chap 3 - goals mcs.pptx

7/28/2019 Chap 3 - Goals MCS.pptx

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Management Control System


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Introduction Goals: goals are targets pursued by organization.

Defined as: broad statement of what the organizationwants to achieve in the long run or on a permanentbasis.

Goals are timeless statement.

They are the wheels that keep an organization going.

In many corporations, the goals originally set by thefounder persists for generations.

E.g.. Ford, Walt Disney, Eastman Kodak, Sam Walton Wal-Mart


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Organizational Goals Profitability

Maximizing Shareholders Value

Risk Management

Other Goals: by Posner & Schmidt

Organizational Effectiveness High Productivity

Good Organization Leadership

High Morale

Good Organizational Reputation Organizational growth

Organizational Stability

Value to Local Community

Service to Public


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Goal Congruence

Every individual has Personal Goals

Many a times, conflict between Personal & org. Goals

Hence, this necessitates a development of a control

system that integrates the personal goals with org.goals so that goal congruence is achieved

Goal congruence means the action people take in

accordance with their perceived self-interest and alsoin the best interest of the organization.

MCS should be designed and operated with theprinciple of goal congruence in mind.


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5

Individuals work in different

hierarchies and handles

different responsibilities &

may have different goals.

But they must come together as

far as Companys Goal is

concerned, its called Goal

Congruence

Goal Congruence


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Example 1 The HR manager has devised a HR trainingprogram to enhance the skills of its sales personnel,with an objective to enhance their productivity But ifcompany is in strategic need of attaining a certainsales volume in a given quarter, it can not do so onaccount of non availability of personnel.

Goal Congruence Examples


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Example 2 The marketing department has plannedan impressive advertising campaign, which promisesgood returns, But say due to cash crunch Companyscurrent financial position may not let to lose thestrings

Example 3 Production Manager may get a good

applause for reducing cycle time; But at what cost?Building up the high inventory i.e. higher investmentin current assets. While doing so he just overlookedthe financial interest of the company.

Goal Congruence Examples


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Informal factors that influence Goal Congruence

ExternalFactors

InternalFactors


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External Factors : External factors are norms ofdesirable behavior that exist in the society of which theorganization is a partWork EthicsAttitudesLoyalty

Pride in doing jobDiligenceType of industryNation


E.g.: Silicon Valley Major Source of newbusiness creation & wealth Attracts people with EntrepreneurialSpirit, a zest for hard work, high ambition

Over the last 50 years HP, Microsoft,Apple, Sun Microsystems, Oracle Known as the centre of TechnologyInnovation


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Culture Common beliefs, Shared Values, Norms of Behavior, Assumptionsthat are indirectly accepted and openly/directly manifestedthroughout

Cultural norms are extremely important since they explain why twoorganizations with identical formal management control systems,may vary in terms of actual control.

A company's culture usually exists unchanged for many years. Certainpractices become rituals, carried on almost automatically because"this is the way things are done here.

Organizational culture is also influenced strongly by the personality

and policies of the CEO, and by those of lower-level managers withrespect to the areas they control.

Attempts to change practices almost always meet with resistance, andthe larger and more mature the organization, the greater theresistance is.


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Management Styles : Strongest Impact on ManagementControl

Attitude of CEOAttitudes of SubordinatesAttitudes of SuperiorsManagers come in all shapes and sizes.

Some are charismatic and outgoing;others are less ebullient.Some spend much time looking and talking to people(management by walking around);

others rely more heavily on written reports.


Internal Factors


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Reginald Jones 1970 More Discipline, Formal, dignified, refined,bright, willing to & able to delegate authority

Jack Welch 1980 outspoken, impatient, informal, an entrepreneur.Growth 1981 -1999 through mega acquisition, shift frommanufacturing to services, rapid globalization into Europe & Asia,Implementation Six Sigma Quality, Integration of Internet into All

GEs Businesses. Result - Sales Increase Fourfold, from $27 Billion to$101 Billion , profits six folds, from $1.6 Billion to $9.2 Billion. GEsStock price increased by 3100% from $4.2 to $133.75 Billion

Jeff Immelt 2001 Confident, friendly, and likeable leader . Where

Welch was feared within GE, Immelt is Adored. Immelt Focus Use ofTechnology, Customer Orientation, Business Mix, ManagementDiversityGE Well Deserved reputation for producing sterling BusinessManagers who had different styles but a common ability to leadsuccessfully

Example


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Informal OrganizationLine Management - official authority and responsibilities-

of each manager.Production Manager General ManagerIn extreme situations, the production manager may notpay adequate attention to messages received from Gen.Manager, especially likely to occur when the latter isevaluated on production efficiency rather than on overallperformanceThe realities of the management control process cannotbe understand without recognizing the importance of the

relationships that constitute the informal organization.


Internal Factors


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Perception & Communication

Operating managers must know what are goals& what actions are supposed to be taken toachieve them.Despite many Formal & Informal channels ofInformation, Its not always clear what seniormanagement wants to do.

Conflict of Interest


InternalFactors


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The Formal System

Rules

PhysicalControl

Manuals SystemSafeguards

TaskControlSystems


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The Formal System

Rules

Formal Instructions, Job Descriptions, Standard OperatingProcedures, Manuals, Guidelines

Rules RangeUntil modified, do not changeRules as guidelines- permitted or indeed expected to departfrom them, either under specified circumstances or whentheir own judgment indicates about the departure being inthe best Interest of the organizationEx: Credit PolicyPositive requirements Fire drillsProhibitions unethical, undesirable, Illegal


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The Formal System

Rules

PhysicalControl

Security GuardsLocked Showrooms

VaultsComputer PasswordsTelevision Surveillance


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The Formal System

Rules

Manuals

Much judgment requiredWritten Instructions

ProceduresPractices

Some rules become outdatedRe-examination of the rules toensure that they are still consistent

with the current senior

managementPressure of day today activities,updating is overlooked which mayresult into having those rules which

are obsolete


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The Formal System

Rules

SystemSafeguards

Cross CheckingAuthorization

Safeguarding AssetsInternal ControlAuditing


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The Formal System

Rules

AutomationResponsibilitiesChecking

ReviewingReporting

TaskControlSystems


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Goals and

Strategies

OtherInformation

BudgetingStrategic

Planning

Responsibility

Centre

Performance

Rules

Report

Actual Versus

Plan

Performance

Measurement

Reward (Feedback

Feedback CommunicationReview Corrective

Action

Measurement

Formal Control Process


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Functional Structure

CEO

Production

Manager

Marketing

Manager

Manager

Plant 1

Manager

Plant 2

Manager

Plant 3

Manager

RegionA

Manager

RegionB

Manager

RegionC

Staff

Staff

Staff


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Types of Organizational Structure

Functional People are grouped based on their expertise and skills

Vertical hierarchy is stronger

Calls for centralization

Cannot adapt easily to environmental changes

Advantages:

Specialized Knowledge

Better Decisions

Supervision

Efficiency

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Disadvantages:

No clear way of determining

effectiveness

No way of measuring contribution

towards profitDispute grievance

Inadequate for diversified

products & markets

Tends to be silos


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Business Unit Structure

CEO

Manager

Business

Unit A

Plant

Manager

Marketing

Manager PlantManager MarketingManager

Staff

Staff

Staff

Manager

Business

Unit B

Manager

Business

Unit C

PlantManager MarketingManager

Staff


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Divisional Also known as Product Structure or

Strategic Business Unit (SBU)Responsible for all the function involved in producing &

marketing a specified product lineBased on Product range/specific market/geographical location,

divisions are formed & they act as separate companies

Responsible for planning & coordinating work of separatefunctions and for resolving disputes between them

Performance measured on the basis of profit of BU. A validcriterion since it reflects the activities of both.

BU Managers exercise broad authority but Headquartersreserves certain key prerogative.

HQs may be responsible for obtaining & allocating fundsAlso approves budget, judges performance of BU manager, sets

their compensation, and if situation warrants, remove them

HQs establishes Charter for Product, territory.


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HQs establishes Company wide policies may becodified in to few & general or in several thick volumes

of manuals

HQs staff may assist BU in specialized areas like

Human Resource

Legal Affairs

Public Relation

Controller & treasury matters

HQs functions are crucial; without them the BU would

be better off as a separate companies


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Advantages:

Provides a training ground

for general managementImbibes entrepreneurship

skills in BU manager

Being nearer to market than

HQs, Managers make sounddecisions

The unit as a whole can

react to new threats or

opportunities

Disadvantages:

Possibility of work

duplicationUnit manager is

presumably generalist

whereas subordinates are

functional specialistsmaylead to problems both

within BU and with HQs

Disputes between

Business units

Disputes between Business

Units and HQs


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Matrix Organization

Chief Executive Officer

Functional

Manager

A

Project

Manager

X

FunctionalManager

B

Functional

Manager

C

Project

Managery

Project

Manager

Z


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MatrixIntegrates desired features of Functionaland Divisional structure

Evaluation of performance of such organizationalentities is very difficult

This form of organization is very complex, fromthe point of view of management control system

Along with hierarchy, there is some form of lateralauthority, influence or communication

Employee reports to two supervisorssimultaneously

Managers share the resources

Firms that follow this structure are TCS, WIPRO,

Shell etc. 30

Matrix Organization


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Disadvantages:

it may pose problemssuch as added complexityin control function,assignment ofresponsibility andauthority etc.

Lot of time is consumedin conflict resolution

The configuration dilutes

priorities and createsconflicts product lines and

functional lines over theallocation of resources.

Advantages:Promotes interactionbetween functions and so

useful where suchinteractions are necessary ordesirable

Matrix structure offers

advantages such as fasterdecision making process,efficiency and effectiveness

Matrix organization hasadvantage of motivation andcoordination


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Functions of the Controller

The person who is responsible for designing and operating the management

control systems . In many organization, CFO = Controller. Nowadays, CIO

= Controller

1. Designing and operating information & Control Systems

2. Preparing Financial Statements and Financial reports for

shareholders & other parties3. Preparing, Analyzing, and interpreting financial reports

4. Analyzing budget proposals from various segment of the company and

consolidating them into an overall budget.

5. Supervising internal auditing and accounting control to ensure validity

of information6. Establishing adequate safeguards against theft and fraud

7. Developing personnel in the controller Organization

8. To advice management on financial implication of decisions under

consideration

9. Tax returns


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Controller Controllers involvement in managerial function depends upon

Financial orientation of the company

Importance of planning, budgeting and reporting in theorganization

The extent to which controller is involved

in business decisions

Characteristics of a good controller

Personal integrity and professional commitment

Accounting knowledge and analytical skills

Understanding business problems and recommending

actions Building effective interpersonal relationships

Recognizing the responsibility towards the division as wellas corporate management

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Business Unit Controller

Dotted line Relationship

Here the controller reports to BU Manager, who is immediate boss,

and ultimate authority in hiring, training, transfer, compensation,

promotion, and firing.

Quote of Bernard Doyle of General Electric:

our controllership structure is based on a strong functional

reporting line. The business unit controllers report directly to the general

managers of their business units but they have a functional or dotted line

responsibility to the CFO of the company. The glue that holds it together is

that the people in those business unit functional jobs can be appointed only

from a slate of candidates the corporate CFO first approves, and he has the

unqualified right to remove these people. But, as importantly, these people

are the CFOs of their business units. They are team players.


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Business Unit Controller

Solid line Relationship

Here the controller reports to Corporate Controller who is also boss

of the business unit controller and having authority for hiring.

Quote of Helmut Maucher, CEO of Nestle :

As controller, you report to BU manager. The Bu manager has complete

responsibility for the unit. However, in rare cases something may happen

that means your loyalty to the unit manager is finished and your loyalty to

the company takes over. I want a clear line of command, but everythinghas its limits; and , in that case, you cannot excuse yourself. I want your

loyalty in general to the BU manager; but if he has five girlfriends and

drinks too much, you must tell us at headquarters. This is your higher

priority of loyalty.


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Alternative Controller Relationship

Business

Unit

Controller

Corporate

Controller

BusinessUnit

Manager

Business

Unit

Controller

Corporate

Controller

BusinessUnit

Manager

Dotted Line Solid Line


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Controllers Relation to Line

Organization

Controller sometimes acts as line manager but their decisionscan be overruled by actual line managers.

Sometimes they do take decisions. For E.g. deciding the

propriety of expense listed on a travel voucher

The Business Unit Controller

He has divided loyalty between corporate controller &

Unit Manager.

If he reports to Corporate Controller, he is treated as spyrather than trusted aide by unit manager.

And if he is reporting to unit manager, he may not give

objective reports on Business Unit.

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