Вы находитесь на странице: 1из 57

Chapter 1

Meaning of Management Control: process by
which managers influence other members of
the organization to implement the
organizational strategies. It involves the
influences on the behavior, operations,
performance, output, quality, physical
resources and processes.
Management Control Systems
Management Control Systems (MCS) is a system which
gathers and uses information to evaluate the performance of
different organizational resources like human, physical,
financial and also the organization as a whole considering the
organizational strategies. Finally, MCS influences the behavior
of organizational resources to implement organizational
strategies. MCS might be formal or informal. The term
management control was given of its current connotations
by Robert N. Anthony (Otley, 1994).
Elements of Management Control
Strategic planning
Resource allocation
Performance measurement, evaluation, and
Responsibility centre allocation
Transfer pricing
Meaning and characteristics of control system
A control system is a mechanism that
monitors, measures, and evaluates the
functions and performance of ongoing process
and develops means to ensure the efficient
and smooth functioning of the system. It
involves the following elements:
A detector or sensor
An assessor
An effector
A communication network
Boundaries of Management Control
Deciding what, if any, action should be taken
Influencing people
Goal congruence
Tool for Implementing Strategy
Financial and nonfinancial emphasis
Strategy formulation
Task control
The Impact of Internet on MCS
The Internet provides the following major
benefits in management control:
Instant access: on the Web, huge amounts of
data can be sent to anyone, anywhere in the
world in a matter of seconds.
Multi-targeted communication: the Internet
has a vastly expanded one-to-many reach; one
Web entry can reach millions of people.
Costless communication: A business that uses telephone
operators to interface with customers must pay for telephone
personnel salaries, toll-free call, and bricks and mortars to
support the customer service functions. Communication with
customers via the Internet avoids all these costs.
Ability to display images: Unlike the telephone, the Web
enables consumers to see the products being offered for sale.

Shifting power and the control to the
individual: Perhaps the most dramatic benefits
of the Web is that the individual is virtually
king. Consumers are in control and can use
the Web 24 hours a day at their own
conveniences without being interrupted or
unduly influence by sales representatives or

Limitations of the uses of Internet facilities

The Internet facilitates coordination and control through the efficient and effective
processing of information, but the Internet cannot substitute for the fundamental
processes that are involved in management control. This is because implementing
management strategies through management controls is essentially a social
process thus cannot be fully automated. The availability of electronic access to
database contributes little to the judgment calls required to design and operate an
optimal control system. Thus judgments involve:
Understanding the relative importance of various, and sometime competing, goals
that drive individuals to act (e.g., personal achievement versus collective
achievement, value creation for customers and shareholders rather than for
Aligning various individual goals with those of the organization.
Developing specific objectives by which business units, functional areas, and
individual departments will be judged.
Communicating strategy and specific performance objectives throughout the
Determining the key variables to be measured in assessing an individuals
contribution to strategic goals.
Evaluating actual performance relative to the standard and making inference as to
how well the manager has performed.
Conducting productive performance meetings
Designing the right reward structure
Influencing individuals to change their behavior.
In sum, the Internet has vastly improved information processing; the fundamental
elements of management controlwas information to collect and how to use it
are essentially behavioral in nature and thus not amenable to a formula approach.

Classification of MCS
Experts have classified management controls
based on
the object of control,
the extent of formalization of control, and
the time of implementation of controls.

Based on the object of control
management controls have been classified into
action controls
results controls
personnel/cultural controls

action controls: Action controls are aimed directly at
the actions which take place at different levels of an
organization. These can be further classified into
behavioral restrictions, pre-action appraisal, and
action accountability.
results controls: Results controls focus on the
consequences of actions taken rather than on the
actions themselves.
Personnel/cultural controls influence the people and
the organizational culture, with the expectation that
the right people in the right culture will perform the
right actions that will ultimately yield the desired

Extent of Formalization
Management controls can be classified into
formal controls and
informal controls,

Based on the time of implementation
Controls can be classified into:
open loop controls and
closed loop controls.
feedback (follow-up) control and
feedforward (anticipatory) control.
contextual factors influence the design
and use of management control
nature and purpose of the organization;
organization structure and size;
national culture;
corporate strategy and organizational diversification;
competitive strategy;
managerial styles;
organizational slack;
stakeholder expectations and controls; and
organizational life cycle.
Nature and Purpose of the

The nature and purpose of an organization,
that is, whether it is a for-profit or a non-profit
organization has a major impact on
management control systems. The aspects in
which non-profit organizations differ from for
profit organizations include measurement of
the profitability and utilization of profits.

Organization Structure
The organization structure establishes the
formal pattern of job roles and responsibilities
that individual employees and groups have to
undertake, and the hierarchical structure and
reporting relationships.

Size of the Organization
The size of the organization influences the
nature of controls such as rules,
documentation of information, creation of
specialized role functions, and a higher degree
of decentralization.
National Culture
The management control system of any organization is
influenced by the national culture of the country in
which it operates. Geert Hofstede identified four
dimensions along which national cultures vary. The
dimensions are:
power distance (acceptance of hierarchical levels);
uncertainty avoidance (avoiding risk and ambiguity);
individualism/collectivism (people's preference to work as
individuals or in a team); and
masculinity (competitive spirit, independent thinking,
assertiveness)/femininity (interdependence, nurturing
Corporate Strategy and
Organizational Diversification

To achieve goal congruence between the goals
of the organization and those of individual
strategic business units, it is necessary that
the management control system has a good fit
with the corporate strategy. Management
controls also differ depending on the type of
diversification - related or unrelated.

Competitive Strategy
The choice of generic competitive strategy -
overall cost leadership, differentiation, or
focus - also influences the management
control system.

Managerial styles
Managerial styles (autocratic or democratic,
permissive or directive) play an important role
in influencing the behavior of the employees
in an organization and thus the design and
implementation of control systems.

Organizational Slack
Organizational slack refers to that capacity in
an organization which is in surplus of what is
required for normal operations. It may be
created voluntarily or involuntarily and may be
good or bad for the organization.

Stakeholder Expectations and

Stakeholders (investors, employees and
managers, suppliers, customers, community,
government, etc.) are defined as individuals or
groups of people who are impacted by or who
impact the activities and operations of the
organization. It is necessary for organizations
to consider what the stakeholders want while
designing their management control systems.

Chapter 2
Understanding Strategies
Management control systems are tools for
implementing strategies. Strategies differ
between organizations, and controls must be
tailored to the requirements of specific
strategies. Different strategies require
different task priorities; different key success
factors; and different skills, perspectives, and
Thus, a continuing concern in the design of
control systems should be whether the
behavior induced by the system is the one
called for by the strategy.

Strategies are plans to achieve organizational
goals. Therefore, in this chapter we first
describe some typical goals in organizations.
Then we describe strategies at two levels in an
organization: the corporate level and the
business levels. Strategies provide the broad
context within which one can evaluate the
optimality of the elements of management
2.1 Goals
Goals of a corporation refer to the end results that it wants to
attain and which is set the chief executive officer and other
top executives or sometimes by the owners.
The major forms of goals include the followings:
Maximizing shareholder value
Multiple stakeholder approach
2.2 The Concept of Strategy
Strategy describes the general direction in
which an organization plans to move to attain
its goals. Every well-managed organization has
one or more strategies, although they may not
be stated explicitly.
A firms strategies are formed or crafted by matching its
vision, mission, objectives, external opportunities and threats
and internal strengths and weaknesses.
The main spirit of strategy is to gain competitiveness by
satisfying customers and beating the competitive forces.
Strategies can be found at four levels of an organization:
corporate strategy, business levels strategies, functional level
strategies, and operating level strategies.
Corporate-Level Strategy
Corporate strategy is concerned more with the
question of where to compete than with how
to compete in a particular industry; the latter
is a business unit. At the corporate level, the
issues are (1) the definition of businesses in
which the firm will participate and (2) the
deployment of resources among those

In terms of their corporate-level strategy, companies
can be classified into one of three categories:
A single industry firm operates in one line of
A related diversified firm operates in several
industries, and the business units benefits
from a common set of core competencies.
An unrelated business firm operates in
businesses that are not related to one
another; the connection between the
business unit is purely financial.
Core Competence and Corporate Diversification
Research results suggest that related
diversified firms, on an average, perform the
best, single industry firms perform next best,
and unrelated diversified firms do not perform
well over the long term.
Implications of Control Systems
Corporate strategy is a continuum with single
industry at the end of the spectrum and
unrelated diversification at the other end
(related diversification is in the middle of the
spectrum). Many companies do not fit neatly
into one of the three classes.
The planning and control requirements of
companies pursuing different corporate level
diversification strategies are quite different.

The key issues for the control systems
designers, therefore, is:
How should the structure and form of control
differ across a single industry firm, a related
diversified firm and an unrelated diversified
2.3 Business Unit Strategies
Business unit strategies deals with how to
create and maintain competitive advantage
in each of the industries in which a company
chosen to participate. The strategy of a
business unit depends on two interrelated
(a) Mission
(b) Competitive advantage
Business Unit Mission
In a diversified firm one of the important tasks
of senior management is resource
deployment, that is, make decisions regarding
the use of the cash generated from some
business units to finance growth in other
business units.
BCG Model
Question markbuild
Cash cowharvest
Business Unit Competitive Advantage
Every business unit should develop a
competitive advantage in order to accomplish
its mission. Three interrelated questions have
to be considered in developing the business
units competitive advantage.
First, what is the structure of the industry in
which the business unit operates
How should the business unit exploit the
industrys structure
Third, what will be the basis of the business
units competitive advantage.
Michael Porter has described two models useful
in strategic analysis and formulating
Five-Force Model of Competition
Value Chain Model
Porters Five-Force Model
Industry competitors
Bargaining power of customers
Bargaining power of suppliers
Threat of substitute products
Threat of new entry.
Generic Strategies
Low cost provider strategy
Broad differentiation strategy
Best-Cost provider strategy
Market Niche based on low cost
Market Niche based on differentiation
Value Chain Analysis
The value chain consists of the various
activities associated with the procurement of
inputs to the end-user point services. The
major activities associated with the value
chain include the following:
Primary activities
Procurements and logistics
Outbound logistics and distribution
Sales and marketing
Customer services

Support activities
Human resources
Engineering and R & D
General administration
The key questions are:
Can we reduce costs in this activity, holding
the value or revenue constant?
Can we increase value or revenue in this
activity, holding costs constant?
Can we reduce assets in this activity, holding
costs and revenue constant?
Most importantly, can we do (i), (ii) and (iii)
Strategic Performance Control

Strategic learning involves anticipating changes, monitoring the business
environment continuously, and taking proactive steps. Management
control contributes to strategic learning and enables the organization to
survive in the marketplace.

The vision of the organization is its envisioned future and reflects its core
ideology. The mission statement flows from the vision statement and
explains the reason for the organization's existence. The vision and
mission statement together provide growth directions for the organization
and control the allocation of resources.

The strategies that an organization adopts depend on the resources and
strengths available with it and the strategic gaps existing in the
marketplace. These strategies can control organizational performance. The
degree of control depends on the manner in which the organization
distinguishes itself from its competitors and the competitors' ability to
respond to its strategies.
The ability of the organization to craft strategies which effectively leverage
on its resources or strengths and align them with the environment in
which it operates depends on how well it addresses its critical success
factors (CSFs). According to Rockart, CSFs are "the limited number of areas
in which results, if they are satisfactory, will ensure successful competitive
performance for the organization. They are the few key areas where things
must go right for the business to flourish." They are "areas of activity that
should receive constant and careful attention from management."

Each industry and, in turn, each organization, has a different set of CSFs.
The alignment between the mission and strategic goals which determine
the CSFs is ensured by strategic controls. Performance measures are
required to track and monitor the activities which lead to the achievement
of the CSFs. Performance measures are of three types: performance
indicators (lead or lag indicators), key performance indicators, and key
result indicators.

Performance indicators clearly identify the specific areas which
need control intervention to improve organizational performance.
Good performance indicators are Specific, Measurable, Attainable,
Realistic, and have a Time perspective. Key performance indicators
are identified from the performance indicators. Key performance
indicators deal with aspects which, when improved upon, lead to
radical performance improvements. If a key performance indicator
is improved upon, it will have a positive ripple effect on most of the
other performance indicators. Key result indicators indicate
whether the approach toward achieving performance is appropriate
but do not indicate the means or method to achieve better
performance or outcomes. Key result indicators are useful for
governance and are usually reported to the top management and
the board on a monthly or quarterly basis.

The continuous monitoring/reporting of various
performance measures has been greatly facilitated by
advancements in information technology and systems
(IT&S). Some of the business contexts in which IT&S is
of strategic significance are: nature of operations
(printing press, dairy processing); information intensity
(hotels, airlines, banks, financial services companies);
extent of geographical and operations spread
(diversified conglomerates); and nature of industry
(electronic chip design, software products, automobile
manufacturing, pharmaceuticals).

'The Balanced Scorecard (BSC)' was proposed by Robert Kaplan and
David Norton in 1992. It is a concept which combines financial and
non-financial measures, short-term and long-term goals, the
organization's market performance and internal improvements,
past outputs and ongoing requirements. The BSC framework
considers the customer perspective (To achieve our vision, how
should we appear to our customers?); internal business process
perspective (To satisfy our customers and shareholders, what
business processes must we excel at?); and the innovation/learning
and growth perspective (To achieve our vision, how will we sustain
our ability to change and improve?); in addition to the financial
perspective (To succeed financially, how should we appear to our
shareholders?). In the implementation of the BSC, these
perspectives are seen and evaluated in an interconnected manner
and not as standalone perspectives. The BSC is useful as a tool for
strategic performance control and strategic learning.

3.4 Functions of the Controller
Designing and operating information and
control systems
Preparing financial statements and financial
Preparing and analyzing performance reports,
interpreting these reports to managers.

Supervising internal audit and accounting
control procedures to ensure the validity of
information, establishing adequate safeguards
against theft and fraud, and performing
operational audits
Developing personnel in the controller
organization and participating in the
education of management personnel in
matters relating to the controller function.