Definition of The New Paradigms of Management Control Systems

Introduction

Management control is a must in any organization that practices decentralization. One view argues that management control systems must fit the firm’s strategy. This implies that the strategy is first developed through a formal and rational process, and this strategy then dictates the design of the firm’s management systems. An alternative perspective is that strategies emerge through experimentation, which is influenced by the firm’s management systems. In this view, management control systems can affect the development of strategies.

When firms operate in industry contexts where environmental changes are predictable, they can use a formal and rational process to develop the strategy first and then design management control systems to execute that strategy. However, in a rapidly changing environment, it is difficult for a firm to formulate the strategy first and then design management systems to execute the chosen strategy. Perhaps, in such contexts, strategies emerge through experimentation and ad hoc processes that are significantly influenced by the firm’s management control systems.

The importance of the subject matter is captured in the widely accepted truism that more than 90 percent of businesses including non organizations is founded on the rocks of implementation; either the strategies never come into being or get distorted, or the implementation is much more costly and time-consuming than anticipated. However, laudable strategic intentions may be, if they do not become reality, they usually are not worth the paper on which they are written. Conversely, high-performing companies excel at execution.

Consider the collapse of companies such as Enron, WorldCom, Global Crossing and Tyco. Part of the reason for their demise was the lapse in controls. CEO and top management compensation in these companieswas so heavily tied to stock options that executives were motivated to manipulate financials to buoy the short-term stock price.

Consider world-class companies such as Dell Computer, Walmart, Cisco Systems, New York Times, Emerson Electric, Lincoln Electric, Worthington industries, 3M Corporation, Nucor Corporation, Analog Devices and so on. Their long-term success is not just because they have developed good strategies; more importantly, they have designed systems and processes that energize their employees to execute those strategies; more importantly, they have designed systems and processes that energize their employees to execute those strategies effectively.

The traditional perception of control systems is similar to that of the autocrat through his policemen controlling an unruly mob. But in the twenty-first century the unmistakable forward trend towards empowerment should not go unnoticed. Systems, which are in perfect control without an autocrat and policemen controlling them, would show the profound difference between the concept of controlling persons and that of systems being under control and being able to achieve their goals and objectives with ease. They deserve to be emulated.

Definition of Management Control Systems

A MCS is a set of interrelated communication structures that facilitates the processing of information for the purpose of assisting managers in coordinating the parts and attaining the purpose of an organization on a continuous basis.

A MCS is a logical integration of techniques, to gather and use information to make planning and control decisions, to motivate employee behaviour, and to evaluate performance.

Purpose and Importance

Imagine that you have the tendency to put on weight. It is in your genes and if you are not careful you might go the same way as several people in your family went earlier. So what do you do? You cut down on your food intake. It might help or may not. You start exercising, but you are alarmed to discover that you are building up a lot of needless muscle. Maybe the exercises you are doing are not suited to your constitution.

The Management Control System

Then you change your method of exercising and you find that it works. You start shedding weight. This is weight control. It gives us control over our body and its functioning. If such control is not exercised, we may not be able to do whatever we set out to do so. In a similar way, organizations need to be in control of them. An organization lacking in controls is bad for its employees and hence, bad for itself in the long run.

The purpose of all management and control systems is to achieve the goals and objectives of an organization with ease and at least cost. The ultimate purpose of any system is that it should be ‘in control’ instead of controlling people. It also aims at assisting management in the coordination of the parts of an organization and the steering of those parts toward the achievement of its overall purposes, goals and objectives.

The purposes of a management control system are:

To clearly communicate the organisation’s goals;

To ensure that managers and employees understand the specific actions required of them to achieve organizational goals;

To communicate results of actions across the organisation; and

To ensure that managers can adjust to changes in the environment.

A control system is designed to bring unity out of the diverse activities of an organization as it seeks to fulfil its overall purpose.In the above following diagram shows the components of a management control system.

Basic ConceptsControl

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.

An organization must also be controlled, i.e., 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.

Elements of a Control System

Every control system has at least four elements:

A detector or sensor – a device that measures what is actuallyhappening in the process being controlled.

An assessor – a device that determines the significance of whatis actually happening by comparing it with some standard or expectation of what should happen.

An effector – a device (often called ‘feedback’) that alters behaviourif the assessor indicates the need to do so.

A communications network – devices that transmit informationbetween the detector and the assessor and between the assessor and the effector.

These four basic elements of any control system are given in the following diagram.

Elements of the Control Process

The functioning of these four basic elements is described in three examples of increasing complexity; the thermostat, which regulates room temperature; the biological process that regulates body temperature; and the driver of an automobile, who regulates the direction and speed of the vehicle.

Thermostat The components of the thermostat are (i) a thermometer(the detector), which measures the current temperature of a room; (ii) an assessor, which compares the current temperature with the accepted standard for what the temperature should be; (iii) an effector, which prompts a furnace to emit heat (if the actual temperature is lower than the standard) or activates an air conditioner (if the actual temperature is higher than the standard) and which also shuts off these appliances when the temperature reaches the standard level; and (iv) a communications network, which transmits information from the thermometer to the assessor and from the assessor to the heating or cooling element.

Body Temperature Most mammals are born with a built-in standardof desirable body temperature; in humans that standard is 98.6°F. The elements of the control mechanism by which the body strives to maintain that standard are

the sensory nerves (detectors) scattered throughout the body;

the hypothalamus centre in the brain (assessor), which compares information received from detectors with the 98.6°F standard;

the muscles and organs (effectors) that reduce the temperature when it exceeds the standard (via panting and sweating, and opening the skin pores) and raise the temperature when it falls below the standard (via shivering and closing the skin pores); and

the overall communications systems of nerves.

This biological control system is homeostatic – that is, self-regulating. If the system is functioning properly, it automatically corrects for deviations from the standard without requiring conscious effort.

The body temperature control system is more complex than the thermostat, with body sensors scattered throughout the body and hypothalamus directing actions that involve a variety of muscles and organs. It is also more mysterious; scientists know what the hypothalamus does but not how it does it.

Automobile driver Assume you are driving on a highway wherethe legal (i.e., standard) speed is 65 mph. your control system acts as follows:

Your eyes (sensors) measure actual speed by observing the speedometer;

your brain (assessor) compares actual speed with desired speed, and, upon detecting a deviation from the standard,

directs your foot (effector) to ease up or press down on the accelerator; and as in body temperature regulation, your nerves form the communication system that transmits information from eyes to brain and brain to foot.

But just as body temperature regulation is more complicated than the thermostat, so the regulation of a car is more complicated than the regulation of body temperature. This is because there can be no certainty as to what action the brain will direct after receiving and evaluating information from the detector.

For example, once they determine that the car’s actual speed exceeds 65 mph, some drivers, wanting to stay within the legal limit, will ease up on the accelerator, while others, for any number of reasons, will not. In this system, control is not automatic; one would have to know something about the personality and circumstances of the driver to predict what the actual speed of the automobile would be at the end point of the process.

Management

Management in business and human organization activity is simply the act of getting people together to accomplish desired goals. Management comprises planning, organizing, staffing, leading or directing, and controlling an organization (a group of one or more people or entities) or effort for the purpose of accomplishing a goal. Resourcing encompasses the deployment and manipulation of human resources, financial resources, technological resources, and natural resources.

Management can also refer to the person or people who perform the act(s) of 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). 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. 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 CEO or 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.

Management Control Systems versus Simpler Control Processes

Unlike in the thermostat or body temperature systems, the standard isnot preset. Rather, it is a result of a conscious planning process. In thisprocess, management decides what the organization should be doing and part of the control process is a comparison of actual accomplishments with these plans. Thus, the control process in an organization involves planning. Management control, however, involves both planning and control.

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. Although she may have routine ways of comparing certain reports of what is happening with standards of what should be happening, the manager must personally perform the assessor function, deciding for herself whether the difference between actual and standard performance is significant enough to warrant action, and if so, what action to take.

Unlike controlling an automobile, a function performed by a single individual, management control requires coordination amongindividuals. An organization consists of many separate parts, andmanagement control must ensure that each part works in harmony with the others, a need that exists only minimally in the case of the various organs that control body temperature and not all in the case of the thermostat.

The connection for perceiving the need for action to determine the action required to obtain the desired result may not be clear.

Much management control is self control; i.e., control is maintained notby an external regulating device like the thermostat, but by managers who are using their own judgement rather than following instructions from a superior.

Systems

System is a set of interacting or interdependent entities, real or abstract, forming an integrated whole.

The concept of an “integrated whole” can also be stated in terms of a system embodying a set of relationships which are differentiated from relationships of the set to other elements, and from relationships between an element of the set and elements not a part of the relational regime.

The scientific research field which is engaged in the study of the general properties of systems includes systems theory, systems science and systemic. They investigate the abstract properties of the matter and

organization, searching concepts and principles which are independent of the specific domain, substance, type, or temporal scales of existence.

The term system may also refer to a set of rules that governs behavior or structure.

A system is a prescribed and usually repetitious way of carrying out an activity or a set of activities. Systems are characterized by a moreor less rhythmic, coordinated, and recurring series of steps intended to accomplish a specified purpose. The thermostat and the body temperature control processes are examples of systems. Management control systems are far more complex and judgemental.

Most systems share the same common characteristics. These common characteristics include the following:

Systems are abstractions of reality.

Systems have structure which is defined by its parts and their composition.

Systems have behaviour, which involves inputs, processing and outputs of material, information or energy.

The various parts of a system have functional as well as structural relationships between each other.

Many management actions are unsystematic. Managers regularly encounter situations for which the rules are not well defined and thus must use their best judgement 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.

If all systems ensure the correct action for all situations, there would be no need for human managers.

Boundaries of Management Control

Management control is distinguished from two other systems or activities that also require both planning and control: strategy formulation and task 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. 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, and management control is in between.

General Relationships among Planning and Control Functions

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.

Management Control

Management control is the process by which managers influence other members of the organization to implement the organization’s strategies.

Management Control Activities

Management control involves a variety of activities including

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

Conforming to a budget is not necessarily good, and departure from a budget is not necessarily bad.

Budgets or 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. If a manager discovers a better approach – one more likely than the predetermined plan to achieve the organization’s goals – the management control systems should not obstruct its implementation.

Goal Congruence

Organizational goals explain how an organization intends to go about achieving its mission. For example, a car manufacturer might identify its mission as increasing market share and making a profit. Establishing goals of introducing a new model of car each year and providing the highest-quality spare parts to customers will enable it to achieve that mission.

Goal congruence means 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 keeping in mind the principle of goal congruence.

Tool for Implementing Strategy

Management control systems help managers move an organization toward its strategic objectives. Therefore, management control focuses primarily on strategy execution.

Apart from management controls, strategies are also implemented through the organisation’s structure, its management of human resources, and its particular culture. This is indicated in the following diagram.

Organizational structure: An organizational structure is a mostlyhierarchical concept of subordination of entities that collaborate and contribute to serve one common aim.

Framework for Strategy Implementation

Organizational structure allows the expressed allocation ofresponsibilities for different functions and processes to different entities. Ordinary description of such entities is as branch, site, department, work groups and single people. Contracting of individuals in an organizational structure normally is under timely limited work contracts or work orders or under timely unlimited employment contracts or program orders.

It specifies the roles, reporting relationships, and division of responsibilities that shape decision-making within an organization.

Human Resource Management (HRM): Human ResourceManagement is the strategic and coherent approach to the management of an organization’s most valued assets - the people working there who individually and collectively contribute to the achievement of the objectives of the business. In simple sense, Human Resource Management means employing people, developing their resources, utilizing, maintaining and compensating their services in tune with the job and organizational requirement.

HRM is the selection, training, evaluation, promotion, and termination of employees so as to develop the knowledge and skills required to execute organisational strategy.

Organizational Culture

Every organization has an unwritten culture that defines standards of acceptable and unacceptable behavior for employees. After a few months, most employees understand their organization’s culture. They know things like how to dress for work, whether rules are rigidly enforced, what kinds of questionable behaviors are sure to get them into trouble and which are likely to be overlooked, the importance of honesty, integrity and the like. While many organizations have sub cultures – often created around the work groups – with an additional and modified set of standards, they still have dominant culture that conveys to all employees those values the organization holds dearest. Members of work groups have to accept the standards implied in the organization’s dominant culture if they are to remain in good standing.

Organizational climate

Perhaps one of the most important and significant characteristics of a great workplace is its organizational climate. Organizational climate, while defined differently by many researchers and scholars, generally refers to the degree to which an organization focuses on and emphasizes:

Innovation

Flexibility

Appreciation and recognition

Concern for employee well-being

Learning and development

Citizenship and ethics

Quality performance

Involvement and empowerment

Leadership

Organizational climate, manifested in a variety of human resource practices, is an important predictor of organizational success. Numerous studies have found positive relationships between positive organizational climates and various measures of organizational success, most notably for metrics such as sales, staff retention, productivity, customer satisfaction, and profitability

Financial and Non-financial Emphasis

Management control systems encompass both financial and nonfinancial performance measures. The financial measures are focused on the monetary “bottom line” – net income, return on equity, etc. But all organizations have nonfinancial objectives – product quality, market share, customer satisfaction, on-time delivery, and employee morale.
Aid in Developing New Strategies

In industries that are subject to rapid environmental changes, management control systems can also provide the basis for considering new strategies. This function, referred to as interactive control, draws management’s attention to both positive and negative developments – that indicate the need for new strategic initiatives. Interactive controls are an integral part of the management control system. This is illustrated below in diagram:

Interactive Controls

Strategy Planning & Formulation

Strategic planning is an organization’s process of defining itsstrategy, or direction, and making decisions on allocating its resources to pursue this strategy, including its capital and people. Various business analysis techniques can be used in strategic planning, including SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats ) and PEST analysis (Political, Economic, Social, and Technological analysis) or STEER analysis involving Socio-cultural, Technological, Economic, Ecological, and Regulatory factors and EPISTEL (Environment, Political, Informatic, Social, Technological, Economic and Legal)

Strategic planning is the formal consideration of an organization’s future course. All strategic planning deals with at least one of three key questions:

“What do we do?”

“For whom do we do it?”

“How do we excel?”

In many organizations, this is viewed as a process for determining where an organization is going over the next year or more -typically 3 to 5 years, although some extend their vision to 20 years.

In order to determine where it is going, the organization needs to know exactly where it stands, then determine where it wants to go and how it will get there. The resulting document is called the “strategic plan”.

It is also true that strategic planning may be a tool for effectively plotting the direction of a company; however, strategic planning itself cannot foretell exactly how the market will evolve and what issues will surface in the coming days in order to plan your organizational strategy. Therefore, strategic innovation and tinkering with the ‘strategic plan’ have to be a cornerstone strategy for an organization to survive the turbulent business climate.

Strategy formulation is the process of deciding on the goals of theorganization and the strategies for attaining these goals.

Goals describe the broad overall aims of an organization and objectives describe specific steps to accomplish the goals within a giventime frame.

Goals are timeless; they exist until they are changed, and they are changed only rarely. For many businesses, earning a satisfactory return on investment is an important goal; for others, attaining a large market share is equally important. Non-profit also have goals to provide maximum services possible with available funding. In the strategy formulation process, the goals of the organization are usually taken as given, although on occasion strategic thinking can focus on the goals themselves. 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 a automobile manufacturer to produce and sell an electric automobile would be a strategic decision.

The need for formulating strategies usually arises in response to a perceived threat (e.g., a shift in customer tastes, or new government regulations, or market inroads by competitors) or opportunity (e.g., technological innovations, new perceptions of customer behaviour, or the development of new applications for existing products).

A new CEO usually perceives both threats and opportunities differently from how his predecessor did. So changes in strategies occur when a new CEO takes over.

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 R&D team or the head quarters staff. Anyone might come up with a bright idea, which after analysis and discussion can form the basis for a new strategy.

Complete responsibility for strategy formulation should never be assigned to a particular person or organizational unit.

Task Control

Task control is the process of ensuring that specified tasks are carried out effectively and efficiently. It is transaction-oriented i.e., it involves theperformance of individual tasks according to rules established in the management control process. 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. Their function involves humans only when the latter proves 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.

Many task control activities are scientific; i.e., the optimal decision or the appropriate action for bringing an out-of-control condition back to the desired state is predictable within acceptable limits.

For instance, the rules for economic order quantity determine the amount and timing of purchase orders. Task control is the focus of many management science and operations research techniques.

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 worked by employees, and the amount of cash disbursed. Many of an organization’s central activities – including procurement, scheduling, order entry, logistics, quality control, and cash management – are task control systems.

The Four Paradigms of Control

The conceptual framework, around which the theme of controls is built, has four aspects to it, which are the four paradigms of control. This needs an understanding of the environment (both internal and external) in which an organization operates and its impact on the organization’s control structure.

The four paradigms are

Adaptability,

Integration across organization,

Optimal mix of control and coordination, and

Reinforcing cooperative instincts.

The First Paradigm

A control system is one that enables organizations to adaptthemselves to their environment, know what they want and achieve it withoptimal effort.

The prime purpose being effective adaptation to the environment, the acid test for their success is their ability to discover for themselves, the best strategies and instruments of control to achieve this task of adaptation. Therefore, the criteria should never be only to see that the lines of command are strict and rigid and that the central authority is in a position to enforce its command adequately.

Example

The success of Indian IT and pharmaceutical firms is mainly due to their understanding of control systems. On the other hand, the great failure of the US aviation industry was due to its inability to adapt itself to the fast-changing consumer demands for this service. The expectations of the average air traveller rapidly changed. They were no longer hooked on to luxurious comfort and superb food. They were looking for cheap fares, easy process of booking on the internet and, of course, prompt and reliable service.

The Second Paradigm

The integration of all activities of an organization is the secondparadigm which is described in the diagram. The behaviour of top level is described as corporate governance, senior levels as management controls, supervisory levels as process or operational controls and grass root level as task controls.

All levels are interdependent of each other and it is necessary that at all levels satisfactory controls are in place.

Example

‘N’, a multinational in the detergent industry, had positioned its product as a superior one with prices much higher than its competitors. Its dealers and sales force realized that this was shutting out many markets. This was conveyed to their board. They therefore decided that they should drastically cut down their prices; they cut them down almost 50%.this required them to drastically cut costs and they undertook a cost ascertainment exercise to pinpoint potential savings.

Among other things, they found that the size of the working capital should be cut down. They had targets for these cuts in costs and the organization watched the newly accepted norms of cost performance. Thus, the consumption rate of material, wastage, direct labour productivity and machine productivity had to be watched both in aggregate numbers and also as broken down into individual centres of responsibility. They also set up a quality control system to maintain the quality, which was in the danger of getting eroded in the newly found enthusiasm for cutting costs. This was all management control. The processes were streamlined. This was process control. The productivity of every individual was watched as also were the adherence to quality using statistical quality control techniques. This was task control. Thus the entire hierarchy from the top to the bottom was enabled to work together in congruence.

So the integration of the systems at the board level, the senior levels, operational levels and grass root levels have been emphasized in this paradigm.

The Third Paradigm

It deals with coordinating control systems with self-control and designing and implementing systems for controlling the not-so-sincere people. There is a traditional and modern approach to it.

The Single and Dual Approach

Single focus is on the manner in which leaders could control the not-so-sincere people and systems. Whereas a dual focus is emerging in which it incorporates the need to encourage and build self-control in organizations. Just because no one is ‘in control’ does not mean that there is ‘no control’. In fact, all healthy organizations have processes of control. However, they are distributed processes, not concentrated in any one authoritarian decision maker. We can imagine what would happen if the immune system had to wait for before releasing anti-bodies to fight an infection.

The above diagram shows two alternative paths for control, the single focus and the dual or multiple focuses. The image of the autocrat and policeman in the earlier focus and the emerging trends of empowerment in the altered paradigm of control systems have been invoked here.

The two focus can be described in the following diagram

The New Paradigm of Dual Focus in Control Systems

According to the ideas of Harvard’s Robert Simons, one may say that the single focus paradigm is supported by diagnostic systems, which monitor performance against targets and boundary systems of control which punish prohibited behaviour, and establish the revised paradigm supported by belief systems which are the universally accepted ethics of an organization and interactive systems of control which keep the grass roots and other levels constantly in touch with each other, usually informally. Both the paradigms co-exist in organizations.

Systems Controlled by the Control Paradigm

Systems Controlled by the Coordination Paradigm

The Fourth Paradigm

Simons makes very heroic assumptions about human beings that they want to contribute, achieve, innovate and work competently even if they do not have specific external inducements to be so. Systems designers for controls need, however, make sure that there are no organizational blocks to dissuade them to the contrary.

Human beings are quite capable of generating and implementing adaptive control strategies all by themselves, with mutual consultation without an overweening driving force from the top to make them fall in line and work for the organization. Vernon Smith, the Noble Laureate in Economics in the year 2002, calls it ‘the ecological rationality arising from the social mind’.

The diagram needs an explanation.

The prime mover is the Decision Maker. It is implicitly presumed that the decision maker is on the spot at the interface with the environment using its sensor.

Decision Makers have their goals.

The sensor gets the feedback from the environment.

It forms a perception.

It checks the facts or factual premises.

It compares factual premises with the goals using the comparator (an engineering term for devises to compare actual with expected).

Decision maker may modify the goals through the effector, its agent.

It may also choose to modify behaviour.

It chooses one of the feasible behavioural alternatives from its repertoire.

It effects the change through the effector which is its agent.

The effector checks back with the sensor.

The feedback loop goes on as the system evolves further and further.