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).
• Management control systems consist
of all organization structures,
processes and subsystems designed
to elicit behavior that achieves the
strategic objectives of an
organization at the highest level of
performance with the least amount
of unintended consequences and risk
to the organization.
 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-to-many 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, toll-free 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 individual’s
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 control—was information to collect and how to use it—
are 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
• organizational life cycle
• Extent of IT Applications
 Nature and Purpose of the
Organization
• The nature and purpose of an organization,
that is, whether it is a for-profit 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.
 Chapter 2
Understanding Strategies
• Management control systems are tools for
implementing strategies. Strategies differ
between organizations, and controls must be
tailored to the requirements of specific
strategies. Different strategies require
different task priorities; different key success
factors; and different skills, perspectives, and
behaviors.
• Thus, a continuing concern in the design of
control systems should be whether the
behavior induced by the system is the one
called for by the strategy.
• Strategies are plans to achieve organizational
goals. Therefore, in this chapter we first
describe some typical goals in organizations.
Then we describe strategies at two levels in an
organization: the corporate level and the
business levels. Strategies provide the broad
context within which one can evaluate the
optimality of the elements of management
systems.
 2.1 Goals
Goals of a corporation refer to the end results that it wants to
attain and which is set the chief executive officer and other
top executives or sometimes by the owners.
The major forms of goals include the followings:
• Profitability
• Maximizing shareholder value
• Risk
• Multiple stakeholder approach
 2.2 The Concept of Strategy
• Strategy describes the general direction in
which an organization plans to move to attain
its goals. Every well-managed organization has
one or more strategies, although they may not
be stated explicitly.
• A firm’s strategies are formed or crafted by matching its
vision, mission, objectives, external opportunities and threats
and internal strengths and weaknesses.
• The main spirit of strategy is to gain competitiveness by
satisfying customers and beating the competitive forces.
• Strategies can be found at four levels of an organization:
corporate strategy, business levels strategies, functional level
strategies, and operating level strategies.
 Corporate-Level Strategy
• Corporate strategy is concerned more with
the question of where to compete than with
how to compete in a particular industry; the
latter is a business unit. At the corporate
level, the issues are (1) the definition of
businesses in which the firm will participate
and (2) the deployment of resources among
those businesses.
In terms of their corporate-level strategy, companies
can be classified into one of three categories:
• A single industry firm operates in one line of
business.
• A related diversified firm operates in several
industries, and the business units benefits
from a common set of core competencies.
• An unrelated business firm operates in
businesses that are not related to one another;
the connection between the business unit is
purely financial.
Core Competence and Corporate Diversification

• Research results suggest that related

diversified firms, on an average, perform the
best, single industry firms perform next best,
and unrelated diversified firms do not perform
well over the long term.
 Implications of Control Systems
• Corporate strategy is a continuum with single
industry at the end of the spectrum and
unrelated diversification at the other end
(related diversification is in the middle of the
spectrum). Many companies do not fit neatly
into one of the three classes.
• The planning and control requirements of
companies pursuing different corporate level
diversification strategies are quite different.
• The key issues for the control systems
designers, therefore, is:
• How should the structure and form of control
differ across a single industry firm, a related
diversified firm and an unrelated diversified
firm.
 2.3 Business Unit Strategies
• Business unit strategies deals with how to
create and maintain competitive advantage
in each of the industries in which a company
chosen to participate. The strategy of a
business unit depends on two interrelated
aspects:
(a) Mission
(b) Competitive advantage
 Business Unit Mission
• In a diversified firm one of the important tasks
of senior management is resource
deployment, that is, make decisions regarding
the use of the cash generated from some
business units to finance growth in other
business units.
 BCG Model
• Star—hold
• Question mark—build
• Cash cow—harvest
• Dog—divest
 Business Unit Competitive Advantage

• Every business unit should develop a

competitive advantage in order to accomplish
its mission. Three interrelated questions have
to be considered in developing the business
unit’s competitive advantage.
• First, what is the structure of the industry in
which the business unit operates
• How should the business unit exploit the
industry’s structure
• Third, what will be the basis of the business
unit’s competitive advantage.
Michael Porter has described two models useful
in strategic analysis and formulating
strategies:
• Five-Force Model of Competition
• Value Chain Model
 Porter’s Five-Force Model
• Industry competitors
• Bargaining power of customers
• Bargaining power of suppliers
• Threat of substitute products
• Threat of new entry.
 Generic Strategies
• Low cost provider strategy
• Broad differentiation strategy
• Best-Cost provider strategy
• Market Niche based on low cost
• Market Niche based on differentiation
 Value Chain Analysis
• The value chain consists of the various
activities associated with the procurement of
inputs to the end-user point services. The
major activities associated with the value
chain include the following:
 Primary activities
• Procurements and logistics
• Operations
• Outbound logistics and distribution
• Sales and marketing
• Customer services
 Support activities
• Human resources
• Finances
• Engineering and R & D
• General administration
 The key questions are:
• Can we reduce costs in this activity, holding
the value or revenue constant?
• Can we increase value or revenue in this
activity, holding costs constant?
• Can we reduce assets in this activity, holding
costs and revenue constant?
• Most importantly, can we do (i), (ii) and (iii)
simultaneously?
 Strategic Performance Control

• Strategic learning involves anticipating changes, monitoring the business

environment continuously, and taking proactive steps. Management
control contributes to strategic learning and enables the organization to
survive in the marketplace.
The vision of the organization is its envisioned future and reflects its core
ideology. The mission statement flows from the vision statement and
explains the reason for the organization's existence. The vision and
mission statement together provide growth directions for the
organization and control the allocation of resources.
The strategies that an organization adopts depend on the resources and
strengths available with it and the strategic gaps existing in the
marketplace. These strategies can control organizational performance.
The degree of control depends on the manner in which the organization
distinguishes itself from its competitors and the competitors' ability to
respond to its strategies.
• The ability of the organization to craft strategies which effectively leverage
on its resources or strengths and align them with the environment in which
it operates depends on how well it addresses its critical success factors
(CSFs). According to Rockart, CSFs are "the limited number of areas in which
results, if they are satisfactory, will ensure successful competitive
performance for the organization. They are the few key areas where things
must go right for the business to flourish." They are "areas of activity that
should receive constant and careful attention from management."
Each industry and, in turn, each organization, has a different set of CSFs. The
alignment between the mission and strategic goals which determine the
CSFs is ensured by strategic controls. Performance measures are required to
track and monitor the activities which lead to the achievement of the CSFs.
Performance measures are of three types: performance indicators (lead or
lag indicators), key performance indicators, and key result indicators.
• Performance indicators clearly identify the specific areas which
need control intervention to improve organizational performance.
Good performance indicators are Specific, Measurable, Attainable,
Realistic, and have a Time perspective. Key performance indicators
are identified from the performance indicators. Key performance
indicators deal with aspects which, when improved upon, lead to
radical performance improvements. If a key performance indicator
is improved upon, it will have a positive ripple effect on most of the
other performance indicators. Key result indicators indicate
whether the approach toward achieving performance is
appropriate but do not indicate the means or method to achieve
better performance or outcomes. Key result indicators are useful
for governance and are usually reported to the top management
and the board on a monthly or quarterly basis.
• The continuous monitoring/reporting of various
performance measures has been greatly facilitated by
advancements in information technology and systems
(IT&S). Some of the business contexts in which IT&S is
of strategic significance are: nature of operations
(printing press, dairy processing); information intensity
(hotels, airlines, banks, financial services companies);
extent of geographical and operations spread
(diversified conglomerates); and nature of industry
(electronic chip design, software products, automobile
manufacturing, pharmaceuticals).
• 'The Balanced Scorecard (BSC)' was proposed by Robert Kaplan and
David Norton in 1992. It is a concept which combines financial and
non-financial measures, short-term and long-term goals, the
organization's market performance and internal improvements,
past outputs and ongoing requirements. The BSC framework
considers the customer perspective (To achieve our vision, how
should we appear to our customers?); internal business process
perspective (To satisfy our customers and shareholders, what
business processes must we excel at?); and the innovation/learning
and growth perspective (To achieve our vision, how will we sustain
our ability to change and improve?); in addition to the financial
perspective (To succeed financially, how should we appear to our
shareholders?). In the implementation of the BSC, these
perspectives are seen and evaluated in an interconnected manner
and not as standalone perspectives. The BSC is useful as a tool for
strategic performance control and strategic learning.
• Strategy and Control
Critical Success Factors and Controls
Performance Measurement
Information Technology and Systems for Strategic Control
Nature of Operations and Information Intensity
Extent of Geographical and Operations Spread
• Nature of Industry
The Balanced Scorecard
Customer Perspective
Financial Perspective
Internal Business Process Perspective
Innovation/Learning and Growth Perspective
Implementing the BSC
 Chapter 3
Behavior in Organization
Management control systems influence human
behavior. Good management control systems
influence behavior in a goal congruent manner;
that is, they ensure that individual actions taken
to achieve personal goals also help achieve the
organization’s goals.
 3.1 Goal Congruence
• The purpose of management control systems
is to ensure the goals undertaken by
individuals at various levels of an organization
must contribute to the overall objectives of
the firm. This concept is known as the goal
congruence.
• The goal congruence process refers to the
characteristic of the control systems that
ensures that the actions people are led to take
in accordance with their perceived self-
interest are also in the best interest of the
organization.
 To most important question to ask are:

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?
 3.2 Informal Factors Influencing Goal
Congruence
• External Factors –norms of desirable behavior,
set of attitudes, work ethic, employee
diligence, work spirit, etc.
• Internal Factors
– Culture
– Management Style
– The Informal Organization
– Perception and Communication
 3.2 The Formal Control System
• Rules: all types of formal instructions and
controls, including standing instructions, job
description, standard operating procedures,
manuals, and ethical guidelines.
Some specific types of rules are:
• Physical controls—security guards, locked
storerooms, vaults, computer passwords,
television surveillance, and other physical
controls may be part of the control structure
• Manuals
• Systems safeguards.
• Task Control Systems
 3.3 Types of Organizations
• Functional Organization Structure
• Business Unit Structure
• Matrix Structure
Design of Organization Structure and
Control Systems
• Organization structure refers to the role-
responsibility relationships of different
employees in an organization along with their
pre-defined interaction patterns. It facilitates
the flow of information both vertically and
horizontally in an organization.
• The structural dimensions of organization
design are - formalization, specialization,
hierarchy of authority, centralization,
professionalism, and personnel ratios. Some of
the contextual dimensions of organization
design are - organization size; the technology it
uses; and the environment in which it operates.
• An organization should be structured in such a
way as to go beyond maximizing performance
levels and effectiveness of operations. It
should encourage participation and
innovation throughout the organization.
 Types of organization structures
include –
• functional,
• divisional,
• matrix,
• horizontal, and
• hybrid structures.
• The functional structure is characterized by
grouping people based on their expertise and
skills.
• In the divisional structure, the divisions are
formed based on an organization's product
range, the specific markets the organization
caters to, or the geographic locations in which
it operates.
• The matrix organization tries to integrate the
desired features of both the functional and
divisional structures. In this structure, an
employee reports simultaneously to two
different supervisors. One of these supervisors
represents a functional department and the
other represents the division, product,
market, geography, or project.
• The horizontal structure prevents the rigidity and
departmentalization existing in a vertical system
by grouping the managers and employees into
synergistic teams for problem solving.
• When organizations use a combination of any
two structures (say, functional and divisional or
functional and horizontal), the resulting
structure is called a hybrid structure. It combines
the strengths of the structures being merged.
• A responsibility structure is a collection of responsibility centers. A responsibility
center is a function, division, or unit of an organization under a specified authority
with a specified responsibility. Responsibility accounting can be defined as a
system of management accounting under which accountability is determined
according to the responsibility allotted to various levels of management. In an
organizational setting, it is necessary that the performance measurement systems
are designed to be fair. Two major aspects to be considered are controllability and
goal congruence. The controllability principle says that each manager should be
assessed and rewarded only for those factors that are under his/her control. Goal
congruence is achieved when managers (and employees), while working toward
their best self-interest as perceived by themselves, take decisions that are
successful in attaining the overall goals of the organization. This happens when
their individual objectives are aligned with the organizational goals. Transfer
pricing is a tool used in responsibility accounting to assign monetary values to
transactions taking place between two or more responsibility centers.
• According to the nature of monetary inputs
and outputs, responsibility centers can be
classified into four types. They are cost
centers, revenue centers, profit centers, and
investment centers. Cost centers are further
divided into standard cost centers and
discretionary expense centers.
• Designing an optimal management control system involves
determining the specific control measures to be used and
the degree of tightness or looseness of control required to
provide the desired level of certainty of achievement of
objectives. An organization may choose any one or a
combination of action control, results control, and
personnel/cultural control. The decision on the choice and
degree of tightness of control is made on the basis of a
cost-benefit analysis. Costs include the consumption of
available resources, harmful behavioral side-effects, and
the development of negative attitudes among employees.
Benefit refers to the level of certainty that the organization
is able to achieve by implementing the control system.
•
Complexities and uncertainties in the business environment
make it necessary to design the organization structure and
management control system in such a way that the benefits
earned from operating in numerous countries are higher
than the costs incurred. Three main aspects have to be
considered for designing the organization structure of an
MNC. These are the strategy of international business,
extent of centralization, and the division of an MNC into
subsidiaries based on product, operational location, or
function.
• Organizations can choose from one of the following four strategies
for doing international business - international strategy, multi-
domestic strategy, global strategy, or transnational strategy. This
strategic choice depends on the pressure on cost competitiveness,
pressure for local responsiveness, and the need for worldwide
learning. The extent of centralization of decision-making in different
areas such as product development, marketing, production, etc.,
depends on the choice of strategy for doing international business.
In terms of organization structure of the MNC, global structures
based on area or product, are common. Limitations in these
structures resulted in MNCs adapting the transnational strategy
which uses a global matrix structure. A flexible matrix structure can
be used to overcome the rigidities of a global matrix structure
through the use of informal networks between managers.
• The controllability of a subsidiary's results goes from
high to low as we move from the multi-domestic
strategy to international strategy to global strategy to
transnational strategy, as the interdependencies and
the costs of control go from low to high. For multi-
domestic strategy and international strategy, results
controls are therefore more appropriate. For global
strategy and transnational strategy, it is more
appropriate to use action controls and
personnel/cultural controls.
• Management control of non-profit organizations is an area
distinguishable from that in for-profit organizations because of the
inherent difference with respect to source of funds, features of
service, the strategies for selling the service, the mode of delivering
the services, reward systems for employees, etc. According to Geert
Hofstede, four criteria which help in better management control of
non-profit organizations are clear objectives, quantifiable results,
predictable interfaces, and activities that can be repeated. For
different combinations of the four criteria, the organization can
adopt different types of controls - routine control, expert control,
trial and error control, intuitive control, judgmental control, and
political control.
• Managers must find ways to encourage employees to be creative and to initiate
process improvements, but must still retain enough control to ensure that
employee creativity benefits the organization. The concept of "levers of control"
proposed by Robert Simons is relevant here. The four levers of control are
diagnostic control systems, beliefs systems, boundary systems, and interactive
control systems. Diagnostic control systems use quantitative data, statistical
analyses, and variance analyses to scan for anything unusual that might indicate a
potential problem. Diagnostic systems work well if the goals are reasonable and
attainable. Beliefs systems are used to communicate the doctrines of corporate
culture to every employee of the organization. Boundary systems are based on the
principle that in an age of empowered employees, it is easier and more effective
to set the rules regarding what is inappropriate rather than what is appropriate.
The effect of this kind of thinking is to allow employees to create and define new
solutions and methods within defined constraints. Interactive control systems are
futuristic and involve frequent communication between top managers. The
interactive control system helps organizations in positioning themselves
strategically in the rapidly changing market.
• Chapter 2 : Overview
• Organization Structure
Structural Dimensions of Organization Design
Types of Organization Structures
Responsibility Structure
Controllability, Goal Congruence, and Transfer Pricing
Responsibility Centers
Designing Control Systems
Control Alternatives
Management Control of International Businesses
Strategy of International Business
• Centralization Decision in International Business
Choice of Organization Structure for International Business
Designing Control Systems for International Business
Management Control of Non-Profit Organizations
Control Systems for Empowerment, Innovation, and Creativity
Diagnostic Control Systems
Beliefs Systems
Boundary Systems
Interactive Control Systems
 3.4 Functions of the Controller
• Designing and operating information and
control systems
• Preparing financial statements and financial
reports
• Preparing and analyzing performance reports,
interpreting these reports to managers.
• Supervising internal audit and accounting
control procedures to ensure the validity of
information, establishing adequate safeguards
against theft and fraud, and performing
operational audits
• Developing personnel in the controller
organization and participating in the
education of management personnel in
matters relating to the controller function.
Types of Management Controls