R e n d e l l C o m p a n y Management Control System C A S E 04/12/11 By Aviroop Banik RIMSR, Bandra(W),Mumbai Management Control Systems R e n d e l l C o m p a n y 7 operating divisions. Smallest div.

.annual sales= $50 million Largest div.annual sales= $500 million Profitable for 50 years, but growth rate slowed considerably. 04/12/11 Mr.Fred Bevins (Controller) What would be the organizational status of my divisional controllers??? 04/12/11 He had joined co. as Asst.Controller in 1981 Person responsible for designing and operating the management control system, strategic plans and budgets. 1.Preparing financial statements and reports for shareholders. 2.Preparing and analyzing performance reports. 3.Supervising internal audit. Management Control System 04/12/11 CONTROLLER (CFO) J a m e s H o d g k i n Controller President He thought that corporate controller play a more active role in the process of establishing budgets and analyzing performance. So he took active role in reviewing budgets and studying divisional Performance. Likewise,Mr.Bevins had done the same thing. 04/12/11 Corporate Controller Divisional GM Divisional Controller ---------------------------------Dotted line relationship Divisional controllers reported directly to the div. general managers, but the corporate controller always was consulted prior to the appointment of a new divisional controller. act as staff assistant to R E N D E L L Divisional Controller Divisional GM 04/12/11 Divisional GM Corporate Controller Meeting with Corporate controller, but in Presence of Div.controller Divisional Controller Technical aid Technical aid R E N D E L L 04/12/11 Corporate Controller Divisional Controller R E N D E L L Divisional Controller Turmoil in relationship Corporate Controller Is providing biased information to Corporate controller ----------------------- 04/12/11 Corporate Controller Divisional Controller Divisional Controller Relationship according to Mr.Bevins Corporate Controller Mr.Bevins want Divisional controller to directly Report him rather than to Divisional general manager Divisional GM -------------------- 04/12/11 Mr.Fred Bevins (Controller) Should we go in the direction of controllership practiced by Martex Company? 04/12/11 Corporate Controller Divisional Controller Martex Organogram Divisional GM ------------------- 04/12/11 M A R T E X Control structure Mr.Bevins (Corporate controller) Mr.Harrigan (Asst. controller) 25 years in Rendell Mr.Bevins respect Mr.Harrigans knowledge about the company and his opinion on organizational matters. Mr.Harrigan speaks very frankly with Mr.Bevins. 04/12/11 Q&A What is the organizational philosophy of Martex w.r.t the controller function? Should Rendell adopt this philosophy? 04/12/11 Corporate Controller Divisional Controller Martex Organogram Divisional GM ------------------- 04/12/11 M A R T E X Control structure 04/12/11 Rendells business unit setup Strengths Weaknesses Divisional controller is trusted by divisional GM, thus internal information is shared. Ability of Divisional GM to conceal financial flaws. Divisional controller shares a common goal with his/her assigned division hence part of the team. Lack of empowerment to Divisional controllers. The reliability of information provided by divisional controller to corporate controller may be in question. 04/12/11 Martexs functional setup Strengths Weaknesses Divisional controller is empowered to perform intended functions Goal incongruence between Divisional controller and divisional GM may hamper divisions objectives. The decrease of asymmetric information between corporate controller and divisional controller Divisional controllers maybe regarded

as a spy rather than a part of the team.. Promoting goals congruence since it reduces conflict of interest level between division and its headquarter Corporate Controller Divisional GM Divisional Controller Solid line relationship Divisional controllers in Martex reported directly to the corporate controller, but the disadvantage is that the Divisional GM may treat Divisional controller like a spy from the front office rather than as a trusted aide. M A R T E X -------------------- 04/12/11 Corporate Controller Divisional GM Divisional Controller Solid line relationship Based on the above diagram, it is clear that controllership role can only be accomplished through the Martex method. Goal congruence between divisional controller and corporate controller will only be achieved if Rendell co. follow Martex structure. Yes , Rendell should adopt the Martex philosophy. M A R T E X -------------------- 04/12/11 What are organizational goals? Goals of division 1 + Goals of Division2 + Goals of Division 3 + Goals of Division 4 is equal to organizational goals. 04/12/11 We need to concentrate on each divisional goals to achieve organizational goals. Rendell needs goal congruence not only between corporate controller and divisional controller but also between corporate controller and divisional managers and Divisional controller and Divisional managers. So, in this point of time Martex structure is applicable in Rendell but if we want future growth perspective of Rendell with its several units, divisional or business unit structure should be applied with high loyalty factor. Q&A What should be the relationship between the corporate controller and the Divisional controllers? What steps would you take to establish the relationship on a sound footing? Divisional Controller Solid line relationship Corporate Controller 04/12/11 Goal Congruence Central purpose of MCS Individual employee / Divisional goal Rendell Company Rendells corporate goal Organizational goal should support and provide shade to the individual goal of employee. Dont hit your employees to attain your goal. We need to ask two imp questions for generating goal congruence- 1.What actions does it motivate people to take their own self-interest? 2.Are these actions in the best interest of the organization? 04/12/11 Q&A To whom the divisional controllers report in the Rendell company? Why? Divisional Controller Divisional GM report to with a dotted line relationship with Corporate controller 04/12/11 Divisional GM Divisional Controller 04/12/11 1. Rendell company has 7 operating divisions. So, to maintain the production and marketing of divisional products, they require independent divisions with designated Divisional GM. Reporting to Divisional manager as Divisional manager has complete responsibility for the Division. 2. 2. Immediate boss 3.F or long term perspective Divisional manager can become organizational head in the future as each div. act like independent company. So, Divisional manager should get good corporate involvement. 4.As the division is closer to the market for its products than HQ is, its manager may make sounder production and market decisions than HQ might. Can react to new threats and opportunities quickly. 5. Dotted line relationship with corporate controller The corporate controller should hire the Divisional controller and should have right to remove these people ,if necessary. Q&A Would you recommend any major changes in the Basic responsibilities of either the corporate controller or divisional controller? 04/12/11 We think the most important responsibility that a divisional controller need to hold is high end loyalty towards corporate controller and divisional GM regarding any report that he/she submits to both of them. Major change in the responsibility of corporate controller is to enforce management decisions and take initiative to implement suitable organizational culture where divisional controllers play an important role in achieving organizational goals along with divisional GM.

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Adopting a single and integrated financial accounting system across all divisions. Authorizing division controllers to pursue the role of internal auditor of the division. Empowering the division controllers to provide recommendations based on its analysis of capital budgeting requests. Applying bonuses based on the value of the company instead of the related division. Enhance the relationship between the divisional controller and its division by providing team-based activities such as out bounds periodically. If possible, the divisional controller should consist of people who have a previous relationship and experience dealing with the divisional manager to ensure that they are more welcomed at the site.

Recommendations Conclusion 04/12/11 Divisional managers are prone to protect their own individual or divisional interests by putting more importance in meeting Divisional targets than meeting the common goals. To achieve goal congruence , divisional controller should report to corporate controller ,instead of divisional manager at this point of time. 04/12/11 Communicate the new organizational structure and roles , responsibilities of each divisions through a formal document. Highlight changes in position and the new relationship between the corporate controller, Divisional controller and divisional GM. Formalize the new tasks of the divisional controllers through a PPM (Process, Procedures and Methods) manual that will be available across all depts. Initiate a common code of conduct manual for all employees . This manual should also include how employees should conduct themselves when submitting information . Recommendations 04/12/11 Now Rendell should adopt Martex set-up but for future growth with several units, Rendell should adopt Dotted line relationship

Corporate controller should pick people of Divisional controller and should have a right to warn them for any unethical practice or any biased report is submitted to corporate controller.

2. Corporate controller should give rights to Divisional controller to speak about the management practices(good or bad) followed by the Divisional GM . 3. Corporate controller should provide opportunity and situation to Divisional controller to express his/her views in Divisional budget or monthly reports. He should encourage and praise the Divisional controller for his/her work. 4.These certain activities would help in creating an environment where the Divisional controller not only become loyal to his immediate boss i.e Divisional GM but also to the Corporate controller. 5The relationship should enhance the loyalty of Divisional controller towards Corporate controller. Divisional GM and Corporate controller need to treat him/her like a trusted assistant