MCIS ASSIGNMENT

DESIGNING OF MANAGEMENT
CONTROL SYSTEMS

Submitted By:
Hardik Varia
Saumyendra Pratap Singh
Shubham Agarwal
Supriti Mukherjee
Vikash Bhanthia
Vivek Vatsalya Ayyagari
Waseem Mansuri
Introduction to management control systems
To begin with management control Information system introduction some e.gs
can be studied

1) Controlling a car with brakes and accelerator

2) Controlling temperature of human body or driving car

Management control system can be defined as a set of interrelated

communication structures that facilitates the processing of information to assist
the managers in coordinating the parts to achieve goals on continuous basis
bringing out the unity/harmony out of diverse activities.

Management control is not a preset standard. It is an adaptive technique which

needs planning and control together. It cannot be compared to automatic car
because it involves human beings. It requires coordination among individuals. In
management controls actions are not specified. It depends on the situation.

Management control systems are of two types:

 Systematic control
 Unsystematic control

Purpose Of management control Information systems

1) Planning activities- It requires control of actual accomplishments with set

plans
2) Coordinating activities-It means harmony among functional units
3) Communicating-It promotes communication of information to various level
of hierarchy
4) Evaluating- It suggests evaluation of information and decide actions
accordingly
5) Influencing- MCS helps to influence human behavior
Organization context of Management Control Systems

 Organization is divided into subunits having independent autonomy and

objectives
 MCS lowers cost to coordinate them
 MCS brings out efficiency and effectiveness
 It facilitates adaptation and innovation
 It helps to maintain inducement-contribution balance among stakeholders
 To maintain MCS there is need to understand human behavior because
human beings are rational, creative, they have strong/weak morals, they
have desire to be associated or to be in community.

Steps in designing Management Control Systems

A well designed management control supports and coordinates the decision-
making process and motivates individuals throughout the organization to act in
concert. The first and most basic component in a management control system is
the organizations' goals. Because the focus of the management control system is
on motivating decisions that help achieve the organizations goals. A basic adage
of management control system is that "you get what you measure". It means the
measures of performance will influence managers' decisions; therefore measure
of performance should be consistent with the organizations goals. To design the
management control system that meets the organizations' goals or organizations
needs, the designing has to be done according to the following stages.

Stage 1: Identifying Responsibility Centers

Under this stage the whole organization is divided into responsibility centers and
for every responsibility center their goals are decided and responsibilities are also
fixed.

Stage 2: Developing Performance Measures

For every responsibility center the performance measures are fixed. Means if
some responsibility has been assigned then the method of their measurements
are developed at this stage. Unless we measure the performance, no objectivity
could be introduced in the system. To practically implement this performance
measures, Key Performance Indicators (KPI's) should be developed for every
responsibility center. KPI's are measurement of the performance in a very clear
cut and quantifiable terms.

Stage 3: Monitoring & Reporting

After having fixed the responsibility centers and having placed the KPI's in place
the job of MCS just begins. Because this system needs continuous reporting and
monitoring so that it is ensured that everyone follows the system to the fullest
and if there seems to be any need of improvements in the MCS itself that could
also be introduced.

Stage 4: Rendering of Rewards and making people take corrective actions

After having gone through the first three stages up to the reporting the next
obvious stage is to render rewards to those who perform better than expected.
Besides this the next step is taking corrective actions for those who performances
are found to be low and taking the decision of even firing to those who are either
far below expectations or are not having the scope of improvement at all.
Designing of control system requires an understanding of what the organization
wants from each employee individually. This involves identifying the role of each
individual right from the top-most level to the lowest level of the organization. Its
purpose must be to identify the desired actions which are important for the
organization and are key to its success. Thus the organization must find out what
knowledge and information it requires to control employees’ actions. Another
way to understand what has to be controlled is to identify Key Actions (KA). Key
actions differ from firm to firm and individual to individual. For lower level key
action can be easily traceable because they are routinized and mechanical. KA of
higher level employees may not be easily understood as they need professional
judgment. Most companies have standard sets of actions for employees who
prepare investment proposals, business plans, and give justification for
recruitment decisions. These are called Action Controls.

Role demands can also be identified through the Key Results (KR). Key results are
the areas which are important for the growth of an organization. Key results
changes according to the prevailing internal and external environment of an
organization.

The steps that follows the understanding the of the role demands involves
understanding the likely actions or results of the role demands. If the analysis
shows that what is desired is not different form what is likely, then it may be
concluded that the company has effective management control system. However
if there is a difference between the two, the reason needs to be investigated.
Thus depending on the severity of the situation, different controls needs to be
applied.

1. CHOICE OF CONTROL
As mentioned above, the choice of control depends on the severity of the
problem. It must be selected from different alternatives which yields maximum
results. Managers should first consider personal or cultural as these have very few
consequences and are less costly. However these controls work only when
employees have clear defined roles, their goals and expected performance levels.
There are generally two types of control and choices among these controls
depend upon the advantage and disadvantages of each control.

A. Action Controls

As discussed above, these are controls that work on the standard set of
procedures. The advantages of action controls are:

 Directly linked to the task being performed.

 Directs managerial attention towards the action being taken within the
firm.
 They are means for attaining efficiency, as they are a key element in the
bureaucratic form of organization.
 As their application in organization is uniform in nature, they aid in
organizational co-ordination.

These controls have their own disadvantages:

 They are useful only for highly routinized jobs.

 This type of control does not foster creativity and innovation among
employees, thus employees tend to quit their jobs.
 Because of the rigidity of the rules, companies have difficulty in adapting to
the changing external business environment.

B. RESULT CONTROLS

These are used to control behavior of employees. These are effective in

addressing motivational problems. In this, employees are informed about what is
expected from them and what they should do in order to produce the desired
results. It is established by first designing the dimensions on which the control
needs to be set. The dimensions can be either customer satisfaction or product
profitability. The next step involves measuring performances based on these
dimensions. Then setting performance target and providing adequate incentives
to employees is the final step. The advantages of Result Controls are:
  These controls are feasible and provide effective control.
 It provides On-the-Job training and also provides an opportunity to learn
from their mistakes.
 It results in motivating employees, and commitment towards the job as it
gives employees greater autonomy to perform their task.

The disadvantages of result controls are:

 Often the controllable results that the organization desires and the
performance of the individual cannot be measured effectively.
 Any problem that arises as a result in this control is attributed to the
employee’s mistake.

After the choice of controls the next decision is related to the tightness of
controls.

2. TIGHTNESS OF CONTROLS
Whether the control should be tight or loose depends on how the organization
perceives the following issues-the benefits of tight controls, the cost incurred due
to tight controls, and the side effects of the tight control. Some organizations
prefer tight control in those areas which are critical to their success. But the
implementation may be too costly to the organization and requires significant
amount of top management’s time and effort. Thus the cost benefit analysis
needs to be made. Secondly, it is also necessary to know whether there are any
harmful effects of the control being used, as tight control limit adaptability.
Employees also find it difficult to adjust to the changing environment.

Thus, the best control would be the combination of tight and loose controls- an
environment where autonomy, entrepreneurship and innovation are encouraged,
and, at the same time, employees share rigid values.
Managerial styles and the Design of control systems :
Every manager in an organization has its own style of managing employees. The
different styles of managing have an impact on the design of control systems. If
the control systems are not designed keeping in mind the managerial styles,
conflicts arises between managerial styles and organizational goals. The different
managerial styles that influence the control systems are classified as:

1) External control
2) Internal control
3) Mixed control.

External Control system:

External control works on the premise that subordinates can be motivated
through rewards and recognition. This style is authoritative and mechanical as the
organizational goals are set by the top management. The style also establishes
that to achieve the goals it is necessary to

• Set difficult goals so that the employees need to stretch themselves.

• Form strict regulations so that employees are not able to manipulate their
tasks.
• Embed adequate incentives in the performance assessment systems, so that
employees are motivated to perform.

Advantages of External control system are:

 Subordinates may be motivated to perform, as rewards are directly linked

to performance.
 Because of high control executed by the top management, superior will be
able to monitor subordinates work and there would be no manipulations.

Disadvantage of External control system are:

• Employees will not have any commitment towards the organization. They
will perform only to obtain rewards and benefits.
 • Employees will concentrate only on one aspect of their job and ignore the
rest. An employee may concentrate on increasing the sales volume, and
ignore customer service.
• Only the positive outcomes of a particular task would be informed to the
higher authorities. The negative information about it will be withheld,
fearing deduction in incentives.
• Employees will invest all of their potential in their area of work and ignore
other aspects that are important for the well-being of an organization as a
whole.

Internal control system:

This style works on the premise that subordinates will be motivated and
committed to the organization if they are involved in the decision making process.
The style assumes that employees will experience a sense of achievement,
recognition and self-esteem if they are involved in the decision making process.
The following are strategies that are important to implement internal control
style:

• The management style should be participatory in nature as the employees

are involved in the process of decision making. The emphasis here is not so
much on achieving the goals, but on how well they are set.
• Strategies are designed to solve problems jointly, and not to blame a
particular individual for its occurrence. When an employee's performance
moves in an undesired direction, the subordinates and managers meet to
identify the reasons for this and to develop appropriate solutions to the
problem. Thus this system works in a positive direction to analyze problems
at an early stage.
• Rewards in this system are not based on one or two specific measures of
performance, but on accountability of the overall performance. This
management style does not punish an employee for his past actions, but
intends to improve his performance in the future.
Advantages of Internal Control system are:

• It inspires high levels of commitment and motivation in the employees.

Since the employees also take part in the decision-making process they are
more focused on achieving the targets.
• This type of control encourages accountability towards the work and an
open work atmosphere. Employees are free to give their feedback on
managerial decisions.

Disadvantages of Internal Control system are:

• It exercises loose control within the organization. In this situation managers

will have less control over their subordinates.
• The information provided in this control is basically meant for identifying
the problems and suggesting corrective action. Hence it does not work as an
evaluation tool for rewarding employees.
• Employees who are not willing to participate in this kind of management
may not perform well.

Mixed Control System:

Two major types of control system were discussed above with their advantages
and disadvantages. Hence the manager has to carefully design the control system
taking into consideration the benefits of both which will in turn be the most
beneficial to an organization. Sometimes a manager has to balance both types of
control styles in the organization. In doing so, he has to consider four important
issues. They are:

Congruency between control and managerial style:

In order to choose the type of control to be adopted for the organization, a
manager has to first analyze his style of management. If his style is participatory
in nature, than internal control would be a better. If it is authoritative, then
adopting the internal control style would not work, as the subordinates may not
be used to putting forward their views during the decision-making. They may not
be in a position to set realistic goals. Hence, there is a need for congruency
between the managerial style and the control style.
Analyzing the climate, structure and reward system of the organization:
All these factors determine employee behavior. For example, if employees are
used to a participatory work environment, and the organization adopts a tight
control system, then there will be no congruence of goals.

Reliability of job performance measures:

In some organizations control systems clearly indicate the performance measures
that have to be implemented in the organization. But some control styles do not
indicate the performance of the employees clearly. For example, an external
control system cannot be implemented if employee's performance is not
measured precisely. This requires loose and more internally oriented
organizational control.

Individual differences among subordinates:

It is usually assumed that a manager has a clear understanding of the nature of all
the employees and their needs. Some employees may be willing to take part in
the decision-making process while others may not be interested in it. A manager
should consider all these factors while finalizing his choice of control system for
the organization. It may be difficult for a manager to consider all the factors
discussed above. Therefore, the manager should sequentially prioritize his
decisions.

• Firstly, a manager needs to question himself about the managerial style he

uses, the strategy of the organization, the accuracy and reliability of the
performance measures and the willingness of the subordinates to
participate in the decision-making process.
• The best way for a manager to choose the most appropriate control style is
to use the decision tree approach.
• Also, a manager should consider the trade-off for different styles that can be
applied to a particular situation. This trade-off has to be prepared by
weighing the desirable and undesirable effects that a control system can
have on some subordinates.

Just as an organizational strategy is important for the implementation of

organizational plans, a control system and the way it is implemented play an
important role in making an organization and its employees more productive.
Management control is the process by which an organization ensures that its sub-
units act in a coordinated and cooperative fashion so that more resources could
be obtained and optimally allocated in order to achieve the organization's goals.
Corporate culture consists of shared values, common perceptions and common
premises that the members of an organization use to achieve goals.
Organizational culture influences several basic premises of an organization and,
hence, has a major influence on the organizational goals. Thus, while designing
management control systems, the heads of an organization should take its culture
into consideration. Bureaucracies, markets and clans are three types of corporate
control mechanisms that exist in varying degrees in different organizations.
Bureaucracies follow strict formal rules, procedures and directives. It has clearly
defined roles for each member of the organization. The most important
component of a market-based approach is creating incentives to motivate
performance. In the case of the clan control mechanism, the organization
depends on values and beliefs to boost performance. Values and beliefs are
conveyed to the employees at all levels, initially through recruitment and
socialization process and subsequently through training and development.

Corporate Culture and Design of Control Systems

Corporate culture helps in the overall coordination of all the activities of an

organization. In an organization when the goals and values are shared by the
individual members, problems are minimized and a sense of group loyalty
prevails. For example, IBM has designed the following belief system for its
employees.

• Respect for the individual

• Customer service
• Dedication to work towards excellence
• Decentralized business
• Total quality management
• Empowerment of people

Employees should also be rewarded appropriately for understanding and

implementing the suggestions proposed by the management and achieving new
goals. Sometimes, as a result of resistance from the leader certain changes are
prevented from being implemented. In such cases, it is better to change the
leader. After the change has been implemented, it is important to extend it on to
other sub-systems of the control system.

Impact of corporate culture upon control system

Culture becomes an important asset of an organization when it is properly

imbibed in an organization. Conversely, it is a liability when it adapts poorly to the
environmental needs of the organization.

The Strength of Corporate culture depends upon:

 Its “thickness”, as how many important assumptions are shared by the

organization
 How widely assumptions are shared
 The “clarity” of the ordering : how clear it is that some assumptions are
more important than others

A control system must be so designed that it fits the existing culture of the
organization. This can be done by stressing on the values that the management
wants its employees to follow and rewarding them for achieving goals based on
these values. In order to foster desirable values in an organization, the
subsystems and components of its formal control systems should be so changed
as to inculcate these values.

Steps in imposing cultural change:

 Promote intrinsic motivation by getting people to see the inherent worth of

what they are being asked to do.
 Nullify inappropriate justifications for retaining the old beliefs by giving
people a way cut.
  Communicate the new pattern of belief sand values by appropriate timing
and by achieving consensus through identification with respected
associates and by challenging them with “try it, you will like it” approach.

Decentralization and Design of Control Systems

It is necessary for every organization to decentralize the decision-making

authority, so that sub-goals can be set. In this way, every decision-maker is made
responsible only for a small portion of the overall organizational objective.
Decentralization ensures that the decision-maker arrives at the right decision by
making use of sufficient information. However, decision-makers should find ways
to deal with the complexity in the organizational environment even when the
information available to them is limited. The purpose of a control system is to knit
the subunits of an organization together. Without a centralized control system, it
would be difficult to bring this about. There what is important for an organization
is not whether it should be decentralized or not, but to what extent it should be
decentralized.

Organizational Slack and Design of Control Systems

Cyert and March define organizational slack as “the disparity between the
resources available to the organization and the payments required to maintain
the coalition.” Organizational slack occurs when an organization under- exploits
its environment. This under exploitation results in higher salaries, wages and
perquisites than necessary to carry out the goals and objectives of the firm.
Dividends may be higher than necessary to maintain the confidence of
shareholders. But, in terms of management control systems, slack acts as a
cushion against changing the business environment and provides resources for
innovation and adaptation in various areas.
Stakeholder Controls and Design of Control Systems

The stakeholders of an organization include investors, customers, employees,

suppliers and the public. It is necessary for the organization to determine the
goals and objectives, performance measures of each of the above categories. A
functional organizational structure is designed keeping these goals in view and
then managerial controls are designed for departments of the organization. Based
on the relationships and the goals, organizations exercise control over
stakeholders. The analysis of stakeholder relationships begins with identifying all
the stakeholders. The next step is to distinguish the most important stakeholders.
This group consists of stakeholders who are highly influential, powerful insofar as
the organization's decision-making process is concerned.
The next step is the analysis of the inducements that can be offered to the
stakeholders. Inducements can include material rewards, power, distinction and
participation in the activities of the organization. Next, the contribution for a
particular stakeholder has to be analyzed. Contributions include capital, revenue,
performance and community support. Finally, the competition for a particular
stakeholder is analyzed. All these steps help the company in identifying crucial
stakeholder variables that help in monitoring and influencing the control process

Communication Structures and Control Process

The formal and informal communication within an organization include meetings,
day-to-day contacts among managers, body language etc. All these formal and
informal communication are crucial in understanding and improving the control
process. Let us discuss how communication structures support control process
with the help of information systems. The first element of the information system
is a formal or informal process, which scans the environment in which an
organizational subunit operates. After this the organization requires a planning
process. The planning stage is the most crucial of all, as it involves four sub-
processes namely strategic planning, business planning, long range planning and
operations planning. All these processes would remain incomplete without proper
communication across various levels of the organizational hierarchy. Feedback is
necessary after the completion of each stage (environmental scanning, planning).
The feedback is compiled in the form of a report. This is followed by decision-
making procedures and implementing them.

The below is an example of an effective stakeholder analysis:-

Establishing a Customer-Focused Total Quality Structure

In the current competitive scenario, the need of the hour for all organizations is to
look into customer satisfaction. In spite of being around companies that offer a
number of options to buyers, a company can stand at an advantageous position
by concentrating on customer-focused total quality culture. While competing with
others in the business, the organizations also have to identify the needs of the
customers and respond on them. Total quality management ensures that
organizations attain the required levels of efficiency targets as well as satisfy
customers. Thus, we can say that TQM is a system which looks into the following
areas:
a) Concentrate on customer satisfaction.
b) Continuous improvement of its services and products to meet the needs of
existing and potential customers.
The organizations have to accomplish these objectives by the empowerment and
active involvement of all the staff.

Today, control is an integral part of any business. The progress of a quality

improvement program gets adversely affected by lack of structured and formal
quality assurance and control training.
TQM follows a cybernetic paradigm in resolving day to day challenges:

a) The key principles of TQM are set up by the top management.

b) A companywide quality improvement program is then set by the top
management. Quality improvement teams are formed as per the mission
and targets of the organization. The main task of the team is to
communicate the various philosophies and charter subunit teams in a
hierarchical fashion.
c) The teams are then to come up with ideas about products and services that
are required to be launched.

Implementing Total Quality Management-

TQM programs are usually long processes which sometimes take as long as seven
years for completion. Its implementation lies on the top management. The top
management needs to hunt for expert trainers and organize TQM training
programs for different teams within the organization. Teams should be
encouraged for working towards the improvement of TQM objectives in the form
of rewards and recognition for good work. Middle management should ensure
that the environment needed for the implementation for TQM is easily
susceptible to changes and continuous improvement. The figure below shows the
importance of formal and informal systems necessary to support a TQM program.
The subsystems and components of a control system should be designed in way
to help a TQM program achieve customer satisfaction.

Impact of IT on Control Systems design

Information technology has benefitted conventional control systems in many
ways:

 Data can be managed more easily at a reasonable cost.

 The various departments of the organization can work towards achieving
the organization's goals and collaborate for fast decision-making e.g. ERP.
 Data can be collected for strategic and operating decisions.
 With the help of the new spreadsheet technology, the budgeting process of
a company can be speeded up, and the quality of the budgets can be
improved. New technology also ensures that managers update the budgets.
 Data architectures help companies adapt to regulatory or other
environmental changes. In production facilities, information technology is
increasingly being used for speeding up the control process.
 With the new technologies even a slight change in the production process
can be detected.
 Information technology can also help a company align its control and sales-
incentive measures.
 New inventory tracking systems can help companies update account
balances, monitor inventory and alert manufacturers and suppliers for
upcoming requirements.

The complexity, task uncertainty, and interdependence as contingent factors

related to MCS. When using complexity as a factor, the technology relates to the
complexity of the production function. There is also a focus on the complexities of
the value chain and their implications for MCS design. Overall, the more complex
a process is, the more likely the MCS will be organic and less traditional. Task
uncertainty is considered as a factor associated with functional departments. For
example, marketing departments have more task uncertainty than production
departments, and thus need a system that includes a broad scope of information.
Interdependence, can affect the study of MCS. In this case, interdependence
refers to interdependence between functional areas. As control systems operate
all the areas of an organization, any change in them requires changes to be made
in the overall structures and strategies of the organization. Therefore, managers
should take the right decisions in choosing what type of technology requirements
the organization needs. Technology should be used for making work easier rather
than indulging in complex and expensive systems such as costly data, storage
systems.
Providing Information for Operational and Strategic Decision Making

The decline in the cost of information processing led to the rise of ABC (activity
based costing) systems. These systems provide accurate cost data for the
operational and strategic decisions in an organization. The availability of
electronic equipment, called the optical scanning equipment, has improved the
efficiency of inventory control techniques. This equipment is also used to conduct
market research by noting customers’ demand patterns.

Summary
Designing control systems require an understanding of what the organization
wants from each of its employees. This involves identifying the role of each
individual from the chief executive officer to the employees at the lowest
hierarchical level in achieving organizational goals. While designing a control
system, it is necessary that the managerial style and the culture of the
organization should be clearly analyzed. There are three types of managerial
control systems namely external control, internal control and mixed control.
External control is authoritative and mechanical, as the organizational goals are
set by the top management. This style works on the premise that subordinates
will be motivated and committed to the organization if they are involved in all
aspects of decision making. In the case of the mixed control style, the manager
analyzes the benefits of each style and carefully chooses the one that would
benefit the organization the most. The control process includes the essential
elements of planning, decision-making and control.

Decentralization ensures that the decision-maker arrives at right decision with the
help of sufficient information. Organization slack occurs when the organization
under exploits its resources. In such cases, the organization incurs extra costs in
all its functional operations. Stakeholders are the essence of an organization and
it is the duty of every organization to identify key stakeholders variables and
monitor their performance. The designer of a control system designer should
make use of communication structures to coordinate various activities of the
organization. TQM ensures customer satisfaction and commitment to the
continual improvement of the organization’s services and products to meet the
needs of existing and potential customers, through empowerment and active
involvement of the staff. Subsystems and components of control systems should
be designed to assist TQM in achieving customer satisfaction. New technology has
benefitted control systems in a number of ways by helping companies manage
data easily.