Management Control & Systems

Ozone
 Lets start with a small Quiz…….

Please write down some “Adjectives” when you

see the photographs. Restrict on Adjectives
pertaining to the photographed persons
professional life and not personal life
Virendra Sehwag…….

kind of matches is he suitable? What’s his style of p

kind of brands does he endorse?
Ozone
Akshay Kumar ……

What kind of movies is he most suitable? What

kind Ozone
of brands is he associated with?
Arnob Goswami…….

What kind of news items is he popular for? What

kind of anchoring does he do?
Ozone
Can you imagine?
•Virendra Sehwag playing a 5 day match?
•Akshay playing a role in Shyam Benegals “Art movie”
•Arnob featuring is a documentary on “Tribals”

Well….. I teaching MCS, a little dry and dab

subject is also a similar situation

Ozone
Objective of “Management control &
systems”
• To appreciate the importance of having “Foundation”
before building an “High raise apartment”
• To understand the basics
• How to plan, what we want? (Strategic planning process)
– GE matrix , BCG matrix and Porter 5 force model
• Financials that define performance?
– Some key ratios- ROE, ROCE, EVA
• How to plan to achieve goals? (Budgeting)

• How to track if you are on track or not? ( MBO/Balanced Score card

• How to report if performance in on track? ( Responsibility budgeting)

• How to ensure cross functional teams work together to achieve goals (Transfer pricing)
• How to control processes – Internal and External
• Special situations

Ozone
What do we learn?
Session 1 Strategic planning process Classroom

Session 2 Financials to define Simulation- Business

performance game
Session 3 Financials to define Simulation- Business
performance game
Session 4 Overview of budgeting Classroom/ MCS
handout 1 – A case
study
Session 5 Balance score card-
Overview
Session 6 Balance score card – Implementation of
Practical Balanced score card-
A case study
Session 7 Transfer pricing / Internal Class room
and External audit
Session 8 Summary & Special
Ozone situations
Pedagogy

• Class divided into 8 groups, group of ~ 10-12 each

• Composition of group - Finance & Marketing

• Cases, pre-reading on the yahoo groups

• Evaluation for 100 marks

– 60 marks end terms (Application oriented)

– 20 marks for case study presentation

– 10 marks for class participation

– 10 marks for surprise quiz

Ozone
Ground rules
• No late comers in the class

• Name tag a must for every student

• Pre reading material on the yahoogroups and all students

are expected to go through the same before the class

• No mobiles in the class (Can be in silent mode)

• Ask as many questions as you want

• Friendly but not a friend!!!!

Ozone
• CEO in Making….…….

Session 1

Ozone
Lets sharpen the pencil

• Associates:- 53000 employees.

• Revenue:- Amongst Top 5 In India
• Geographies:- 63 countries

Ozone
Which company is this?
• Client Base:- 690 Clients all over the world.

• Line of Business – Software solution, BPO & IT.

• Listed on:- NYSE, US and Euro next, Amsterdam,

Europe in addition to BSE and NSE in India.

Business IT
Quality
process strategy
consulti
consulti consulti
ng
ng ng CONSULTING
e-
ER Supply CR PL
busin
P Chain
Engineering & M M
B ess
EA
Embedded
solutions
I I SYSTEM
Applicatio Infrastru Business
INTEGRATION
n Mgmt Process
Cust cture
Packa Outsour
om services
built
ged cing OUTSOURCING
Ozone
Achievements at a glance
1995 – First ISO 9001:2000.
•

1999 - Listed on NASDAQ.

•

• 2001 - Listed on New York Stock Exchange.

2002 - wins Golden Peacock Award for excellence in Corporate Governance.

•

• 2002 –Wins CNBC's Asian Business Leader.

• 2003 - Honored with prestigious IBM Lotus Award.

• 2005 - Acquired Knowledge Dynamics. Launched EMRI.

• 2006 - Achieved global certification - ISO 9001, ISO 20000,ISO 27001.

• 2007 - Becomes the Official IT Services Provider for the FIFA World Cups, 2010 (South Africa) and 2014 (Brazil).

Ozone
THE BITTER TRUTH
(Accounting Fraud)

Ozone
There are many more to the list of
“Honour”
• Enron , collapse overnight

• WorldCom inflated income by USD 3.8 billion

• Lucent technologies

• The list goes on and on and on……………….

• These examples are to illustrate that the absence of management

control & systems lead to losses or bankruptcy

• MCS of course is not about accounting control, it is about

attainment of goals and execution of strategies . E.g. Potential of
Reebok shoes in India

Ozone
What is management control all about?
• Robert Anthony and Vijay Govindrajan: Management control is a process

by which managers influence other members of the organization to

implement the organization strategy.

• William Newman: According to him-control one of the basic phases of

managing, along with planning, organizing and leading.

• Control is an integral and essential art of the management process and all

the managerial efforts of an organization.

Ozone
Investors Priority

Ozone
Investors Priority

Ozone
Financial Statement Fraud
• Financial statement fraud causes a decrease in
market value of stock of approximately 500 to
1,000 times the amount of the fraud.

$7 million fraud $2 billion drop in

stock value

Ozone
Corporate Quiz
• Apart from Raju family members, which name is most often taken

with Satyam scam (Hint: He was/ is an employee of Satyam)

• Apart from Satyam, which other firm’s name is taken along with

the scam? (Hint: Auditors) and who is partner of that Firm?

• What is common between Global trust bank, Satyam and

Nagarjuna fertilizers (Hint: City of origin)

• Where is headquarters of troubled company SKS microfinance

(Golmaal “N”)

Srinivas, Hyderabad
Ozone
 Imagine…… you were a child of 12
years

What did you always wanted to be?

If we wanted to succeed, what are

some steps that you had undertaken?
Did you undergo this process?

Visio
Integrativ n Single
e Mission
Dominant
Objective
Do

s
m

g ic
in

Goal Man
an

Specifi

Lo
s y
t

c
Plans
Ozone
What you dreamt was your Vision!!
• It is a dream (not a forecast) about, what the company wants
to become in the foreseeable future. It is a combination of
three basic elements –
– An organisations fundamental reason for existence; beyond
just making money.
– It stands for the unchanging core values of the company.
– It represents the company’s aspirations. It should be
audacious, but achievable.

Ozone
Reliance – Where growth is a way of
life.
Clarity
Vividly descriptive image of what the company wants to be known
for in the future.

Reachable
It should be within a reasonable target in the known future.

Brevity
It should be short, clear, and preferably memorisable.

Empathy
It should reflect the company’s beliefs to which it is sensitive.

Sharing
The company across all hierarchies should have faith in it.

Ozone
Maximizing return to share owners while being mindful
World’s favourite company Coca cola
of our overall responsibilities. Being a great place to

work where people are inspired to be the best they can

be.

Bringing to the world a portfolio of beverage brands that

anticipate and satisfy peoples; desires and needs.

Nurturing a winning network of partners and building

mutual loyalty.

Being a responsible global citizen that makes a

difference.
Profit, People, Portfolio, Partners, Planet
Ozone
They are what they are – Who is who of
World Inc
Pepsi : Continually improve all aspects of the world in which we
operate i.e. environment, social, economic – creating a better tomorrow
than today.

Google: To develop a perfect search engine.

Toyota :To sustain profitable growth by providing the best customer

experience & dealer support.

Proctor & Gamble :To provide branded products & services of

superior quality & value that improve the lives of the world’s consumers

FedEx Vision Statement : At FedEX the vision statement is

“Leading the way”

BMW (Bremen Motoren Werken) : To become most

successful premium manufacturer in the car industry.
Ozone
Mission
• It is a broad and enduring statement that distinguishes it
from another organisation. It helps identify the scope of the
organisation in terms of its products and markets. It also
serves as a road–map to reach the vision; its reason for
existence.
– What business are we in?

– It reflects the organisations image and identity.

– Its objective should be broad and enduring.

– It should reflect current realities.

– It should be flexible an dynamic.

– It is a philosophy.

Ozone
Mission- Some ideas
• Reliance – We are in the business of integration.
– We do not offer clothes,
…………………. We offer comfort.
– We do not offer engine oils,
…………………. We offer liquid engineering.
– We do not offer software's,
…………………. We offer solutions.
– We do not offer insurance,
…………………. We offer security.
– We do not offer steel,
…………………. We offer strength.

Ozone
Goals
• Reliance – We want to become a Rs.1,00,000 crore
company by the year 2010. It reflects the result
that an organisation expects to achieve in the
distant future.

• It adds legitimacy to the mission.

• It lends direction – time frame.
• It provides a benchmark for evaluation.
• It involves all the SBU’s.
• It motivates the top management to identify the –
key success factors.

Ozone
Plans
• Reliance – Desire to invest Rs.25000 crore in telecom
business (circa 1999). It is the process of garnering
necessary inputs, coordinating appropriate technologies, and
gaining access to desired markets in the near future.
• Backward integrate process technologies.
• Compress project times.
• Leverage economies of size and scale.
• Use price-elasticity to break market barriers.
• Acquire a market share of indomitable position.

Ozone
MCS- Must for every CEO in making
MCS is all about execution to make sure processes, systems & role of
multiple functions like marketing, Finance, HR & Operations ensure
Vision translates into plans and succeed in achieving the same

Visio
Integrativ n Single
e Mission
Dominant
Objective
Do

s
m

g ic
in

Goal Man
an

Specifi
Lo
s y
t

c
Plans
Ozone
Do any companies illustrate this?

• Pantaloon group- A case study

• TBEM- A case study

Ozone
Is it that important to have all this?

• Only 14% of the fortune 500 in 1959 exist. 86% have

either vanished, bankrupt, merged or sold

• Only 1 of the first 20 listed companies in BSE still

exist , that too is loss making now!!

• Portfolio mix of Top 10 groups in India has completely

changed in last 20 years.

Ozone
Who imagined? India- Awakening of a
“Tiger”
• Richest man in the world – Mukesh Ambani

• Largest Refinery in the world – Reliance

• Cheapest car in the world – Tata Nano

• Largest numbers and cheapest cataract operation in the world –

Aravind Netralaya

• Worlds largest Telecom Network – Airtel

• World’s fastest growing economy

• World’s highest returns in stock markets in last decade

• Dean of Harvard & Kellogg’s

Ozone
What do CEO’s face a challenge in

Ozone
What is management control?
• Ensuring that the necessary resources are mobilized & are deployed
effectively

• It is about the organization, methods and procedures adopted by

management to provide reasonable assurance that available
resources and assets are properly deployed

• For this appropriate systems and procedures are evolved and the
related revenues and expenditures are properly recorded and
accounted for, facilitating proper maintenance of accounts and the
preparation of reliable financial reports. Management control covers
the administrative, accounting and financial management areas.

Ozone
What does it encompass?
• Programs and responsibility centers.

• Planned data and actual data. While planned data covers programs, budgets &
standards; actual data provides information on actuals

• Includes all the aspects of the organization. It aims at assuring that all aspects are
in balance and are operating in close co-ordination.

• Follows a definite pattern and time schedule. The entire process is elaborately
defined and set in the policies and procedures manual.

• Management control should be co-coordinated and integrated to other sub

systems operating in the organization.

Ozone
Involves communications and interactions
Scope of management control
•Programs/Goals: The process also tries to determine the
resource process as well as the resource requirement for achieving
the goals.
•Budgeting: The process of budgeting involves conversion of each
programme into monetary terms. This exercise is carried out for
each and every responsibility centre.
•Operating and Accounting: This process is concerned with
keeping records of the resources that are actually consumed and
the revenues actually earned. Responsibility centers identify the
costs and revenues.
•Reporting and Analysis: No control program can function in the
absence of information. Every manager requires both monetary and
non-monetary information pertaining to internal and external
Ozone
environment. This helps the manager to co-ordinate the plans and
Summary
• MCS is a journey of making Vision into a plan and make it achievable

• MCS makes sure “Execution”, which is most major challenge in World

Corporate Inc is done with ease & smoothness

• MCS encompasses of
– Programs & Goal setting

– Budgeting

– Operating & accounting

– Reporting & analysis

• MCS is a must for every CEO in making and backbone of every

organisations “Success”

Ozone
 The first step towards
translation of vision into
action is creation of strategy

Ozone
Strategic management - framework

Economic
al
Fit Strategic Fit

Technological
Management
Finance
Productio
Fit
Strategic
Political

HR
PoliticalIntent
Strategic
Fit
Political
Marketin
n

g
Fit Manageme Fit
nt
Social &
Cultural

Ozone
Strategy – Origin

• The word strategy has its origin from the Greek word
strategia meaning Military Commander. In the ancient
days battles were fought over land. In contrast,
today's battles are fought over markets.
– In the ancient days battles were won not by virtue of size,
efficiency, adaptive ability; but by virtue of their strategies.
– Even in today’s markets, battles fought on the market front
are won by companies by virtue of their strategies, which has
its origin in the battles fought in the ancient days.

Ozone
Strategy – in action

• Japan’s attack on Pearl Harbour

– Strategy: Attack where it hurts the most.
– Toyota’s entry in the US challenging GM and Ford.
• US attack of Morocco to capture Germany
– Strategy: Pin-hole strategy
– Wal-Mart challenging Sears by first entering small
towns.
• Battle of Moses and Ramases II
– Strategy: Survival of the fittest
– Jack Welch’s ruthless downsizing of GE.
Ozone
Strategy – in action
• Caesar, Genghis Khan, Alexander
– Strategy: Concentration of resources.
– Nokia challenging Motorola.
• Allied Forces Vs Germany (World War II)
– Strategy: Forging alliances.
– Yahoo and Microsoft challenging Google.
• Napoleon’s attack on Russia
– Strategy: Waiting for the right time.
– Reliance’s entry into telecom.
• Cold War: US Vs USSR
– Strategy: Containment.
– Tata’s during the 80’s vis-à-vis Reliance.

Ozone
 Strategy is a “Hot term” but it is
important to know, how to think and
implement strategy

Ozone
BCG Matrix
• BCG Matrix a.k.a. Growth-Share Matrix, Boston Box,
Boston Matrix, Boston Consulting Group analysis.

• Created by Bruce Henderson for the Boston Consulting

Group in 1970 to help corporations with analyzing their
business units or product lines.

• This helps the company allocate resources and is used

as an analytical tool in brand marketing, product
management, strategic management, and portfolio
analysis.

Ozone
What are the 4 phases of the BCG
matrix

Ozone
Business Analysis – Tata Group
• Stars – They have enormous potentials in the long term, provided the industry
growth rate continues and the company is able to maintain its market-share
(i.e. diversify). These businesses are net users of resources (Eg. TCS).
• Question Marks – They have potentials in the long term, provided the
company is able to build up on its market-share (i.e. market penetration,
market development, product development), which remains a big? These
businesses are also net users of resources, but their risk profile is higher than
the stars (Eg. Trent, Tata Telecom).
• Cash Cow – These are matured businesses, and the company dominates the
industry ahead of competition (i.e. stability). Given that the growth potential
in the business is low, they are generators of resources. However, cash cows
may also need to invest provided the industry takes an upswing (Eg. Tata
Motors, Tata Chem, TISCO).
• Dogs – They are a drag on the group, and they lack on competencies to take
on competition and are basically cash traps (Eg. Nelco, Tata Pharma). Groups
prefer to dispose such businesses (i.e. divest).

Ozone
What does these 4 phases mean?

Ozone
Is strategy in “Air” or applicable?

Star Question mark

•Agri Business •FMCG-Foods
•Hotels
G •Paperboards & Packaging
R
O
W
T
Cash Cow Dog
H
•FMCG-Cigarettes •ITC Infotech

MARKET SHARE
Ozone
Five force model – Porter

Threat of New Entrants

Bargainin
Bargainin Competition gBargainin
power
g power from Existing ofg power
of Players of
Suppliers
Suppliers Customer
s

Threat of Substitutes
Ozone
India’s biggest “MBA” Employer- Insurance
sector
Capital Costs high (Rs 100- Rs 2500 Crores)
Highly regulated industry
Distribution driven
Reputed & Stable foreign partner - key

Distributors & Human

Low at consumer level
capital
(Blind)
: mostly perceived as tax sav
(Trend could change)
Incentive expectations

Limited product differentiation

24 players and many in queue.
“Big daddy” LIC losing market
share Mutual Funds
High fixed costs & Commission Health Insurance
Pension funds

Ozone
GE - MATRIX

Distinctive Capabilities
Strong Medium Weak
High

Diversify (++)Intensify (+) Stability

Attractiveness
Med
Industry

Intensify(+) Stability Harvest(-)

Low

Stability Harvest(-) Divest (- -)

Ozone
Remix version 1: ARTHUR’ D. LITTLE

Inception Growth Maturity Decline

Dominant Invest Consolidate Hold

Competitive Position
Strong Improve

Favourable Selective Harvest

Tenable Niche

Weak Abandon Divest

Ozone
Industry Life-Cycle
Remix version 2: Shell – directional policy matrix (DPM)

Business Sector Prospects

Attractive Average Unattractive
Distinctive Capabilities

Market Generate
Strong Growth
Leadership Cash

Try Phased
Custodial
Average Harder Withdrawal

Double
Phased
Or Expand Divest
Withdrawal
Weak Quit

Ozone
 Diversification Strategy

Ozone
Conglomerate diversification - ITC

Paper & Packaging

Edible Oils Tobacco Hotels

Food & Confectionary

Ozone
Horizontal diversification – Reliance

Reliance Capital

Reliance Reliance Industries Reliance Ports

Infrastructure

Reliance Power

Ozone
Vertical diversification - Reliance

Oil & Gas exploration

Naptha-cracking
Acetic Acid
Paraxylene (PX)
(PTA) (MEG)
Purified tetra-pthalic Mono-ethylene glycol
acid
Polyester Filament Polyester Staple Fibre
Yarn (PFY) (PSF)
Textiles

Ozone
Strategic drift

• Historical studies have shown that most organisations tend to continue

with their existing strategies. Therefore, past strategies tend to have a
bearing on future strategies. This tendency to restore continuity is
known as inertia (resistance to change).

• When changes in the environment is incremental, equilibrium is

maintained. However, radical change may lead to disequilibrium. This
state of affairs is known as strategic drift.

• In such a context strategies lose touch with emerging environment.

Ozone
Strategic drift framework

Environmental Change
Radical Change
Strategic Change
Degree of change

Incremental Change

State of Flux Stage of Transformation

Continuity
Strategic Drift

Stage of Atrophy

Time
Ozone
What is difference between strategic planning?
Management control and Operational control?
Strategic Planning Management Control Operational Control

a) Level Evolving goals and Performance Focuses on individual

providing resources. evaluation oriented. tasks & activities.
Concentrated at the Practiced at all levels Confined to the
top level supervisory level.

b) Focus Focuses on one aspect Focuses on the whole Focuses on efficiency

at a time operation that of the individual
obviously impacts the
organizational
effectiveness

c) Complexity Complex process as Comparatively less Simple as the

many variables have complex as it involves attention is on simple
to be simultaneously administrative activities only
analyzed in order to activities
evolve an effective
strategy
d) Element of Involves adoption of Involves judgment as -
Judgment creative and managers go by the
analytical data for rule book and pursue
formulating foals. This prescribed procedures
is not possible
without judgment.
Ozone
e) Information Information is Data is financial in Data is tailor-made for
What is difference between strategic planning?
Management control and Operational control?
f) Purpose of Indicates expected Leads to desired Results in desirable
Estimates results results changes in future
strategies.

g) Persons involved It is a staff function. Deals with Deals with

Involves top evaluation, responsibility centres
management monitoring & and as such involves
controlling supervisors
organizational sub
units. It involves both
top management &
line managers

h) Source discipline Originates from Originates from socialOriginates from

economics psychology economics & other
physical sciences

i) Time Horizon Long drawn process Involves weeks, Involves day-to-day

spread over years months & years activities
j) Nature of activity Requires creative & Requires Follows directions
analytical skills administrative and that are generally
persuasive skills. listed in the rule
Ozone book.