Definition of Key Controllable Variables

Key Controllable Variables

One of the dreams of neo-classical economists is to have the different departments, segments, or regions, work as if each one of them is a separate organization. According to this view, market systems judged and rewarded each one of them by their profits. This will result in the overall good of the organization and even of society. Those who actually practice management or economists who are closer to management sciences have realized the difficulty of pursuing this manner of control all the way. Thus, how do we work out the profits of the HR function, the training function, the public relations function, the research and development function, and so on.

These functions have typical discretionary expenditure. They are in contrast to production functions that are governed by engineered costs. In discretionary items, there are difficulties in evaluating the output in monetary terms. Secondly, there is also difficulty in quantifying the correlation between inputs and outputs.

The concept of loosely-coupled systems and the key control variables to evaluate the various departments can be illustrated.

Research and Development: New innovations which have profitpotential, the time taken for converting an idea into a saleable product, cost incurred for innovations, compared to reasonable standards.

Purchase Department: Cultivating and sustaining good vendordevelopment and vendor relation, keeping the production line continuously fed and avoiding stock outs, keeping the cost of purchase low and reasonable, developing alternate sources of supply to be used when the need arises.

Maintenance Department: Minimize down time of machinery,developing preventive maintenance schedule of training.

Training Department: Correctly identifying training needs of theemployees, developing cost-effective ways.

It is an organic link but should operate in complex organizations, as it would in biological systems. A loosely-coupled system is like a train that has carriages coupled with links, which can twist and turn as the train takes a curve. If it were rigidly coupled, the whole train would collapse. These control variables of each sub-unit of the organization must surely be congruent with the overall objective of the organization, which is usually the profit. But this measurement of performance cannot be made in a mechanically manner. There has to be an overall understanding of how the sub-units’ performance would benefit the organisation as a whole. This is the essence of the belief systems which harmonises the dual focus approach.

Key Success Variables

Key control variables are for evaluating different segments of an organisation. The concept of key success variable assumes that every segment of an organisation has its eyes and ears open and watches those factors that would affect its well-being. These variables may not be under the control of the department but nevertheless responses to these variables are critically for success.

There are five factors that affect the key success variables.

Industry characteristics

Typically in the hotel industry and the airlines, the fixed costs are very high compared to variable costs and occupancy is the critical success variable for the consultancies and the contract industry, the critical success factor is timely delivery.

Competitive strategy

One can choose either to provide a premium product in which the competitive feature would be primarily one of the quality or novelty, or a standard product that provides a product of acceptable quality at reasonable prices. This line of thinking is attributed to the Harvard Professor, Michael Porter.

Environmental forces

These are critical in industries that affect the environment either by pollution or by destroying resources which cannot be regenerated easily. This would be an important success variable in petroleum refineries, paper industry, chemical industry and few others. Some industries specially attend to ethical treatment of environment and maintaining sustainable development. This is now a world-wide movement. Some industries which have scant respect are confronted with closures by regulators or by activist groups. The US based Mangalore Power Company has to close short recently because the employees were brutally assaulted by activists.

Significant Problems

Some industries have unique problems, for example, the banking and finance industries have special problems in assessing credit-worthiness of those who wish to borrow from them. The film industry, the music industry, the fashion industry or even the publishing industry have to keep in mind precarious factor of public taste.

Functional Issues

Treasurers and finance executives have to watch interest rates and production departments have to watch for quality expectations vis-à-vis their performance.

Delegation

Delegation (also called deputation) is the assignment of authority and responsibility to another person (normally from a manager to a subordinate) to carry out specific activities. However the person who delegated the work remains accountable for the outcome of the delegate work. It allows a subordinate to make decisions, i.e. it is a shift of decision-making authority from one organizational level to a lower one. Delegation, if properly done, is not abdication. The opposite of effective delegation is micromanagement, where a manager provides too much input, direction, and review of delegated work

Decentralization

Decentralization is the process of dispersing decision-making governance closer to the people or citizen. It includes the dispersal of administration or governance in sectors or areas like engineering, management science, political science, political economy, sociology and economics. Decentralization is also possible in the dispersal of population and employment. Law, science and technological advancements lead to highly decentralized human endeavours.

A central theme in decentralization is the difference between hierarchies, based on:

Authority: two players in an unequal-power relationship; and
An interface: a lateral relationship between two players of roughly equal power.

The more decentralized a system is, the more it relies on lateral relationships, and the less it can rely on command or force. In most branches of engineering and economics, decentralization is narrowly defined as the study of markets and interfaces between parts of a system. This is most highly developed as general systems theory and neoclassical political economy.

Delegation and Decentralization

The extent of both delegation and decentralization would depend on complex factors that cover transaction costs associated with information transfer and delay in decision-making, the transaction gains of better optimal use of resources in centralization, hindrances to information sharing in decentralization, and so on. Much depends upon the culture, traditions and mindset of employees.

Formal structures of delegations are given below:

Organizations with very high capital intensities will tend to be centralized.

Organizations having unrelated diversification will tend to be decentralized.

Organizations having technologies with much greater long term benefits as compared with short term profits will be centralized.

Organizations having a great impact on environment will tend to be centralized

Organizations in which scarce resources of material, talent and skills have to be shared with several parts of the organization will tend to be centralized.

Research and development, which is process-oriented, will tend to be decentralized to production units, whereas those which are product-oriented will tend to be centralized at the corporate office.

Organizations in which the actions of one part of the organization will affect another part of the organization will tend to be centralized.

Organizations that indulge in corruption will tend to centralize.

Organizations in which there is great interdependence among the parts of the organization will tend to become centralized.

Research and development costs being discretionary costs, the decision on their total amount will tend to be determined centrally, whereas the controls on its expenditure will tend to be delegated without undue interference.

In situations where there are great difficulties in reducing man power, organizations would tend to keep recruitment decisions to a centralized authority.

Asset acquisitions are usually centralised in most organisations, as temptations at local operational levels to gain short term advantage by adding assets, is a common failing of local executives.

Where cost-effectiveness, logistical advantages and synergies results if we do production planning centrally, these powers are usually not delegated to divisions.

Managerial cadres are trained in the ways of the organisations as a whole, and their postings are usually flexible and therefore are centralized.

Mutually Supportive Management Systems (MSM) and the Contingency ModelThe effective operation of control systems is a culmination of the mutual support of several systems, most of all the formal and informal. They are however, somewhat discursive in the description of the mutual supportive systems. A more explicit conceptual support for the concept is from the Mackenzie framework of the Seven Ss – strategy, structure, system, style, staffing, skills and shared values. Their mutual linkages can be understood from the diagram below:

Mackenzie framework of the Seven Ss

The organization is not just the structure; rather it is made up of seven elements, shown above. These are divided into two types: Hard and Soft. Elements in green are hard; they are easy to identify and feasible. They can be found in strategy elements, corporate plans, organizational structures and other documentations. The soft elements are hard to describe. They are sort of intangible. Hence it is more difficult to plan or influence these elements.

Effective organizations achieve a fit between all these seven elements. If one element changes, then, it will affect all the others. For example, a change in HR-systems like internal career plans and management training will have an impact on organizational culture (management style) and thus will affect structures, processes, and finally characteristic competences of the organization.

In any change process in an organization, more focus is given on hard S’s and often soft S’s are ignored. This is not a good strategy. It is difficult to build new structures and strategies upon inappropriate cultures and values. Many M&A fail because of the clash of culture, value and style. Hence 7S model is an effective tool in initiating change process in the organization. One should look at the current status of these seven elements in the organization and compare with the ideal state. Then make and plan and implement them.

Let us describe these elements one by one:

Staff - Number of Staff; How people are hired, integrated, developed,and socialized into the organization

Skills - The distinctive skills, capabilities, and competencies thatreside in the organization

Strategies - The initiatives that the organization has chosen to gainsustainable competitive advantage and reach its vision

Structures - The organizational structure, roles, and otherframeworks that the organization uses to guide activities

Systems - The formal and informal processes and procedures thatsupport and govern activities

Style of Leadership - The leadership approach of top management

Shared Values - The guiding concepts and principles used to guidebehavior in the organization

Summary

A system is a prescribed way of carrying out any activity or set of activities. The systems used by management to control the activities of an organisation are called the management control system. Management control is the process by which managers influence other members of the organisation to implement the organization’s strategies. Management control is facilitated by a formal system that includes a recurring cycle of activities.

Management control is one of three planning and control functions that are present in almost every organisation. The other two are strategy formulation, the largely unsystematic process of identifying threats and opportunities and deciding on new strategies in response; and task control, the process of ensuring that specified tasks are carried out efficiently and effectively.

There are four new paradigms in control systems. First, that one needs to concentrate to ensure that organisations are under control rather than concentrate on controlling individual members. Second, that control systems are spread over the entire hierarchical structure and the systems appropriate to the different levels of hierarchy are variously described as corporate governance, management control, process control and task control. The interdependence of these systems is explained. The third paradigm is that controlling and coordination have to be balanced as they are mutually supportive of each other. The fourth and last paradigm is that human beings are not only economic maximisers but also social creatures who have the propensity to cooperative and innovate, and that control systems need to fully encourage and use this for organizational advantage and empowerment of employees.

Robert Simons’ concept of the four levels of control, namely, diagnostic systems, interactive systems, belief systems and boundary systems are described, as also the manner in which they should be combined appropriately. Newman’s twelve point guidelines for designing control systems are described.

The lesson also describes the six sources of tensions in control systems and suggests ways to relieve them. Tensions arise due to the options available in choice of strategies, due to problems in generating goal congruence between different stakeholders, employees and departments and the limitations of the maximum feasible span of control.