an age of empowered employees, it is easier and

more effective to set the rules regarding what is inappropriate rather than what is appropriate.
Boundary systems are minimum standards that the

employees have to be maintain.

Boundary systems have an approach to control that is in

direct contrast to that of diagnostic control systems or beliefs systems.

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Interactive control systems

They are futuristic and involve frequent communication

between top managers.

Helps

organizations in positioning strategically in the rapidly changing market.

themselves

Help trigger better action at the management level. They focus on information like technologies, government

policies, competitor activities and customer preferences.

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End Points
Organization Structure

Responsibility Structure
Designing Control Systems Management Control of International Businesses

Management Control of Non-Profit Organizations

Control Systems for Empowerment, Innovation, and

Creativity

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