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Perspective of Management Control Systems

K.Viswanathan

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Perspective of Management Control Systems Concept of control (Example of car)Elements of control system:1. Detector or sensor- device to measure what is actually

happening in the process being controlled2. An Assessor- A device that determines the significance of what is

happening as compared to standard or what should happen3. An effector- a feed back that alters the behaviour, if need be4. A communication network-Devices that transmit information

between detector assessor and effector.Examples of controls :a. Thermostatb. Body Temperaturec. Car Driving

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Perspective of Management Control Systems Differences between Management controls and other controls:1. Standards are not preset. Planning is different from control.2. Management control is not automatic like body temperature

control. Because actions intended to alter the behaviour of organisations involve human beings, the manager must interact with at least one more person to bring about a change.

3. Management control requires coordination among individuals.4. The connection between perceiving the need for action and

determining the action required to obtain the desired result may not be very clear. We cannot know what action a manager will take when there is significant difference between actual and expected performance.

5. Much of the management control is though self regulation.

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Perspective of Management Control Systems Systems:A system is a prescribed and usually repetitive way of carrying out an activity or set of activities. Systems are characterised by more or less rhythmic, coordinated and recurring series of steps intended to accomplish a specific purpose. Many a time management actions are unsystematic. Managers regularly encounter situations for which the rules are not well defined, and thus they must use their best judgment in deciding the course of actions to be taken. The effectiveness of their actions is determined by their skill in dealing with people, not by any rule specific to the system . If all systems ensured the correct actions for all situations, there would be no need for human managers.

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Perspective of Management Control Systems Management control systems are required in any organisation practising decentralisation. Optimium utilisation of all the natural and created resources for the betterment of the society requires control and efficiency. To have effective controls managers need to know the alternative methods and systems. Management control systems have to fit in the firm’s strategy. Any strategy gets developed through a formal and rational process. The strategy then dictates the design of the management control system. Strategies and management control system have influence on each other. What is strategy? Strategy is the determination of the basic long term goals and objectives of an organisation and the adoption of courses of action and allocation of resources necessary for carrying out those goals. It is a broad long term plan designed to achieve the overall objectives of the firm.

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Perspective of Management Control Systems Strategic Management is a stream of decisions and actions which leads to the development of an effective strategy to help achieve corporate goals. Strategic control is the process that takes into account the changes in the assumptions of internal and external factors affecting the organisation on which strategy is based , continuously evaluating the strategy when it is being applied and taking corrective measures to adjust the strategy according to the changing situation.Operational control is the task of ensuring that specific tasks are carried out effectively and efficiently. It evaluates the performance of the organisation. Financial control is the process by which management ensures that an organisation carries out its financial plans efficiently and effectively.

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Perspective of Management Control Systems Understanding Strategy:The word strategy is derived from the Greek word ‘strategos” which means a “General” (an army leader)- it means the art and science of directing military forces to war. There can be many alternatives to achieving the objectives of an organisation. Thus a strategy is a comprehensive long term plan. In simple words strategy is a broad long term plan designed to achieve the overall objectives of the firm. One has to be clear about the objectives in order to formulate strategies- which are nothing but unified, comprehensive plans. To attain the objectives one needs to allocate the resources judiciously. Strategy is applicable both to business as well as non-business organisations. What are Policies?They are statements or guidelines for business decision making. So that downward delegations are possible. Policies help to decide courses of action to achieve objectives.

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Perspective of Management Control Systems Differentiating Policies and StrategiesSl No Policies Strategies

1 overall guidance to govern and control the managerial action.

courses of action or plans which help in the achievement of objectives.

2 thought oriented action oriented.

3 They help in taking decisions which can be delegated down the line for action.

cannot be delegated.

4 concerned with grappling these situations as and when they emerge so as to suggest a suitable course of action.

concerned with uncertainties, competitive situations, risks etc. which are likely to decide / bring changes in the course of action in future.

5 can be general statements and can be specific or implied.

have to be specific statements and cannot be implied.

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Perspective of Management Control Systems Tactics: Tactics are the methods to implement strategies. They are sub-strategies. Tactics are adopted so that the firm can face competition effectively. For ex. Introduction of new products, processes, proper promotion mix etc can become tactics to increase sales, which by itself can be a strategy. Differences between Strategies and Tactics :

Sl.No. Strategy Tactics 1 Major plans and resources allocation Means of executing the plans

2 Developed by top level of the management

Employed by the lower levels of management

3 Long Term Short term

4 Higher uncertainty in formulation and implementation

Lesser uncertainty in formulation and implementation

5. More important since they decide the future course of action

Less important since they are concerned with execution in specific parts.

6. Personal values affect strategies Personal values do not affect tactics.

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Perspective of Management Control Systems Why are strategies important for Business?1. Minimise Risks: Management has to have alternate strategies

planned for different business situations. 2. Decision Making: Strategies provide necessary guidance and

directions for decision making. Managers have to follow the blue-print of the strategy at the time of making vital decisions.

3. To Achieve Objectives: Strategy provides the directions and guidance to undertake various activities required for the attainment of the objectives of the firm like growth, profitability, stability etc.

4. Facilitate organising resources: Strategies focus on the required resources and facilitate organising the resources in the required quantum and sequence to achieve the long-term objectives.

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Perspective of Management Control Systems

Why are strategies important for Business?5. Control of functions: Strategies help in the control of the various

functions of the organisation. Actual performance is compared with targets and corrective steps are taken to rectify all deviations. Over a period of time, the strategies become well organised.

6. Motivating factor in an organisation: Strategy can prove to be a motivating factor in an organisation. Appropriate strategies motivate the employees to perform their best to achieve the goals of the organisation.

7. Optimum use of Resources: Strategies also ensure that the available resources of the firm are optimally used.

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Perspective of Management Control Systems

Management Control Systems:Management control system is a process by which management influences other members of the organisation to implement its strategies effectively and efficiently. Under Management Control Systems, a firm is divided into simpler more homogenous sub units. Each of these units carry out the process of converting inputs into desired outputs. It is important to recognise the differences among the various units for the process of planning and control.Management control does not mean that the actions should always conform to plans. In case the circumstances turnout to be different from what were originally anticipated during the preparation of the plan, different set of actions may be taken to suit the occasion. Thus management control is expected to anticipate future situations. The CEO is ultimately responsible for implementing the control systems .

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Perspective of Management Control Systems

Management Control Systems: ( Contd…)Management control systems begin after the formation of the goals and strategies of the organisation. It is a broad concept involving interrelationship among all units, their managers and subordinates. It is the process of selecting the best course of action out of the many. An effective Management Control System should have:1. A Strategic Plan duly communicated to all who are responsible

for its execution.2. Profit Plan with standards of measurement prepared on the

basis of responsibility centres and communicated to all the concerned people.

3. Motivation of all employees4. Effective Management Information System (MIS) to control all

the activities of the organisation.

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Perspective of Management Control Systems Approach to Management Control Systems: (MCS) Management control lies between strategy formulation and operational control. MCS has boundaries which distinguish it from other planning and control systems- strategy formulation, operational control and financial control. Strategy formulation is concerned with long term planning and therefore is the least systematic. Planning is the key here Operational control is concerned with short term planning and is therefore most systematic. Control is the key here.Management control falls between them. Both planning and control are required. (a) Strategy formulation :This is a planning process used by firms for deciding on the goals of the organisation and the strategies to be used for achieving them. Strategies establish advantages over competitors. The need for changing a strategy might arise in case of any threat not visulised earlier. Formulation of strategy involves:

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Perspective of Management Control Systems (a) Strategy formulation : (Contd…)(i) Framing Missions and Objectives:The mission states the philosophy and the purpose of the organisation. The objectives are the goals or ends which the organsiation aims to achieve. All these should be clearly defined. (ii) Analysis of Internal Environment:Internal environment refers to man power, machines, methods, money, procedures and other resources of the organisation. It brings to light the strengths and weaknesses of the organisation. (iii) Analysis of external environment:External environment refers to the extent of competition, controls of the government, types of customers, technological developments and other environmental factors. It brings to light the threats and opportunities of the organisation.

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Perspective of Management Control Systems

(a) Strategy formulation : (Contd…)(iv) Gap Analysis: It is the comparison of the present level of performance with the expected level of performance to identify major variations if any and if so to take suitable actions.(v) Framing Alternative strategies:The management has to frame alternative strategies based on Gap and SWOT analyses. Only required strategies may be considered for implementation.(vi) Choice of Strategy: The best strategy which give maximum benefit to be chosen and implemented.

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Perspective of Management Control Systems (b) Operational Control :Operational control is used to ensure that the tasks are carried out efficiently and effectively. This control is achieved through medium of machines and man power. Many operational control activities are scientific in nature. The relationship between cause and effect are used to bring under proper control, activities which are out of control. Some operational research techniques like EOQ, waiting time and others are also used (c) Management Control:It is the process of implementing strategies. There are steps to be implemented and a fixed timetable for their implementation. In case of management control, the focus is on organisational units. Since human elements are involved, this cannot be shown in the form of equation.

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Perspective of Management Control Systems (d) Financial Control: Approved financial plans are used as yardsticks for achievement of goals. Variations of significant nature are analysed on the basis of causes and responsibility centres and reported to the appropriate levels for information and corrective actions. The financial control includes control of direct materials, wages, expenses and manufacturing overheads etc. The financial control is a subset of management control. Its focus is on short term plans. (e) Task Control:Task control is the process of ensuring that specified tasks are carried out effectively and efficiently. It is transaction oriented involving performance of individual tasks according to the rules established during the management control process.

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Perspective of Management Control Systems Differences between Task Control and Management control:

Sl No Task Control Management Control

1 Control systems are scientific

Controls are non-scientific

2 Either human beings are not involved at all or interaction is between a manager and non-manager.

Managers interact with other managers.

3 Focus is on specific tasks performed by the organisational unit

Focus is on organisational units

4 Concerned with specific tasks requiring little or no judgment to perform

Concerned with broadly defined activities of managers deciding what is to be done within the general constraints of strategies.

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Perspective of Management Control Systems Concept of corporate strategy:Corporate strategy means determination of the business in which the firm competes and allocates resources among the business units. Corporate strategy involves the formulation of strategy for the firm as a whole. The firm takes a conscious decision to compete in certain businesses by choosing the right mix of businesses. The corporate strategy has to do more with where to compete. The important issues in formulating corporate strategy are:a. Defining of the business in which the firm wants to competeb. Allocation of appropriate resources to these businesses. Decisions need to be taken regarding:1. The type of business to enter.2. Business to be focused3. Business to be retained4. Business to be divested.

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Perspective of Management Control Systems Concept of Corporate Strategy ( Contd…)Based on their corporate level strategy, firms can be grouped into:a. Single industry firms – Those which operate only in one industry.

For eg a tea companyb. Diversified firms- These are essentially related diversified firms –

firms in industries related to one another. For ex. Hindustan Unilever group- Generally in human hygiene related products.

c. Unrelated conglomerates- These are firms operating in several industries which are unrelated to one another. For example Reliance Group. These firms are known as conglomerates.

Strategic Alternatives:Strategic alternatives revolve around whether or not to pursue the existing business line so as to improve the efficiency of the firm. The four grand strategic alternatives are explained in the subsequent slides.

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Perspective of Management Control Systems Strategic Alternatives: ( Contd…)(i) Stability Strategy:Firm has to hold its current position in the product market and has to stabilise its market share. Really speaking, these firms need no growth. But in practice all firms opt for better growth.(ii) Growth Strategy:Significant incremental level of achievement in growth is targeted. Efforts are made to enter new markets, bring in new product lines and create an entry in additional market segments. Both internal and external growth strategies are attempted. The objectives of growth are:a. To ensure survival in the long runb. To achieve economies of scalesc. To build corporate imaged. To survive during tough times like recessione. To encourage innovativeness on the part of management

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Perspective of Management Control Systems Strategic Alternatives: ( Contd…)(iii) Retrenchment strategy:This involves dropping of some of the activities of the firm. Sometimes the entire business may be dropped; or some functions, products and markets are dropped. The firm may sell some of its products, divisions or leave some markets, or withdraw some brands and products from the market. The retrenchment strategy adopted may be turnaround, disinvestment and liquidation. The strategy may be followed under the following circumstances:a. To get out of unprofitable business linesb. To concentrate on core products with better revenue generationc. To discontinue obsolete productsd. To discontinue those products, which have become a drag on

profits of the company, especially in times of recession.

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Perspective of Management Control Systems Strategic Alternatives: ( Contd…)(iv) Combination strategies:Can use a combination of the various strategies given above. Stable strategy for some businesses, growth strategy for others etc.Business Unit Strategies:Business Unit strategies are those which deal with creation and sustenance of competitive advantage in each of the industries in which the firm is engaged. The business unit strategy is dependent on its mission and competitive advantage. Business units of various firms generate competitive strategies for their own survival and growth. It involves taking offensive and defensive actions to create a defendable position in the industry. The top management of a well diversified firm may deploy resources of one business unit in order to finance the growth of the other business unit/s. The missions of individual business Units are identified by the head of business unit or the corporate office.

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Perspective of Management Control Systems Strategic Business Units: ( SBUs) In multi-product or multi-geographical companies Strategic Business Units are created to manage effectively each of the products or group of products. The following are the important aspects of SBUs. 1. Independent Management: Each SBU is managed independently

as if it is a separate company by itself, with its own products and markets.

2. Own Strategy: Each SBU formulates its own strategy. But it should be in line with the overall strategy of the company.

3. Specific Resources: Each SBU is allotted resources – physical, human, financing -depending upon activities and contribution

4. Intra firm Competition: SBUs may compete with one anotherAdvantages of SBU: a. Effective management b. Proper recognition c. Employee motivation d. Higher efficiency e. Better customer service f. Facilitates innovation g. improves corporate image.

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Perspective of Management Control Systems Boundaries of Management Control Goals:Strategies are plans to achieve organisational goals. Management control systems are tools to implement strategies. The goals of the firm are decided by CEO. Management control lies between strategy formulation and task control. Management control is the process by which managers influence other members of the organisation in order to implement organisational strategies. The following activities are involved in management control:a. Planning the future activitiesb. Coordinating the activities of several parts of the organisation c. Communication of the informationd. Deciding the action to be takene. Influencing people to change their behaviour. Management control systems help the managers to move an organisation towards its strategic goals.

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Perspective of Management Control Systems

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