Management

Control System
Module-I

Management Control System by Robert N Anthony and Vijay Govindarajan, Mc Graw Hill Eduation, Twelfth
Text Books
Edition
facilitator: Dr. Hiteksha Upadhyay 1
 Weightage
Module Contents
(%)
Fundamentals of Management Control
 Meaning, Nature and purpose of control systems, Four elements of control and Boundaries, Difference Between
1 Strategic Planning, Management Control, and Operational Control 20%
 Understanding strategies, Corporate level and Business Unit strategies
 Behavior in organization and goal Congruence
Management Control Functional Perspective
 Responsibility Center, Revenue center, Expense center, R&D Center and Marketing Center
2 25%
 Profit Center
 Transfer pricing objectives and Methods of transfer pricing
Selected Techniques of Management Control
 Measuring and controlling assets employed, EVA and ROI
3  Strategic Planning 25%
 Budget preparation, Nature of Budget and Quantitative techniques
 Analyzing financial Performance, Measuring of variance and Limitation
Measurement and Evaluation of process
4  Performance Measurement, Balance scorecard , Difficulty in implementing Performance measurement system 15%
 Management Compensation, Types of Incentives
Management Control in Specialized organizations
 Controls for Different strategies,
5  Service organization, Health care, Financial and Non-Profit Organization 15%
 Multinational Organization, Exchange rate, cultural difference and transfer pricing
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 Management Control of Project/ Event
 Module 1 Meaning of MCS ; Nature and purpose of control
systems ; Four elements of control and Boundaries

Fundamentals of Difference Between Strategic Planning, Management

Control, and Operational Control
Management
Control
Understanding strategies
Corporate level and Business Unit strategies

Behavior in organization and goal Congruence

facilitator: Dr. Hiteksha Upadhyay 3

Meaning of MCS

Management Control System Comprises of elements

like, Strategic planning; budgeting; resource
allocation; performance measurement; evaluation
and reward; responsibility center allocation and
transfer pricing.
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Management Control
system is a must in
any organization that
practices
Decentralization

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 When environment changes When environment
are predictable, Develop changes are not
strategy first and then design Predictable, Develop
MCS MCS first

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However in a rapidly changing environment, it is difficult for a form to formulate strategy first
BASIC CONCEPTS

Management
Control
System

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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)

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 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
the assessor and between the assessor and the effector
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 Elements of a Control System
Control [Link]. Comparison
device with standard

1. Detector. Information 3. Effector. Behavior

about what is happening alteration, if needed

Entity
being
controlled

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 EXAPLES

1. Thermostat: 2. Body 3. Automobile

Temperature: Driver
1) The Detector: A
1) Detectors: The 1) Sensors:
Thermometer
sensory nerves eyes
2) The Assessor: 2) Assessor: The
Thermostat 2) Assessor:
hypothalamus brain
3) The Effector: Center in the brain
Heating & Cooling 3) Effector:
3) Effectors: The foot
element muscles and organs 4) The overall
4) A 4) The overall
Communications communication
communications s system of
network system of nerves.
facilitator: Dr. Hiteksha Upadhyay nerves. 11
 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.”

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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

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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.

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Boundaries of Management Control

Strategy Management
Task Control
Formulation Control

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General Relation between management & control

Strategy Formation
(Goals, Strategies & Policies)

Management Control
(Implementation of Strategies)

Task Control
(Efficient & Effective execution of each task)
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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

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Several aspect of Management Control system

Goal Congruence

Tools for Implementing Strategy

Aid in Developing New Strategies

Financial and Non-financial

Emphasis

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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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Strategy Formulation

It is in response to
• Perceived threats and opportunities
• CEO’s perceptions
e.g. Louis CEO of IBM in 1993
• Mainframe computer mfg. to networking systems

Edward Zander, CEO of Motorola in 2003

• Technology to customer orientation
Framework for Strategy Implementation

Implementation Mechanisms
Management
Controls

Organizational Human
Strategy Structure Resource Performance
Management

Culture

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Task Control

“Task control is the process

of ensuring that specified
tasks are carried out
effectively and efficiently.”

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Difference Between Strategic Planning, Management
Control, and Operational Control

Point of Difference Strategic Planning Management Operational Control

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 to

(1 to 5 years) day, weekly, monthly

Environment External, toward Internal, adjusting to Internal only

developing internal external factors
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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

management
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Class Assignment

Four Elements of Management Control

Boundaries of Management System

Differences between Strategy Formulation and Management Control

Differences between Management control and Task Control

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Case Study
Wal-Mart’s
Strategy

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Understanding Strategies

CHAPTER 2

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Understanding Strategies

The Corporate Business

Goals Concept of Level Unit
Strategy Strategy Strategies

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Goals

Objectives: Specific
Goals: The broad overall steps to accomplish the
aims of an organization. goals within a given time
frame.

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Some Major Goals

Profitability Maximizing Risk Multiple

Shareholder Stakeholder
Value Approach

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Profitability

Profit Margin = (Revenue – Expense) / Revenue

Investment Turnover = Revenues / Investment

Profitability refers to profits in

the long run, rather than in
Return on
the current quarter or year.
Investment
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• 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

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Maximizing shareholders Value

• Market price of stock or satisfactory profit

• Henry Ford’s operating philosophy

Risk

• Management willingness to take risk

• Asian Financial Crisis during 1996-1998

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Multiple Stakeholder Approach

Capital
Market

Product
Market

Factor
Market
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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

R. Andrews advanced basic concept of Strategy.

According to Andrew, “strategy formulation is a process that senior executive

used to evaluate companies strength and weakness in light of opportunities
and threats present in environment and than to decide on strategies that fit
the companies core competencies with environmental opportunities”

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Strategy Formulation
Environmental Internal
Analysis Analysis
• Competitor • Technology know-how
• Customer • Manufacturing know-how
• Supplier • Marketing know-how
• Regulatory • Distribution know-how
• Social/Political • Logistics know-how

Opportunities
And threats Strengths and
Weaknesses
• Identify opportunities • Identify core competencies

Fix internal competencies

With external opportunities

Firm’[Link]
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Type of Strategy

Corporate Level Business Unit

Strategy Strategies

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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 industries diversification compete
should we be in? Unrelated
diversification

Business Unit What should be the mission of Build Corporate office How to
Level 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 mission? Low cost
Differentiation
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Corporate-Level Strategy

The definition of businesses in

which the firm will participate

The deployment of resources

among those businesses

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Product-Oriented versus Market-Oriented
Definitions of Business
Company Product Definition Market 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 Single Industry Firms
strategy

Unrelated Diversified Firms

Related Diversified Firms

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Corporate-Level Strategy
Refers to the nature of linkages across

High
Single Industry
(Jubilant food)
the multiple business units

Degree Related
Of Diversification
Related (Procter & Gamble)
-ness

Unrelated
Diversification(TATA
, Reliance)

Low Extent of Diversification High

Relates to the number of industries in which the company operates.

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Operating Synergies

Operating
Synergies consist
of two types of
linkages across
business units

Ability to Ability to
share share
common common core
resources competencies

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Core Competence and Corporate Diversification

Core Competence: A core competency has three characteristics:

It is a source of competitive advantage in that it makes a significant

contribution to perceived customer benefits.

It has applications in a wide variety of markets.

It is difficult for competitors to imitate.

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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 facilitator: Dr. Hiteksha Upadhyay 47
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 industry Sharing of core competencies Totally autonomous businesses in
across businesses very different markets

Examples McDonald’s Corporation Procter & Gamble TATA

Ford Motor Johnson & Johnson Reliance
Page Industry HUL ITC
Adani Group
Bajaj

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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?”)
49
facilitator: Dr. Hiteksha Upadhyay
Strategic Business Unit (SBU)
An SBU has three characteristics:

It is a single business or a collection of related business, that

can be planned separately.

It has its own set of competitors.

It has a manager responsible for strategic planning and profit

performance, who controls most of the factors affecting profit.
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 Business Unit Mission
• Planning Models

The General
The BCG Electric Planning
Model Model (The
(Bosten GE/McKinsey
Consulting Matrix)
Group)

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The BCG Model
(Bosten Consulting Group)
Cash Source
High Low
High High
“Star” “Question Mark”

Hold Build
Market Cash
Growth Use
Rate
“Cash Cow” “Dog”

Harvest Divest
Low Low
High Low
Relative Market Share

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Missions of Business Unit
Build • This mission implies an objective of increased market share,
even at the expense of short term earnings and cash flow.

Hold • This mission has the objective of the protection of the business
unit’s market share and competitive position.

Harvest • This mission has the objective of maximizing short-term earnings

and cash flow, even at the expense of market share.

Divest • This mission indicates a decision to withdraw from the business

either through a process of slow liquidation or outright sale.

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DABUR

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HUL

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The General Electric Planning Model
The Portfolio Matrix

High
Winners Winners Question Mark
Industry
Average Average
Attractive- Winners Losers
Businesses
ness
Profit Producers Losers Losers
Low
Strong Average Weak
Business Strength

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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

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facilitator: Dr. Hiteksha Upadhyay 58
BCG Model and GE Model
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.

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.
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Michael Porter
• Two Analytical Approaches in developing a superior and
sustainable competitive advantage:

Industry
Analysis

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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facilitator: Dr. Hiteksha Upadhyay 62
 Three Observations

Depending on the relative Understanding the nature of

The more powerful the five strength of the five forces, each force helps the firm to
forces are, the less profitable the key strategic issues facing formulate effective
an industry is likely to be. the business unit will differ strategies.
from one industry to another.

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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.”

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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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Class Discussion

Types of Goal

Concept of Strategy and strategy formulation

Corporate level strategy

Business Unit Strategy

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 CHAPTER 3

Behavior in Organizations

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Behavior in
Organization

Goals of an
Organization

Goal Congruence

Formal Control
System
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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?

facilitator: Dr. Hiteksha Upadhyay 70

Factors Affecting goal congruence

Informal factors Affecting goal

congruence
Internal Factors
• Culture
• Management Style
• The Informal Organization
• Perception and Communication

External Factors
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 Human Behavior in Organization

Formal System
Informal System

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Informal
Informal Factors That Influence
Goal Congruence

External
Internal Factors
Factors

Attitude, norms,
Work ethic,
Employees’ loyalty to
the organization, The Informal Perception and
Culture Management Style
Employees’ diligence, Organization Communication
Spirit Employees’
pride in doing a good
job

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Informal External

External Factors
• “External factors are norms of desirable behavior
that exist in the society of which the organization
is a part.”

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Informal External

Employees’ loyalty
to the organization

Work ethic Employees’

•2 diligence, Spirit
External
Factors

Attitude, Employees’ pride

norms in doing a good job

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Informal External

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.

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Informal Internal

Internal Factors
1. Culture

2. Management Style

3. The Informal Organization

4. Perception and Communication

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Informal Internal

Internal Factors
1. Culture
The common beliefs

Shared values

Norms of behavior

Assumptions
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It was Peter Drucker who famously said that ‘Culture
eats strategy for breakfast’. A work culture can
absolutely be the deal-breaker or decisive factor
when it comes to defining a company’s success

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Informal Internal
2. Management Style
“An institution is the lengthened showed of a man”
Charismatic personality or less enthusiastic

3. The Informal Organization

Formal relationship and informal relations

4. Perception and Communication

Message from different source may conflict with one
another
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Formal

The Formal Control

System

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Formal

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.”

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Formal

Physical Controls
Some Specific
Types of Manuals
Rules
System Safeguards

Task Control Systems

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Formal Control Process

Goals
Other
And Rules
Information
Strategies

Reward (feedback)

Yes

Responsibility Report Was

Strategic
Budgeting Center Actual Versus Performance
Planning
Performance Plan Satisfactory?

No
Corrective
Revise Revise Action Measurement
Feedback
Communication

facilitator: Dr. Hiteksha Upadhyay 84

Class Discussion
Attitude, norms, Work ethic,
Employees’ loyalty to the
External Factors organization, Employees’
diligence, Spirit Employees’
pride in doing a good job

Culture
Informal

Management
Style
Internal Factors
The Informal
Organization
Formal Rules
Perception and
Communication

facilitator: Dr. Hiteksha Upadhyay 85