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Characteristics of Management Control System
# Diagnostic : Formal systems to monitor results and correct deviations from
present performance standards.
# Interactive : Formal systems to personally involve in the decision activities
of subordinates.
# Beliefs : Formal systems to define, communicate and reinforce the basic
values, purpose and direction of the organisation.
# Boundary : Formal systems to establish explicit rules and limits which must
be respected. (code of business conduct)
Factors influencing design of MCS
A. Managerial style
B. Corporate culture
C. Organisation culture
D. Shareholders ‘s control
E. Communication structure
Factors influencing design of management controls:
A. Managerial styles
# External Control :
Premise : Sub-ordinates can be motivated through rewards
An authoritative style
Organisational goals set by top management
# Internal Control :
Premise : Sub-ordinates will be motivated if they are involved in the
decision making process. A Participative style.
Employees experience a sense of achievement,
recognition and self- esteem.
# Mixed Control :
A combination of both.
B. Corporate culture :
$ Respect for the individual
$ Customer service
$ Passion for excellence
$ Decentralised business
$ Total Quality Management
$ Empowerment of people
Management Control system should fit in well with the existing culture of the
organization.
C. Organzation Culture
1. Centralization / Decentralisation :
# Decide on the extent of decentralisation
# Decision making process
# Wider accountability
# Centralisation helps in knitting the sub-units of de-centralisation.
2. Organisational Slack :
Occurs when organisational goals / objectives are achieved without working
at maximum efficiency.
When environmental pressure is not there, slackness sets in.
Slack acts as a cushion against sudden changes in business
environment.
D. Stakeholder Control :
$ Investors
$ Customers
$ Employees
$ Public
Identify the crucial stakeholder variables that influence the control process
E. Communication structure :
Could be Formal or Informal.
Planning stages : Strategic
Business
Long-range
Operational
Above planning process must be linked through proper communication
Across various levels of the organisational hierarchy.
F. Result Controls :
# Controls employee’s behaviour
# Expectations are clearly communicated to the employees.
Eg; Quality level / Productivity / Sales targets
# Performance is measured.
MCS system in a big conglomerate :
>> Shareholder’s interest and expectations
>> Customer expectations
>> Regulatory requirements
>> Safety / Health / Environment
>> Accommodation of appropriate technology as part of controls
>> Multicultural dimensions for multi locations
>> Compatibility of controls in parent unit and subsidiary
>> Active ethics program
>> People dimension
>> Corporate Social Responsibility
Twelve steps for establishing Management Controls :
1. Controls must be constructive and not punitive.
2. Measurable objectives
3. Limited number of controls.
4. Balance among various aspects to be controlled
5. Assign specific responsibility
6. Compare actual performance to desired results
7. Capture early warning predictors eg; Absenteeism / Low marks
8. Sample the variable to be controlled
9. Acceptable range of variation for aspects to be controlled
10.Exception reports to go immediately to concerned person
11.Plans for corrective action and verification of effectiveness
12.Judgment in establishing controls
Control tightness
Tighter controls :
>> Time consuming
>> Costly to implement
>> Information systems need to be robust
>> Proper measurement techniques required
>> But not suitable for unpredictable environment
Best Control :
>> Combination of tight and loose
>> Autonomy / Flexibility / Innovation / Accountability
Elements Internal External Mixed
Infrastructure
Personal participation Rigid / Formal Flexible / Analytical
Rewards
Plan vs Performance High / Specific Parameters identified
Unhealthy Comptn
Coordination &
Integration
Personal Communication Formal meetings / Mix of both
Team based commn. Circulars
Control Process
Informal reports Formal process Less formal reports.
Verbal Integrated info systems
Frequent reports
KEY SUCCESS FACTORS / Key variables
$ Measuring the whole company
$ Measuring whole Department / Division
$ Measuring functional departments
Warrants close monitoring by the management on a continuous
basis.
Some measures of key variables :
1. Short term profitability
2. Market share
3. Productivity
4. Product leadership
5. Personnel development
6. Employee morale
7. Public accountability
Some examples
Hospitals
>> Beds occupied
Hotels
>> Occupancy rate
Electricity Board
>> KWH sold
Restaurant
>> Revenue / Labour cost
Retail store
>> Gross margin
Marketing Key Variables
1. Order book position
Helps in planning procurement and production planning for distribution
2. Market Share :
Performance indicator
Competitive strength
3. Institutional sale :
Orders received from institutional buyers
Asset management variables :
1. Asset turnover :
Relationship between total assets in the organisation and sales volume.
Calls for constant managerial attention.
2. Working capital turnover :
Efficiency in managing working capital is indicated.
3. Inventory turnover :
Relationship between inventory in the organisation and sales volume.
Production Variables
1. Capital utilisation :
Affected by Marketing variables / Procurement variables
Eg; Dairy sector >> Milk sold / Milk procured
Hotels >> Occupancy rate
2. Losses :
Rejection & Wastage during manufacturing
3. Quality :
No. of customer complaints
Assembly line rejections
Warranty returns
4. Maintenance :
Machine availability
Various types of maintenance
5. Costs :
Cost control measures
6. Delivery :
Timely delivery
Schedule adherence
Key Success variables – Characteristics :
# Directly influences the attainment of management goals
# Require in-depth evaluation
# Must be measurable
# They undergo changes suddenly / unpredictably
# Requires immediate management action
# High importance to management
Identifying Key Variables
@ External Variables :
Mostly outside of a firm’s control
Eg; Macroeconomic variables / Behaviour of competitors / Deliveries
of some supplies / Actions of government
@ Internal Variables :
At least partially under control :
Eg; Cost / Product Quality / Demand variables / HR policies
Discussion Point :
What are the key success factors for Restaurants ?
>>> Customer focus
Focus on changing needs and preferences of customers
>>> Excellence in human relations
Hiring and retaining competent stores managers
>>> Adaptability
Ability to reposition itself
>>> Value
Deliver superior value to the customer in comparison to price
Discussion point :
The success of an organisation depends on its key variable.
What are the key variables for a tea industry ?
Key variables of a tea industry :
>> Availability of land to cultivate the raw material for tea
preparation.
>> Cost of transport of raw material to the factory
>> Cost of distribution
>> Cost of production
>> Control over the process time required to manufacture tea
>> Ability to offer the different flavours as required by the
customers
>> Support price offered by the government, if any.
>> Competition from the rival beverage industries
Discussion point :
What could be the key variables for a service oriented company ?
>> Customer needs
Focusing on changing needs and preferences of customers
>> Adaptability :
Repositioning organisational goals and objectives to suit customer needs.
Willingness to reposition.
>> Quality :
Delivering high quality of service to customers
>> Customer service :
Training in providing professional customer service.
Key success factors for the Auto industry :
>> Global sourcing
>> Strong transport network
>> Lean production systems
>> Quality function deployment
>> Supply chain management
>> Access to technology
>> After sales service network
>> Ability to meet strict environmental standards