Management
Control
System
Module-I
1
Module 1
Meaning of MCS ; Nature and purpose of control
systems ; Four elements of control and Boundaries
Fundamentals of
Difference Between Strategic Planning, Management
Management Control, and Operational Control
Control
Understanding strategies
Corporate level and Business Unit strategies
Behaviour in organization and goal Congruence
2
Module 1
Meaning of MCS
Chapter 1
Management Control System
Comprises of elements like,
Strategic planning; budgeting;
resource allocation; performance
measurement; evaluation and
reward; responsibility center
allocation and transfer pricing.
3
BASIC CONCEPTS
Management
Control
System
4
CONTROL
“Control consists in verifying whether everything occurs in conformity with
the plans adopted, the instructions issued and principles established. It has
for an object to point out weaknesses and errors in order to rectify them
and prevent recurrence. It operates on everything, things, people and their
actions”.
- Henri Fayol
(General and Industrial Management) 5
Elements of a Control System
A Detector or
a device that measures what is actually happening in the
Sensor
process being controlled
a device that determines the significance of what is actually
An Assessor happening by comparing it with some standard or
expectation of what should happen.
An Effector a device (often called “feedback”) that alters behavior if the
assessor indicates the need to do so.
A Communication
devices that transmit information between the detector and
network 6
the assessor and between the assessor and the effector
Elements of the Control Process
Control 2.Assessor. Comparison
device with standard
1. Detector. Information 3. Effector. Behavior
about what is happening alteration, if needed
Entity
being
controlled
7
EXAPLES
2. Body Temperature:
1. Thermostat:
1) Detectors: 3. Automobile Driver:
1) The Detector: A The sensory 1) Sensors: eyes
Thermometer nerves
2) Assessor: brain
2) The Assessor: 2) Assessor: The
Thermostat hypothalamus Center in 3) Effector: foot
3) The Effector: the 4) The overall
Heating & Cooling brain communications system
element 3) Effectors:The of nerves.
4) A muscles and organs
Communications network 4) The overall
communications system of
nerves. 8
MANAGEMENT
“Management is the art of getting things done
through and with the people in formally organized
groups.”
- Harold Koontz
“The management control process is the process by
which managers at all levels ensure that the people
they supervise implement their intended
strategies.”
9
Contrast with Simpler Control
The standard is not preset
Management control is not automatic
Management control requires coordination among individuals
The connection from perceiving the need for action to determining the
action required to obtain the desired result may not be clear
Much management control is self-control 10
SYSTEMS
“A system is a prescribed and usually
repetitious way of carrying out an
activity or a set of activities.”
“An organized or complex whole; an
assemblage or combination of things or
parts forming a complex or unitary
whole.”
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Management Control
Management control is a
process by which
managers influence other
members of the
organization to implement
the organization’s
strategies.
12
Boundaries of Management Control
Strategy Management
Task Control
Formulation Control
13
General Relation between
management & control
Strategy Formation
(Goals, Strategies & Policies)
Management Control
(Implementation of Strategies)
Task Control
(Efficient & Effective execution of
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each task)
Management Control Activities
Planning what the organization should do
Co-ordinating 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 behaviour 15
Characteristic’s & Structural Foundation
Characteristics:
1. Goal Congruence
2. Tools for Implementing Strategy
3. Financial and Non-financial
Emphasis
4. Aid in Developing New
Strategies
16
Framework for Strategy Implementation
Implementation Mechanisms
Management
Controls
Strateg Organizational Human
y Structure Resource Performance
Management
Culture
17
Strategy Formulation
Strategy formulation is the process of deciding on the
goals of the organization and the strategies for attaining
these goals.”
Goals: the broad overall aims of an organization.
Objectives: specific steps to accomplish the goals
within a given time frame.
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Task Control
“Task control is the process of
ensuring that specified tasks
are carried out effectively and
efficiently.”
19
Difference Between Strategic Planning, Management Control, and
Operational Control
Point of Difference Strategic Planning Management Control Operational Control
Level Top management All level-top to front Supervisory
line supervision
Scope Total Overall, consisting of Operating unit
related subsystem
Time Frame Long range Short to intermediate Short periods – day
(1 to 5 years) to day, weekly,
monthly
Environment External, toward Internal, adjusting to Internal only
developing internal external factors 20
Difference Between Strategic Planning, Management Control, and
Operational Control
Point of Difference Strategic Planning Management Control Operational Control
Goals and Objectives Basic Objectives Tangible goals, with in Short-term, tangible to
framework of over all operating unit
objectives
Structuring Relatively unstructured Fairly highly structured Quite rigid pre-
but flexible established
Activity patterns Irregular Rhythmic, regular Highly repetitive
Character of activity Creative Administrative, Following directions
persuasive little initiative
Focal point Entire organization All operations, line Operating unit 21
management
CHAPTER 2
Understanding Strategies
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Understanding Strategies
Goals The Corporate Business
Concept Level Unit
of Strategy Strategies
Strategy
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Goals
Goals and Objectives
Goals: The broad overall aims
of an organization.
Objectives: Specific steps to
accomplish the goals within a given
time frame.
1. Time Period
2. Specificity
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Some Major Goals
Profitability Maximizing Risk Multiple
Shareholde Stakeholde
r Value r Approach
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Profitability
Return on Investment
=
26
The First Ratio: The Profit Margin Percentage
(10,000 – 9,500)/10,000 = 5%
The Second Ratio: The Investment Turnover
10,000/4,000 = 2.5 times
The Return of Investment = 5% * 2.5 times
= 12.5%
Investment = Equity Capital + Debt Capital
Profitability refers to profits in the long run, rather than in the
current quarter or year.
27
The Concept of Strategy
“Strategy describes the general
direction in which an
organization plans to move to
attain its goals.”
“A company’s game plan for
achieving its goals.”
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Strategy Formulation
Environmental Internal
Analysis Analysis
• Competitor • Technology know-how
• Customer • Manufacturing know-
• Supplier how
• Regulatory • Marketing know-how
• Social/Political • Distribution know-how
• Logistics know-how
Opportunities
And threats Strengths and
Weaknesses
• Identify • Identify core
opportunities competencies
Fix internal competencies
With external
opportunities
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Firm’s strategies
Strategy
Corporate Level Business Unit
Strategy Strategies
30
Two Levels of Strategy
Strategy Key Strategic Issues Generic Strategic Primary
Level Options Organizational
Levels Involved
Corporate Are we in the right mix of Single industry Corporate office Where to
Level industries? Related
What industries or sub diversification compete
industries should we be in? Unrelated
diversification
Business Unit What should be the mission Build Corporate office How to
Level of the business unit? Hold and business unit
Harvest general manager Compete
Divest Business unit
How should the business unit general manager
compete to realize its Low cost 31
mission? Differentiation
Corporate-Level Strategy
1. The definition of businesses in which the firm will participate
2. The deployment of resources among those businesses
32
Product-Oriented versus Market-
Oriented
Definitions of Business
Product
Company Market Definition
Definition
Missouri-Pacific Railroad We run a railroad We are a people-and-
goods mover
Xerox We make copying We help improve office
equipment productivity
Standard Oil We sell gasoline We supply energy
Columbia Pictures We make movies We market entertainment
Encyclopedia Britannica We sell encyclopedias We distribute information
Carrier We make air conditioners We provide climate
and furnaces control in the home
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Categories of companies in terms of
corporate-level strategy
1. Single Industry Firms
2. Unrelated Diversified Firms
3. Related Diversified Firms
34
Corporate-Level Strategies
Refers to the nature of linkages across
High Single
Industry
(McDonald’s)
the multiple business units
Degre
e Related
Of Diversification
Relate (Procter &
d- Gamble)
ness
Unrelated
Diversification(T
ATA , Reliance)
Low Extent of High
Diversification
Relates to the number of industries in which the company operates. 35
Operating Synergies
Operating Synergies consist of two types of linkages across
business units:
1. Ability to share common resources.
2. Ability to share common core competencies.
36
Core Competence and Corporate
Diversification
Core Competence:
A core competency has three characteristics:
1. It is a source of competitive advantage in that it makes a
significant contribution to perceived customer benefits.
2. It has applications in a wide variety of markets.
3. It is difficult for competitors to imitate.
37
Richard P. Rumself
Strategy, Structure and
Economic Performance
(Boston: Division of
Research, Harvard
Business School, 1974)
Research has shown that, on average,
Related diversified firms perform the best
Single industry firms perform next best
Unrelated diversified firms do not perform well
over the long term
38
Corporate-Level Strategies:
Summary of Three Generic
Strategies
Type of corporate strategy Single industry firm Related diversified firm Unrelated diversified firm
Pictorial representation of
strategy
Identifying features Competes in only one Sharing of core Totally autonomous
industry competencies across businesses in very different
businesses markets
Examples McDonald’s Corporation Procter & Gamble TATA
Ford Motor Johnson & Johnson Reliance
Du Pont ITC
Gillette Adani Group
AT&T
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Business Unit Strategy
1. Mission of Business Unit
(“What are its overall objectives?”)
2. Competitive Advantage
(“How should the business unit compete in its industry to
accomplish its mission?”)
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Strategic Business Unit (SBU)
An SBU has three characteristics:
1. It is a single business or a collection of related business, that
can be planned separately.
2. It has its own set of competitors.
3. It has a manager responsible for strategic planning and profit
performance, who controls most of the factors affecting profit.
41
Business Unit Mission
Planning Models
1. The BCG Model (Bosten Consulting Group)
2. The General Electric Planning Model
(The GE/McKinsey Matrix)
42
The BCG Model
(Bosten Consulting Group)
Cash Source
High Low
High High
“Question
“Star”
Mark”
Hold Build
Market Cash
Growth Use
Rate
“Cash Cow” “Dog”
Harvest Divest
Low Low
High Low
Relative Market Share
43
Missions of Business Unit
1. Build:
This mission implies an objective of increased market share, even at the expense of short term
earnings and cash flow.
2. Hold:
This mission has the objective of the protection of the business unit’s market share and
competitive position.
3. Harvest:
This mission has the objective of maximizing short-term earnings and cash flow, even at the
expense of market share.
4. Divest:
This mission indicates a decision to withdraw from the business either through a process of slow
liquidation or outright sale.
44
The General Electric Planning Model
The Portfolio Matrix
High Winners
Winners Question Mark
Industry
Average Average
Attractive- Winners Losers
Businesses
ness
Profit
Losers Losers
Low Producers
Strong Average Weak
Business Strength
45
The General Electric Planning Model
Recommended Business Strategies
Invest/Grow Invest/Grow Dominate/
High Strongly Selectively Delay/
(Build) (Build) Divest
Invest/Grow Earn/
Harvest/
Industry Average Selectively Protect
Divest
Attractive- (Build) (Hold)
ness Earn/
Harvest/ Harvest/
Low Protect
Divest Divest
(Hold)
Strong Average Weak
Business Strength
46
BCG Model and GE Model
1. BCG uses industry growth rate as a proxy for industry
attractiveness. In the General Electric Grid, industry
attractiveness is based on weighted judgment about such factors
as market size, market growth, entry barriers, technological
obsolescence, and the like.
2. BCG uses relative market share as a proxy for the business unit’s
current competitive position. The General Electric Grid on the
other hand, uses multiple factors such as market share,
distribution strengths, and engineering strengths to assess the
competitive position of the business unit.
47
Michael Porter
• Two Analytical Approaches in developing a
superior and sustainable competitive advantage:
1. Industry Analysis
2. Value Chain Analysis
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Porter’s Five Forces Model
1. The intensity of rivalry among existing competitors.
2. The bargaining power of customers.
3. The bargaining power of suppliers.
4. Threat from substitutes.
5. The threat of new entry.
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50
Competitive Advantage
“Both intuitively and theoretically, competitive
advantage in the market place ultimately derives from
providing better customer value for an equivalent cost
or equivalent customer value for a lower cost.”
51
Value Chain Analysis
Value chain analysis seeks to determine where
in the company’s operations-from design to
distribution-customer value can be enhanced or
cost lowered.
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Three Observations
1. The more powerful the five forces are, the less profitable an
industry is likely to be.
2. Depending on the relative strength of the five forces, the key
strategic issues facing the business unit will differ from one
industry to another.
3. Understanding the nature of each force helps the firm to
formulate effective strategies.
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CHAPTER 3
Behavior in
Organizations
55
Behavior in
Organization
1. Goals of an Organization
2. Goal Congruence
3. Formal Control System
4. Organizational
Structures
5. Controller and his
functions
6. Business Unit Controller
56
Goal Congruence
“In a goal congruent process, the actions people are led to take
in accordance with their perceived self-interest are also in the
best interest of the organization.”
1. What actions does it motivate people to take in their own self-
interest?
2. Are these actions in the best interest of the organization?
57
Factors Affecting goal congruence
Internal
Factors
• Culture
• Management
Informal Style
factors • The Informal
Organization
Affecting • Perception and
goal Communication
congruence
External
Factors
58
Human Behavior in Organization
Formal System Informal System
59
Informal Factors That Influence
Goal Congruence
Externa
l Internal Factors
Factors
Management The Informal Perception and
Culture
Style Organization Communication
60
Informal Factors That Influence
Goal Congruence
1. External Factors:
“External factors are norms of desirable behavior that exist in
the society of which the organization is a part.”
1. Attitude, norms
2. Work ethic
3. Employees’ loyalty to the organization
4. Employees’ diligence, Spirit
5. Employees’ pride in doing a good job
61
Silicon Valley
Silicon Valley – a stretch of northern California about 30
miles long and 10 miles wide – is one of the major sources
of new business creation and wealth in the American
economy. Silicon Valley attracts people with certain
common characteristics: an entrepreneurial spirit, a zest for
hard work, high ambition, and a preference for informal
work settings. Over the last 50 years, Silicon Valley has
created companies such as Hewlett-Packard, Microsoft,
Apple Computer, Sun Microsystems, Oracle, Cisco Systems,
and Intel. Even after the most recent boom-and-bust cycle,
the old-line companies and the “dot com” survivors have
kept up Silicon Valley’s reputation as the center of
technology innovation. 62
Internal Factors
1. Culture
2. Management Style
3. The Informal Organization
4. Perception and Communication
63
Internal Factors
The common beliefs
Shared values
1. Culture
Norms of behavior
Assumptions
64
1. The management
The Formal
control system
Control
2. Rules
System
65
Rules
“We use the word rules as shorthand for all
types of formal instructions and controls,
including standing instructions, job
descriptions, standard operating
procedures, manuals, and ethical
guidelines.”
66
Some Specific Types of Rules
1. Physical Controls
2. Manuals
3. System Safeguards
4. Task Control Systems
67
Formal Control Process
Goals
And Other
Rules
Strategie Information
s
Reward (feedback)
Yes
Report
Responsibility Was
Strategic Actual
Budgeting Center Performance
Planning Versus
Performance Satisfactory?
Plan
No
Corrective
Revise Revise Action Measurement
Feedback
Communication
68
