The Nature of Management Control Systems 1 Basic

The Nature of Management Control Systems 1

Basic Concepts Elements of a control system consists of: 1. A detector 2. An assessor 3. An effector 4. A communication network 2

1. A detector or sensor is a device that measure what is actually happening in the process being controlled. 2. An assessor is a device that determines the significance of what is actually happening by comparing it with some standards or expectations of what should happen. 3. An effector (feedback) is a device that alters behavior if the assessor indicates the need to do so. 4. A communications network consist of devices that transmit information between the detector and the assessor and between the assessor and the effector. 3

Example: You are driving a car • • Detectors= Your eyes Assessor= Your brain Effector= Your foot Communication network= Your nerves system 4

• Your eyes (detectors) measure actual speed by observing the speedometer. Your brain (assessor) compares actual speed with desired speed (standard: the highest speed is 80 km/hour) to detect a deviation from standard. Your brain (assessor) directs your foot (effector) to ease up the accelerator if actual speed (90 km/hour) is faster than the standard speed (80 km/hour), press down the accelerator if the actual speed (70 km/hour) is slower than standard speed (80 km/hour). And, your nerves (communication network) form the communication system that transmits information from eyes (detectors) to brain (assessor) and brain (assessor) to foot (effector). 5

Boundaries of Management Control • Strategy formulation is the process of deciding on the goals of the organization and the strategies for attaining these goals. • Management control (Anthony and Govindarajan, 2004): is the process by which managers influence other members of organization to implement the organization’s strategies. • Task control is the process of ensuring that specified tasks are carried out effectively and efficiently. 6

Distinctions between strategy formulation and management control: Characteristics System design Unsystematic, Strategic decision may be made any time Control Management Rhythmic, predetermined procedures Nature of information Tailored-made to faced problems, more external and predictive, less accurate Simple Integrated, more internal and historical, more accurate Difficult Top management and staffs Top management and 7 line managers Communication of information Involved people Strategy Formulation

Distinctions between strategy formulation and management control: Characteristics Strategy Formulation Control Management Many people Number of involved people Few people Mental activity Creative and analytic Administrative and persuasive Discipline Time horizon Economics Tend to long-term Social psychology Tend to short-term End products Goals, strategies Strategy implementation 8

Distinctions between management and task controls: Characteristics Control Management Task Control Focus of activity The whole of operation Individual task or transaction Nature of information Tailored-made to individual task, more non-financial data Integrated, many financial data Involved people Management Supervisor or none Mental activity Follow direction or none Tasks are carried out effectively and efficiently End products Administrative and persuasive Strategy implementation 9

Distinctions between management and task controls: Characteristics Control Management Task Control Mental activity Administrative and persuasive Follow direction or none Discipline Time horizon Social psychology Weekly, monthly, annually Economics, physics Daily Type of cost Discretionary costs Engineered costs 10

Examples of decisions in planning and control function: Strategy Management Formulation Control Enter a new business Expand a plant Change debt to equity Issue new debt ratio Task Control Schedule production Manage cash flows Add direct mail selling Determine advertising budget Book TV commercials Decide magnitude and direction of research Acquire an unrelated business Control of research organization Run individual research project Introduce new product or brand within product line Coordinate order entry 11

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