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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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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
Informal factors that influence Goal Congruence
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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Informal factors that influence Goal Congruence
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.
Informal factors that influence Goal Congruence
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.
Informal factors that influence Goal Congruence
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
Informal factors that influence Goal Congruence
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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