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-tomany 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, tollfree 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
individuals 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 controlwas
information to collect and how to use itare 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 forprofit 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.