The Nature of Management

Control Systems

AG Chp.1 1
X Focus strategy implementation
X How a corporations senior executives
design & implement the ongoing
management system used to plan &
control the firms
firm s performance
performance.
X Management control is a must in any
organization
i ti th thatt practices
ti
decentralization.
AG Chp.1 2
I. Management Control Systems must FIT
Firms Strategy
X Strategy is first developed through a
formal & rational process.
Strategy dictates the design of the
firms management systems.
II. Strategies emerge through
experimentation
Influenced by the firms management
systems. Management control systems (MCS)
affect
ff t the
th ddevelopment
l t off strategies.
t t i AG Chp.1 3
When firms operate in industry context where
X Environmental changes are predictable
use a formal & rational process to develop
the strategy first & then design MCS to
execute the strategy.
X A rapidly changing environment difficult
for a firm to formulate the strategy & then
design MCS to execute the strategy
Strategies emerge through experimentation &
ad hoc processes significantly influenced by
the firms MCS.
MCS
AG Chp.1 4
X Considerthe collapse of companies Tyco,
Global Crossing,
Crossing WorldCom,
WorldCom & Enron.
Enron
X Partof the reason for their demise was the
lapse in controls
controls. CEO & top management
compensation in these companies was so
heavilyy tied to stock options
p that executives
were motivated to manipulate financials to
buoy the short-term stock price.

AG Chp.1 5
X Consider world class companies Emerson Electric,
Lincoln Electric, New York Times, Worthington Industries,
3M Corporation, Nucor Corporation, Dell Computer, Wal-
Mart, Southwest Airlines, Cisco Systems, Corning Hasbro
& Analog Devices.
Devices
X Their long term success because they :
developed good strategies
designed systems & processes
that energize
g employees
p y to execute strategies
g effectively.
y

AG Chp.1 6
Basic Concepts

Management
X An organization consists of a group of people who work
together to achieve certain common goals.
X O
Organizations
i ti are lled
dbby hi
hierarchy
h off managers
CEO, Managers of Business Units, Departments, Functions
& other sub units
X The complexity of the organization determines the
number of layers in the hierarchy.
X All managers other than the CEO are both superiors &
subordinates they supervise the people in their own
units & theyy are supervised
p byy the managers
g to whom
they report. AG Chp.1 7
Basic Concepts

X The CEO decides on the overall strategies that will

enable
bl th
the organization
i ti tto meett it
its goals.
l
X Subject to the approval of the CEO, the various BU
managers formulate additional strategies that will
enable their respective units to further these
goals.
X The management control process is the process
by which managers at all levels ensure that the
people they supervise implement their intended
strategies.

AG Chp.1 8
Management Control Processes
1. The standard is a result of a conscious planning process.
Management decides what the organization should be doing & part
of the control process is a comparison of actual accomplishments
with these plans.
Management control involves planning & control

2. Management control is not automatic.

Although routine ways of comparing certain reports of what is
happening with standards of what should be happening managers
must personally perform the assessor function, deciding whether the
difference between actual & standard performance is significant
enough to warrant action.
Because actions intended to alter an organizations behavior involve
human beings, the manager must interact with at least one other
AG Chp.1 9
person to affect change.
Contrast with Simpler Control Processes
3. Management control requires coordination among
individuals.
individuals
An organization consists of many separate parts, &
management control must ensure that each part works in
harmony with the other.
4. The connection from perceiving the need for action to
determining the action required to obtain the desired
result may not be clear
MCS is a black box
5. Much management control is self-control. Control is
maintained by managers who are using their own
judgment rather than following instructions from superior
or external regulating device. AG Chp.1 10
 Strategy Formulation Management Task Control
Control System
y
Least systematic In between Most systematic

Focus on the long

g run Focus on short run
Use rough approximation Use current accurate
of the future data
Planning process more Equal important Control process more
important important

AG Chp.1 11
Boundaries of Management Control
Management Control
The process by which managers influence other members of the
organization to implement the organizations strategies.
Management Control Activities
X Planning what the organization should do
X Coordinating the activities of several parts of the organization
X Communicating information
X Evaluating information
X Deciding what, if any, action should be taken
X Influencingg people
p p to change g their behavior
Management control does not necessarily require that all actions
correspond to a previously determined plan like Budget.
Conforming to a budget is not necessarily good & departure from a
budget is not necessarily bad.
AG Chp.1 12
General Relationships among Planning &
Control Functions
Activity Nature of End Product
Strategy
Goals, strategies, & policies
formulation

Management
Implementation of strategies
control

Task Efficient & effective

control performance if individual
tasks

AG Chp.1 13
Boundaries of Management Control

Goal Congruence
g
Although systematic, the management control process
is by no means mechanical involves interactions
among individuals.
i di id l
Managers have personal as well as organizational goals.
The central
Th t l control
t l problem
bl to
t induce
i d th
them tto actt
in pursuit of their personal goals in ways that will help
attain the organization
g g
goals.
Good congruence the goals of an organizations
individual member should be consistent with the goal
off the
th organisation
i ti itself.
it lf
AG Chp.1 14
MCS help managers move an organization toward its strategic
objectives. focuses primarily on strategy execution.
Implementation Mechanisms

Management
controls

Organization Human
Strategy structure resource Performance
management

Culture

Management control are only one tools managers use in

implementing desired strategies.
strategies Strategies are also
implemented through the organizations structures, its AG Chp.1 15

management of human resources & its particular culture.

 Boundaries of Management Control
Tool for Implementing Strategy
X Organizational structure specifies
the roles
reporting relationships
division of responsibilities that shape decision-making within an
organization.
X Human resource management
the selection, training, evaluation, promotion & termination of
employees to develop the knowledge & skills required to execute
organizational strategy.
X Culture
the set of common beliefs, attitudes & norm that explicitly guide
managerial actions
MCS encompass both financial & nonfinancial performance measures
AG Chp.1 16
Boundaries of Management Control
Aid in Developing New Strategies
X The primary role of management control is to
ensure the execution of chosen strategies.
X In industries subject to rapid environmental
changes management control information
(
(non fi
financial)
i l) can provide
id th
the b
basis
i ffor
considering new strategies Interactive
Control calls managements
management s attention to
developments that indicate the need for new
strategic
g initiatives
AG Chp.1 17
Boundaries of Management Control
Strategy Formulation
X The process of deciding on the goals of the organization &
the strategies for attaining these goals.
X Goals are timeless exist until they are changed & they are
changed only rarely.
rarely
In the strategy formulation process, the goals of the
organization are usually taken as a given.
X Strategies are big plans, important plans.
They state in a general way the direction in which senior
management wants the organization to move.
move
The need for formulating strategies usually arises in response to
a perceived threat or opportunity
Complete responsibility for strategy formulation should never
AG Chp.1 18
be assigned to a particular person or organizational unit.
Boundaries of Management Control
Strategy Formulation Management Control
The process of deciding on new The process of implementing
strategies those strategies
Essentially unsystematic do Systematic
not occur at regular intervals,
may be made at any time
Strategic analysis involves much Involves a series of steps that
judgment & the numbers used occur in a predictable sequence
are rough
h estimates.
ti t according
di tto a more or lless fi
fixed
d
timetable & with reliable
estimates
Analysis of a proposed strategy Management control process
usually involves relatively few involves managers & their staffs
people the sponsor of the at all levels in the organization
idea, headquarters staff & senior
management
AG Chp.1 19
Boundaries of Management Control
Task Control
Task control is the process of ensuring that specified tasks are
carried out effectively.
Task control is transaction oriented involves the performance
off individual
i di id l ttasks
k according
di tto rules
l established
t bli h d iin th
the
management control process.
Task control consists of seeing that these rules are followed.
Mechanical task control devices numerically controlled machine
tools, process control computers & robots.
Most of the information in an organization is task control
information.
Many of an organizations central activities including procurement,
scheduling,
h d li order
d entry,
t llogistics,
i ti quality
lit control
t l & cash
h
management task control systems. AG Chp.1 20
 Boundaries of Management Control
Management Control Task Control
Never be reduced to a science.
science Scientific
Involves the behavior of managers
& this cannot be expressed by
equations
Managers interact with other Either human beings are not
managers involved at all or the interaction is
between a manager & a
nonmanager
The focus is on organizational units The focus is on specific tasks
performed by these organizational
units
Concerned with the broadly defined Relates to specified tasks, most of
activities of managers deciding which require little or no judgment
what is to be done within the to p
perform
general constraints of strategies
AG Chp.1 21
Boundaries of Management Control
Impact of the Internet on Management Control
X MCS involve information & organizations require an infrastructure to
process that information.
information
X The internet provides that infrastructure, making the processing of
information easier & faster
X On the Web,
Web a manager can
collect huge amounts of data
store that data
analyze
y it in different forms
send it to anyone in the organization
use this information to customize & personalize reports
X The internet facilitates coordination & control through the efficient
& effective processing of information, but the Internet cannot
substitute for the fundamental processes that are involve in
management control Implementing strategies through
managementt controls
t l iis essentially
ti ll a social
i l&bbehavior
h i process &
thus cannot be fully automated AG Chp.1 22