The Nature

of Management
Control Systems
 Basic Concepts
• What does Control mean?
• Press the accelerator,
– and your car goes faster.
• Rotate the steering wheel,
– and it changes direction.
• Press the brake pedal,
– and the car slows or stops.
• With these devices,
– you control speed and direction;
• if any of them is inoperative,
– The car does not do what you want it to.
• In other words, it is out of control
 Basic Concepts
• An organization must also be controlled;
– that is, devices must be in place
• To ensure that its strategic intentions are
achieved.
– But controlling an organization
• is much more complicated than controlling a car.
• We will begin by describing
– the control process in simpler systems.
 Elements of a Control System
Every control system has at least four
elements:
• 1. A detector
• 2. An assessor
• 3. An effector
• 4. A communications network
 The four elements
• 1. A detector or sensor
– a device that measures what is actually happening in the
process being controlled.
• 2. An assessor
– a device that determines the significance of what is actually
happening by comparing it with some standard or
expectation of what should happen.
• 3. An effector
– a device (often called “feedback”) that alters behavior if the
assessor indicates the need to do so.
• 4. A Communications network
– devices that transmit information between the detector and
the assessor and between the assessor and the effector.
Elements of the
control process
 Examples

• Thermostat

• Body Temperature

• Automobile Driver
 Management
• An organization consists of a group of
people
• who work together to achieve certain
common goals
– in a business organization a major goal is
to earn a satisfactory profit
 hierarchy of managers
• Organizations are led by a hierarchy of
managers,
• with the chief executive officer (CEO) at
the top,
• and the managers of
– business units, departments, functions,
– and other subunits ranked below him or her
in the organizational chart.
 Hierarchy in the organization
• The complexity of the organization
determines the number of layers in the
hierarchy.
• All managers other than the CEO are both
superiors and subordinates:
– they supervise the people in their own units,
– and they are supervised by the managers to
whom they report
 The management control process
• The CEO
– (or, in some organizations, a team of senior managers)
– decides on the overall strategies that will enable the
organization to meet its goals.
• Subject to the approval of the CEO,
– the various business unit managers formulate additional
strategies that will enable their respective units to further these
goals.
• The management control process is the process by
which managers at all levels
– ensure that the people they supervise implement their
intended strategies
 Contrast with Simpler Control
Processes
• The control process used by managers
contains
• the same elements as those in
• the simpler control systems described
earlier:
– detectors, assessors, effectors, and a
Communications system
 Contrast with Simpler Control
Processes
• Detectors
– report what is happening throughout the
organization;
• assessors
– compare this information with the desired state;
• effectors
– take corrective action once a significant difference
between the actual state
– and the desired state has been perceived;
• Communications system
– Tells managers what is happening and how that
compares to the desired state
 differences
• There are significant differences
between
• the management control process and

• the simpler processes described earlier:

 Differences (1)
• Unlike in the thermostat or body temperature systems,
the standard is not preset
• Rather, it is a result of a conscious planning process.
• The management decides what the organization
should be doing,
– and part of the control process is a comparison of actual
accomplishments with these plans.
• the control process in an organization involves
planning.
• In many situations,
– planning and control can be
• viewed as two separate activities.
• Management control
– involves both planning and control.
 Differences (2)
• Like controlling an automobile
• management control is not automatic.
• Some detectors in an organization may be
mechanical,
– but the manager often detects important
information
– with her own eyes, ears, and other senses
– because actions intended to alter an organization’s
behavior
– Man. Control involves human beings,
• the manager must internet with at least one other person
to effect change
 Differences (3)
• Unlike controlling an automobile,
– a function performed by a single
individual,
– management control requires coordination
among individuals
• An organization consists of many
separate parts,
– management control must ensure that each
part works in harmony with the others
 Differences (4)
• The connection from perceiving the need for
action to determining the action required to
obtain the desired result may not be clear.
• A manager
– acting as assessor
• may decide that “costs are too high”
• but see no easy or automatic action
guaranteed to bring costs down
– to what the standard says they should be.
 Differences (4)
• The term black box describes
– an operation whose exact nature cannot be
observed
• Unlike the thermostat or the automobile driver,
– a management control system is a black box.
– We cannot know what action a given manager will
take
• when there is a significant difference between actual and
expected performance,
– nor what (she assesses, if any) action others will take
in response to the manager’s signal
 Differences (5)
• Much management control is self-
control;
– control is maintained not by
• an external regulating device like the thermostat,
– But by managers
• who are using their own judgment
• rather than following instructions from a
superior.
Systems
 Definition
• A system is a prescribed and usually
repetitious way of carrying out
– an activity or a set of activities
• Systems are characterized by a more or less
– rhythmic, coordinated, and recurring
– series of steps
• intended to accomplish a specified purpose.
• Examples:
– The thermostat
– the body temperature
 management actions
• Many management actions are unsystematic.
• Managers regularly encounter situations
– for which the rules are not well defined
– and thus must use their best judgment in deciding
what actions to take.
• The effectiveness of their actions is
determined
– by their skill in dealing with people,
– not by a rule specific to the system
– (though the system may suggest the general nature
of the appropriate response)
– If all systems ensured the correct action for all
situations,
• there would be no need for human managers
Boundaries of Management
Control
 planning and control
• we define management control
• and distinguish it from two
• other systems—or activities—
• that also require both planning and control:
– strategy formulation
– task control
 management control
• management control fits between
strategy formulation and task control in
several respects
• Strategy formulation
– is the least systematic of the three,
• task control
– is the most systematic,
• and management control
– lies in between
 management control

• Strategy formulation
– focuses on the long run,
• Task control
– focuses on short-run activities,
• and management control is in between.
• Strategy formulation
– uses rough approximations of the future,
• Task control
– uses current accurate data,
• management control is in between.
• Each activity involves
– both planning and control,
• but the emphasis varies with the type of
activity
• The planning process
– is much more important in strategy
formulation,
• the control process
– is much more important in task control,
• and planning and control are of
approximately equal importance in
management control.
General relationships among planning and
control
 Management Control Activities
• Planning what the organization should do.
• Coordinating 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
behavior.
• Management control does not necessarily
require that all actions
– correspond to a previously determined plan,
• such as a budget.
• Such plans are based
– on circumstances believed to exist at the time
they were formulated
• If these circumstances have changed at
the time of implementation,
• the actions dictated by the plan may no
longer be appropriate.
• While a thermostat responds to the actual
temperature in a room,
• management control involves
– anticipating future conditions to ensure that
the organization’s objectives are attained
• If a manager discovers a better approach
– one more likely than the predetermined plan to
achieve the organization’s goals—
– the management control system should not obstruct
its implementation.
• In other words,
• conforming to a budget is not necessarily good,
• and departure from a budget is not necessarily
bad.
 Goal Congruence
• Although systematic, the management
control process is by no means
mechanical;
• it involves interactions among individuals,
which cannot be described in mechanical
ways.
• Managers have personal as well as
organizational goals.
 Goal Congruence
• The Central control problem is to induce them to
act in pursuit of their personal goals in ways that
will help attain the organization’s goals as well.
• Goal congruence means that,
– the goals of an organization’s individual members
should be consistent
– with the goals of the organization itself.
• The management control system should be
– designed and operated with the principle of goal
congruence in mind.
 Tool for Implementing Strategy
• Management control systems help managers
– move an organization toward its strategic objectives.
• Thus, management control focuses primarily on
strategy execution.
• Management Controls are only one of the tools
– managers use in implementing desired strategies.
• strategies are also implemented
– through the organization’s structure, its management
of human resources, and its particular culture.
Framework for strategy implementation
Framework for strategy implementation
• Organizational structure
– specifies the roles, reporting relationships, and
division of responsibilities that shape decision-making
within an organization.
• Human resource management
– is the selection, training, evaluation, promotion, and
termination of employees so as to develop the
knowledge and skills required to execute
organizational strategy.
• Culture refers
– to the set of common beliefs, attitudes, and norms
that explicitly or implicitly guide managerial actions.
 Financial and Nonfinancial
Emphasis
• Management control systems encompass
– both financial and nonfinancial performance
measures.
• The financial dimension focuses on the
monetary “bottom line”—
– net income, return on equity, and so forth.
• virtually all organizational subunits have
nonfinancial objectives—
– product quality, market share, customer satisfaction,
on-time delivery, and employee morale.
Aid in Developing New Strategies -
interactive control
• the primary role of management control is
to ensure the execution of chosen
strategies.
• In industries that are subject to rapid
environmental changes,
– management control information,
– especially of a nonfinancial nature
• can also provide the basis for considering
new strategies
Interactive control
 Interactive control
• Interactive control calls management’s attention
to developments
• both negative
– (e.g., loss of market share, customer complaints)
• and positive
– (e.g., the opening up of a new market as a result of
the elimination o f certain government regulations)
• that indicate the need for new strategic
initiatives.
• Interactive Controls
– are an integral part of the management control
system.
 Strategy Formulation
• is the process
• of deciding on the goals of the organization
• and the strategies
– for attaining these goals
• Goals are timeless; they exist until they are
changed, and they are changed
• only rarely
 Strategy Formulation
• For many businesses, earning a
satisfactory return on investment is an
important goal;
– for others, attaining a large market share is
equally important.
• Nonprofit organizations also have goals;
– they seek to provide the maximum services
possible with available funding.
 Strategy
• In the strategy formulation process,
• the goals of the organization are usually
taken as a given,
• although on occasion
• strategic thinking
– can focus on the goals themselves.
 Strategies
• Strategies are big plans, important plans.
• They state in a general
– way the direction in which senior
management wants the organization to move.

• A decision by an automobile manufacturer

– to produce and sell an electric automobile
– would be a strategic decision
 Strategies
• The need for formulating strategies usually
arises in response to a perceived
• threat (e.g., market inroads by competitors, a
shift in consumer tastes, or new
• government regulations) or opportunity (e.g.,
technological innovations, new
• perceptions of customer behavior, or the
development of new applications for
• existing products).
 Strategies
• A new CEO,
– especially one brought in from the outside,
• usually perceives both threats and
opportunities
– differently from how his or her predecessor
did
• Thus, changes in strategies often occur
when a new CEO takes over
 Strategies
• Strategies to address a threat or opportunity
– can arise from anywhere in an organization and at
any time
• New ideas do not emanate solely from the
• research and development team or the
headquarters staff.
• Virtually anyone might come up with a “bright
idea,”
– which, after analysis and discussion, can form the
basis for a new strategy.
 strategy formulation
• Complete responsibility for strategy
formulation
– should never be assigned to a particular
person or organizational unit.
• Providing a means of bringing worthwhile
ideas directly to the attention of senior
management
– without allowing them to be blocked at lower
levels is important
 Distinctions between Strategy
Formulation and Management
Control
• Strategy formulation
– is the process of deciding on new strategies;
• Management control
– Is the process of implementing those strategies.
• From the standpoint of systems design,
– the most important distinction between strategy
formulation and management control
• is that strategy formulation is essentially
unsystematic
 strategic decisions

• Threats, opportunities, and new ideas

– do not occur at regular intervals;
• thus,
• strategic decisions may be made at any
time
 Strategic analysis
• the analysis of a proposed strategy varies with
the nature of the strategy.
• Strategic analysis involves
– much judgment,
– the numbers used in the process are usually rough
estimates
• the management control process involves
– a series of steps that occur in a predictable sequence
according to a more-or-less fixed timetable
– and with reliable estimates
 Strategy vs. management control
• Analysis of a proposed strategy usually
involves relatively few people
• The sponsor of the idea, headquarters
staff, and senior management.
• the management control process involves
– managers and their staffs
– at all levels in the organization
 Task Control
• Task control is the process
– of ensuring that specified tasks are carried out
effectively and efficiently
• it is transaction-oriented
– it involves the performance of individual tasks
according to rules established in the
management control process
 Task Control
• Task control often consists of seeing that
these rules are followed,
• A function that in some cases does not
– even require the presence of human beings
• Numerically controlled machine tools,
• process control computers,
• and robots
– are mechanical task control devices
 Task Control
• Their function involves humans only
– when the latter prove less expensive or more
reliable;
• this is likely to happen only if
– unusual events occur so frequently that
programming a computer
– with rules for dealing with these events is not
worthwhile
 Task Control
• Many task control activities are scientific
• the optimal decision or the appropriate
action
– for bringing an out-of-control condition back to
the desired state is predictable within
acceptable limits.
• the rules for economic order quantity
– determine the amount and timing of purchase
orders
 Task Control
• Most of the information in an organization
is task control information:
– The number of items ordered by customers,
– the pounds of material and units of
components used in the manufacture of
products,
– The number of hours employees work,
– the amount of cash disbursed
 Task Control
• Many of an organization’s central activities
– including procurement, scheduling, order
entry, logistics, quality control, and cash
management
• are task control systems
• Some of them, though mechanical, can be
extremely complicated
 Distinctions between Task Control
and Management Control
• many task control systems are scientific,
• whereas management control
– can never be reduced to a Science.
• management control involves
• the behavior of managers,
• and this cannot be expressed by
equations
Examples of Decisions
 Distinctions between Task Control
and Management Control
• Serious errors may be made when principles
developed by management scientists
– for task control situations are applied to management
control situations
• In management control,
• managers interact with other managers;
• In task control,
– either human beings are not involved at all
– (as in some automated production processes),
• or the interaction is between a manager and a
nonmanager
 Distinctions between Task Control
and Management Control
• In management control
– the focus is on organizational units;
• in task control
– the focus is on specific tasks performed by
these organizational units
– (e.g.,manufacturing Job No. 59268, or
ordering 100 units of Part No. 3642)
 Distinctions between Task Control
and Management Control
• Management control is concerned with the
broadly defined activities of managers
deciding
– what is to be done within the general
constraints of strategies.
• Task control relates
– to specified tasks, most of which require little
or no judgment to perform.
 Impact of the Internet on
Management Control
• The pace of the information revolution
accelerated
– with the invention of computers,
– gaining tremendous momentum in the 1990s
with the advent of the Internet
 The Internet provides major
benefits, such as:
• Instant access
• Multi-targeted communication
• Costless communication
• Ability to display images
• Shifting power and control to the individual
 Impact of the Internet
• With these advantages the Internet has
changed the rules of the game in the
business-to-individual consumer sector
• The Internet has also changed business-
to-business commerce
• The impact of the Internet on the world of
business has been significant
 the Internet’s impact on
management Controls
• Management control systems involve information, and
organizations require an infrastructure to process that
information.
• The Internet provides that infrastructure,
– making the processing of information easier and faster, with
fewer errors.
• On the Web, a manager can collect huge amounts
• of data, store that data, analyze it in different forms, and
send it to anyone in the organization.
• Managers can also use this information
– to customize and personalize their reports
 the Internet’s impact on
management Controls
• 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 strategies through management
Controls
– is essentially a social and behavioral process and
thus cannot be fully automated
 the Internet’s impact on
management Controls
• although the Internet has vastly improved
information processing,
• the fundamental elements of management
control
– what information to collect and how to use it
• are essentially behavioral in nature and
thus not
• amenable to a formula approach