Gazdasági Ismeretek | Kontrolling » The Nature of Management Control Systems

The Nature of Management Control Systems Basic Concepts What does Control mean? Press the accelerator, and your car goes faster. Rotate the steering wheel, and it changes direction. Press the brake pedal, and the car slows or stops. With these devices, you control speed and direction; if any of them is inoperative, The car does not do what you want it to. In other words, it is out of control Basic Concepts An organization must also be controlled; that is, devices must be in place to ensure that its strategic intentions are achieved. But controlling an organization is much more complicated than controlling a car. We will begin by describing the control process in simpler systems. Elements of a Control System Every control system has at least four elements: 1. A detector 2. An assessor 3. An effector 4. A communications network The four „control” elements 1. A detector or sensor a device that measures what is

actually happening in the process being controlled. 2. An assessor a device that determines the significance of what is actually happening by comparing it with some standard or expectation of what should happen. 3. An effector a device (often called “feedback”) that alters behavior if the assessor indicates the need to do so. 4. A Communications network devices that transmit information between the detector and the assessor and between the assessor and the effector. Example: You are driving a car 6 Detectors: Assessor: Effector: Communication network: 7 Your eyes (detectors) measure actual speed by observing the speedometer. Your brain (assessor) compares actual speed with desired speed (standard: the highest speed is e.g 90 km/hour) to detect a deviation from standard. Your brain (assessor) directs your foot (effector) to ease up the accelerator if actual speed (100 km/hour) is faster than the standard speed (90 km/hour), press down the accelerator if the

actual speed (80 km/hour) is slower than standard speed (90 km/hour). And, your nerves (communication network) form the communication system that transmits information from eyes (detectors) to brain (assessor) and from brain (assessor) to foot (effector). Elements of the control process Management An organization consists of a group of people who work together to achieve certain common goals in a business organization a major goal is to earn a satisfactory profit Hierarchy of managers Organizations are led by a hierarchy of managers, with the chief executive officer (CEO) at the top, and the managers of business units, departments, functions,  and other subunits ranked below him or her in the organizational chart. Hierarchy in the organization The complexity of the organization determines the number of layers in the hierarchy. All managers other than the CEO are both superiors and subordinates: they supervise the people in their own units, and they

are supervised by the managers to whom they report The management control process The CEO (or a team of senior managers) decides on the overall strategies that will enable the organization to meet its goals. With the approval of the CEO, the leaders of the various business units formulate additional strategies that will enable their respective units to advance these goals. The management control process is the process by which managers at all levels ensure that the people they supervise implement their intended strategies Contrast with Simpler Control Processes The control process used by managers contains the same elements as those in the simpler control systems described earlier:  detectors, assessors, effectors, and communications system Contrast with Simpler Control Processes Detectors report what is happening throughout the organization; Assessors compare this information with the desired state; Effectors take corrective action once a

significant difference between the actual state and the desired state has been perceived; Communications system Tells managers what is happening and how that compares to the desired state Differences There are significant differences between the management control process and the simpler processes (car driving, temperature measurement): Differences (1) 1. Unlike in the thermostat or body temperature systems, in the businesses the standard is not preset rather, it is a result of a conscious planning process. 2. The management decides what the organization should be doing, and part of the control process is a comparison of actual accomplishments with these plans. 3. The control process in an organization involves planning. 4. In many situations, planning and control can be viewed as two separate activities BUT 5. In management control involves both planning and control. Differences (2) Like controlling an automobile management control is not automatic. Some detectors in an

organization may be mechanical, but the manager often detects important information with her own eyes, ears, and other senses so if it necessary he/she could make alter in organization’s behavior Management Control involves human beings, the manager must contact with at least one other person to effect change Differences (3) Unlike controlling an automobile, where a function performed by a single individual, management control requires coordination among individuals An organization consists of many separate parts, management control must ensure that each part works in harmony with the others Differences (4) The term black box describes an operation whose exact nature cannot be observed Unlike the thermostat or the automobile driver, a management control system is a black box. We cannot know what action a given manager will take when there is a significant difference between actual and expected performance, nor what action others will take in response to the

manager’s signal Differences (5) Much management control is self-control; control is maintained not by an external regulating device like the thermostat, But by managers who are using their own judgment rather than following instructions from a superior. Systems Definition A system is a prescribed and usually repetitious way of carrying out an activity or a set of activities Systems are characterized by a more or less rhythmic, coordinated, and recurring series of steps intended to accomplish a specified purpose. Management actions Many management actions are unsystematic. Managers regularly meet situations for which the rules are not well defined and thus must use their best judgment in deciding what actions to take. The effectiveness of their actions is determined by their skill in dealing with people, not by a rule specific to the system (though the system may suggest the general nature of the appropriate response) If all systems ensured the correct action

for all situations, there would be no need for human managers Boundaries of Management Control Planning and Control we define management control and distinguish it from two other systems or activitiesthat also require both planning and control: strategy formulation task control Management Control Management control fits between strategy formulation and task control in several respects Strategy formulation is the least systematic of the three, Task control is the most systematic, and Management control lies in between Management Control Strategy formulation focuses on the long run, Task control focuses on short-run activities, and Management control is in between. Management Control Strategy formulation uses rough approximations of the future, Task control uses current accurate data, Management control is in between. Each activity involves both planning and control, but the emphasis varies with the type of activity

Management Control The planning process is much more important in strategy formulation, the control process is much more important in task control, and planning and control are of approximately equal importance in management control. General relationships among planning and control Management Control Activities Planning what the organization should do. Coordinating the activities of several parts of the organization. Communicating information. Evaluating information. Deciding what, if any, action should be taken. Influencing people to change their behavior. Management Control Activities Management control does not necessarily require that all actions correspond to a previously determined plan, such as a budget. Such plans are based on circumstances believed to exist at the time they were formulated Management Control Activities If these circumstances have changed at the time of implementation, the actions dictated by the plan may no

longer be appropriate (suitable). While a thermostat responds to the actual temperature in a room, management control involves calculating future conditions to ensure that the organization’s objectives are realized. Management Control Activities If a manager discovers a better approach one more likely than the predetermined plan to achieve the organization’s goals the management control system should not obstruct its implementation. In other words, conforming to a budget is not necessarily good, and departure from a budget is not necessarily bad. Goal Congruence Although systematic, the management control process is by no means mechanical; it involves interactions among individuals, which cannot be described in mechanical ways. Managers have personal as well as organizational goals. Goal Congruence The central control problem is to influence them to act in pursuit of their personal goals in ways that will help reach the organization’s goals as

well. Goal congruence means that, the goals of an organization’s individual members should be consistent with the goals of the organization itself. The management control system should be designed and operated with the principle of goal congruence in mind. Tool for Implementing Strategy  Management Control systems help managers move an organization toward its strategic objectives.  Thus, management control focuses primarily on strategy execution.  Management Controls are only one of the tools managers use in implementing desired strategies.  Strategies are also implemented through the organization’s structure, its management of human resources, and its particular culture. Framework for strategy implementation Framework for strategy implementation Organizational structure specifies the roles, reporting relationships, and division of responsibilities that shape decisionmaking within an organization. Human resource management is the selection,

training, evaluation, promotion, and termination of employees so as to develop the knowledge and skills required to execute organizational strategy. Culture refers to the set of common beliefs, attitudes, and norms that explicitly or implicitly guide managerial actions. Financial and Nonfinancial Emphasis  Management control systems contains both financial and nonfinancial performance measures.  The financial dimension focuses on the monetary “bottom line” net income, return on equity, and so forth.  virtually all organizational subunits have nonfinancial objectives product quality, market share, customer satisfaction, on-time delivery, and employee morale. Aid in Developing New Strategies - interactive control the primary role of management control is to ensure the execution of chosen strategies. In industries that are subject to rapid environmental changes, management control information, especially of a nonfinancial nature can also provide the basis

for considering new strategies Interactive control Interactive control Interactive control calls management’s attention to developments both negative (e.g, loss of market share, customer complaints) and positive (e.g, the opening up of a new market as a result of the elimination o f certain government regulations) that indicate the need for new strategic initiatives. Interactive Controls are an integral part of the management control system. Strategy Formulation is the process of deciding on the goals of the organization and the strategies for attaining these goals Goals are timeless; they exist until they are changed, and they are changed only rarely Strategy Formulation For many businesses, earning a satisfactory return on investment is an important goal; for others, attaining a large market share is equally important. Nonprofit organizations also have goals; they seek to provide the maximum services possible with available funding.

Strategies Strategies are big plans, important plans. They state in a general way the direction in which senior management wants the organization to move. E.g A decision by an automobile manufacturer to produce and sell an electric automobile would be a strategic decision Strategies The need for formulating strategies usually arises in response to a perceived threat (e.g, market attacks by competitors, a shift in consumer tastes, or new government regulations) or opportunity (e.g, technological innovations, new perceptions of customer behavior, or the development of new applications for existing products). Strategies A new CEO, especially one brought in from the outside, usually perceives both threats and opportunities differently from how his or her predecessor did. Thus, changes in strategies often occur when a new CEO takes over Strategies Strategies to address a threat or opportunity can arise from anywhere in an organization and at any time

New ideas do not emanate solely from the research and development team or the headquarters staff. Virtually anyone might come up with a “bright idea,” which, after analysis and discussion, can form the basis for a new strategy. strategy formulation  Complete responsibility for strategy formulation  should never be assigned to a particular person or organizational unit.  Providing a means of bringing worthwhile ideas directly to the attention of senior management  without allowing them to be blocked at lower levels is important Distinctions between Strategy Formulation and Management Control Strategy formulation is the process of deciding on new strategies; Management control Is the process of implementing those strategies. From the standpoint of systems design, the most important distinction between strategy formulation and management control is that strategy formulation is essentially unsystematic strategic decisions  Threats,

opportunities, and new ideas  do not occur at regular intervals;  thus,  strategic decisions may be made at any time Strategic analysis  the analysis of a proposed strategy varies with the nature of the strategy.  Strategic analysis involves  much judgment,  the numbers used in the process are usually rough estimates  the management control process involves  a series of steps that occur in a predictable sequence according to a more-or-less fixed timetable  and with reliable estimates Strategy vs. management control  Analysis of a proposed strategy usually involves relatively few people  The sponsor of the idea, headquarters staff, and senior management.  the management control process involves  managers and their staffs  at all levels in the organization Task Control  Task control is the process  of ensuring that specified tasks are carried out effectively and efficiently  it is transaction-oriented  it involves

the performance of individual tasks according to rules established in the management control process Task Control  Task control often consists of seeing that these rules are followed,  A function that in some cases does not  even require the presence of human beings  Numerically controlled machine tools,  process control computers,  and robots  are mechanical task control devices Task Control  Their function involves humans only  when the latter prove less expensive or more reliable;  this is likely to happen only if  unusual events occur so frequently that programming a computer  with rules for dealing with these events is not worthwhile Task Control  Many task control activities are scientific  the optimal decision or the appropriate action  for bringing an out-of-control condition back to the desired state is predictable within acceptable limits.  the rules for economic order quantity  determine the amount and

timing of purchase orders Task Control  Most of the information in an organization is task control information:  The number of items ordered by customers,  the pounds of material and units of components used in the manufacture of products,  The number of hours employees work,  the amount of cash disbursed Task Control  Many of an organization’s central activities  including procurement, scheduling, order entry, logistics, quality control, and cash management  are task control systems  Some of them, though mechanical, can be extremely complicated Distinctions between Task Control and Management Control Many task control systems are scientific, whereas management control can never be reduced to a science. Management control involves the behavior of managers, and this cannot be expressed by equations Examples of Decisions Distinctions between Task Control and Management Control Serious errors may be made when principles developed by

management scientists for task control situations are applied to management control situations In management control, managers interact with other managers; In task control, either human beings are not involved at all (as in some automated production processes), or the interaction is between a manager and a nonmanager Distinctions between Task Control and Management Control In management control the focus is on organizational units; In task control the focus is on specific tasks performed by these organizational units (e.g,Manufacturing job no 59268, or ordering 100 units of part no. 3642) Distinctions between Task Control and Management Control Management control is concerned with the broadly defined activities of managers deciding what is to be done within the general constraints of strategies. Task control relates to specified tasks, most of which require little or no judgment to perform. Impact of the Internet on Management Control The pace of the

information revolution accelerated with the invention of computers, gaining tremendous momentum in the 1990s with the advent of the Internet The Internet provides major benefits, such as: Instant access Multi-targeted communication Costless communication Ability to display images Shifting power and control to the individual Impact of the Internet With these advantages the Internet has changed the rules of the game in the business-to-individual consumer sector The Internet has also changed businessto-business commerce The impact of the Internet on the world of business has been significant The Internet’s impact on Management Controls  Management control systems involve information, and organizations require an infrastructure to process that information.  The Internet provides that infrastructure, making the processing of information easier and faster, with fewer errors.  On the Web, a manager can collect huge amounts of data, store that

data, analyze it in different forms, and send it to anyone in the organization.  Managers can also use this information to customize and personalize their reports The Internet’s impact on Management Controls 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 strategies through management Controls is essentially a social and behavioral process and thus cannot be fully automated The Internet’s impact on Management Controls Although the Internet has vastly improved information processing, the fundamental elements of management control what information to collect and how to use it are essentially behavioral in nature and thus not amenable to a formula approach