Recommended Text Books:

1. Management Control
Systems
By Anthony and Govindarajan
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MIS 503 2. Management Control

Management Systems: Performance
Control Systems Measurement, Evaluation and
Incentives
By Kenneth A Merchant, and
Wim A, Van der Stetde
4th Edition
 Chapter 1
Introduction
• Meaning of Management Control: process by
which managers influence other members of
the organization to implement the
organizational strategies.
• It involves the influences on the behavior,
operations, performance, output, quality,
physical resources and processes.
 Management Control Systems
• Management Control Systems (MCS) is a system which
gathers and uses information to evaluate the performance of
different organizational resources like human, physical,
financial and also the organization as a whole considering the
organizational strategies. Finally, MCS influences the behavior
of organizational resources to implement organizational
strategies. MCS might be formal or informal. The term
‘management control’ was given of its current connotations
by Robert N. Anthony (Otley, 1994).
 Elements of Management Control
• Goals
• Strategic planning
• Budgeting
• Resource allocation
• Performance measurement, evaluation, and
reward
• Responsibility centre allocation
• Transfer pricing
 Meaning and characteristics of control system

• A control system is a mechanism that

monitors, measures, and evaluates the
functions and performance of ongoing process
and develops means to ensure the efficient
and smooth functioning of the system. It
involves the following elements:
• A detector or sensor
• An assessor
• An effector
• A communication network
 Boundaries of Management Control

• Activities
– Planning
– Coordinating
– Communicating
– Deciding what, if any, action should be taken
– Influencing people
• Goal congruence
• Tool for Implementing Strategy
• Financial and nonfinancial emphasis
• Strategy formulation
• Task control
 The Impact of Internet on MCS
The Internet provides the following major
benefits in management control:
• Instant access: on the Web, huge amounts of
data can be sent to anyone, anywhere in the
world in a matter of seconds.
• Multi-targeted communication: the Internet
has a vastly expanded one-to-many reach; one
Web entry can reach millions of people.
• Costless communication: A business that uses
telephone operators to interface with customers
must pay for telephone personnel salaries, toll-free
call, and bricks and mortars to support the customer
service functions. Communication with customers via
the Internet avoids all these costs.
• Ability to display images: Unlike the telephone, the
Web enables consumers to see the products being
offered for sale.
• Shifting power and the control to the
individual: Perhaps the most dramatic
benefits of the Web is that the individual is
“virtually king”. Consumers are in control and
can use the Web 24 hours a day at their own
conveniences without being interrupted or
unduly influence by sales representatives or
telemarketers.
 Limitations of the uses of Internet facilities

The Internet facilitates coordination and control through the efficient and effective
processing of information, but the Internet cannot substitute for the fundamental
processes that are involved in management control. This is because implementing
management strategies through management controls is essentially a social
process thus cannot be fully automated. The availability of electronic access to
database contributes little to the judgment calls required to design and operate an
optimal control system. Thus judgments involve:
• Understanding the relative importance of various, and sometime competing, goals
that drive individuals to act (e.g., personal achievement versus collective
achievement, value creation for customers and shareholders rather than for
oneself).
• Aligning various individual goals with those of the organization.
• Developing specific objectives by which business units, functional areas, and
individual departments will be judged.
• Communicating strategy and specific performance objectives throughout the
organization.
• Determining the key variables to be measured in assessing an individual’s
contribution to strategic goals.
• Evaluating actual performance relative to the standard and making inference as to
how well the manager has performed.
• Conducting productive performance meetings
• Designing the right reward structure
• Influencing individuals to change their behavior.
• In sum, the Internet has vastly improved information processing; the fundamental
elements of management control—was information to collect and how to use it—
are essentially behavioral in nature and thus not amenable to a formula approach.
 Classification of MCS
Experts have classified management controls
based on
• the object of control,
• the extent of formalization of control, and
• the time of implementation of controls.
 Based on the object of control
management controls have been classified into
• action controls
• results controls
• personnel/cultural controls
• action controls: Action controls are aimed directly at
the actions which take place at different levels of an
organization. These can be further classified into
behavioral restrictions, pre-action appraisal, and
action accountability.
• results controls: Results controls focus on the
consequences of actions taken rather than on the
actions themselves.
• Personnel/cultural controls influence the people and
the organizational culture, with the expectation that
the right people in the right culture will perform the
right actions that will ultimately yield the desired
results.
 Extent of Formalization
Management controls can be classified into
• formal controls and
• informal controls,
 Based on the time of implementation
Controls can be classified into:
• open loop controls and
• closed loop controls.
– feedback (follow-up) control and
– feedforward (anticipatory) control.
Contextual Factors Influence the Design
and Use of Management Control Systems.
• nature and purpose of the organization;
• organization structure and size;
• national culture;
• corporate strategy and organizational
diversification;
• competitive strategy;
• managerial styles;
• organizational slack;
• stakeholder expectations and controls; and
• organizational life cycle.
 Nature and Purpose of the
Organization

• The nature and purpose of an organization,

that is, whether it is a for-profit or a non-profit
organization has a major impact on
management control systems. The aspects in
which non-profit organizations differ from for
profit organizations include measurement of
the profitability and utilization of profits.
 Organization Structure
• The organization structure establishes the
formal pattern of job roles and responsibilities
that individual employees and groups have to
undertake, and the hierarchical structure and
reporting relationships.
 Size of the Organization
• The size of the organization influences the
nature of controls such as rules,
documentation of information, creation of
specialized role functions, and a higher degree
of decentralization.
 National Culture
• The management control system of any organization is
influenced by the national culture of the country in
which it operates. Geert Hofstede identified four
dimensions along which national cultures vary. The
dimensions are:
– power distance (acceptance of hierarchical levels);
– uncertainty avoidance (avoiding risk and ambiguity);
– individualism/collectivism (people's preference to work as
individuals or in a team); and
– masculinity (competitive spirit, independent thinking,
assertiveness)/femininity (interdependence, nurturing
nature).
 Corporate Strategy and
Organizational Diversification

• To achieve goal congruence between the goals

of the organization and those of individual
strategic business units, it is necessary that
the management control system has a good fit
with the corporate strategy. Management
controls also differ depending on the type of
diversification - related or unrelated.
 Competitive Strategy
• The choice of generic competitive strategy -
overall cost leadership, differentiation, or
focus - also influences the management
control system.
 Managerial styles
• Managerial styles (autocratic or democratic,
permissive or directive) play an important role
in influencing the behavior of the employees
in an organization and thus the design and
implementation of control systems.
 Organizational Slack
• Organizational slack refers to that capacity in
an organization which is in surplus of what is
required for normal operations. It may be
created voluntarily or involuntarily and may be
good or bad for the organization.
 Stakeholder Expectations and
Controls

Stakeholders (investors, employees and

managers, suppliers, customers, community,
government, etc.) are defined as individuals or
groups of people who are impacted by or who
impact the activities and operations of the
organization. It is necessary for organizations
to consider what the stakeholders want while
designing their management control systems.
 Causes of Management Control Problems
• Lack of direction
• Motivational Problems
• Personal Limitations
 Characteristics of an Effective MCS
1. Multi-Dimensional InOperation
The control systemis multi-dimensional in the sense that it should conform
tothenatureandneedsof theactivityorpositionsought tobecontrolled.
2. Participation of all Concerned
The control systemto be more effective it must have the participation of all the managersand his subordinates.
Controls should, not be imposed on the subordinates.

3. Focus On Strategic Control Point

The management control systemsmust focuson strategic control points and support the organization’sestablished overall
priorities. The immediate corrective action would be needed where deviation and would lead toa greater loss.
 Characteristics of an Effective MCS
1. Multi-Dimensional InOperation
The control systemis multi-dimensional in the sense that it should conform
tothenatureandneedsof theactivityorpositionsought tobecontrolled.
2. Participation of all Concerned
The control systemto be more effective it must have the participation of all the managersand his subordinates.
Controls should, not be imposed on the subordinates.

3. Focus On Strategic Control Point

The management control systemsmust focuson strategic control points and support the organization’sestablished overall
priorities. The immediate corrective action would be needed where deviation and would lead toa greater loss.
4. Timely
The management control systemshould be designed toPrivate data on the state of a given production
orof aspecifictime.
For example, amonthly salesreport, weekly or onthedaily report or quality inspectiononaproduction
line, all indicate a time period. Control systems must provide relevant information on specific time
periods.

5. UnderstandableandRealistic
Agoodcontrol systemshouldbewell definedandunderstoodby all thosedirectlyinvolved.
Themanager shouldhavetheknow-howit worksandthesubordinatesshouldknowwhat it seeksfrom
them.
Acomplicated systemof control based on a mathematical analysiswill be nouse if they are not clear
andunderstandabletothemanagerandsubordinates.
6. Immediate Information of deviation
Control systems should be able to report deviations quickly so as to minimize the ill effectsof these
deviations.
7. Control should Focus on the Results
The ultimate aimof the controlling process is to achieveorganizational objectives.
Gathering information, setting standards, identifying problems, measuring deviations and reports are
simply means to this end.
8. Flexible
Agood control systemmust be flexible enough to be adapted to newsituations without much difficulty.
9. Economical
The cost of the controls systemmust be less than the benefits to be derived fromthe use of controls.
10. Simple and Clear
Agood control systemshould be simple and clear which absorbs less effort and are more economical
also.
11. Acceptable to Organizations Members
Control systems designed should be acceptable to the organization’s members.
Rigid controls might cause resentment resulting in lower morale and inefficient performance. A
management control system to be more effective, it should be acceptable to members of the
organization.

12. Well Communicated

A good control system must have the characteristics of the good flow of communication from top
to bottom and feedback from bottom to Upward.

13. DesignedtoMixIndividualswithSpecialization
A good control system should be designed to integrate individuals with
specialization in diversified fields of accounting organizational analysis, strategic
planning, management information system, and other related areas. This would
ensure balance.
14. Must beDesignedtotheRight PersontoMonitor
Controls must be designed in such a way that the right person
monitors the activities of his own field. The sales managers, for
example, should be the right person to control the sales
territories.

15. ShouldWorkonExceptionPrinciple
A good control system should work on the exception principle So
that all-important and major deviations are brought into the
attention of the top management.
This will help top management to concentrate on other activities.
 Control Problems Avoidance
• Avoidance means eliminating the possibility that the control problems will
occur
• Four prominent avoidance strategies:
– activity elimination
– automation
– Centralization
– risk sharing.
 Control Alternatives
 For the control problems that cannot be  trying to hire people who can be relied
avoided, and those for which decisions upontoservetheorganizationwell
have been made not to avoid, managers  modest performance-basedincentives
must implement one or more control  highlyleveragedincentives
mechanisms that are generally called  Target-basedIncentives
management controls.  nonfinancial measuresof performance
 The collection of control mechanisms that  SubjectiveEvaluationof Performance
are used is generally referred to as a  elaboratesetsof policiesandprocedures
management control system(MCS).  extensive use of a large professional
 a combination of action, results, and internal audit
personnel/cultural controls