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The Nature of Management Control Systems

Basic Concepts

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Elements of a control system consists of:1. A detector2. An assessor3. An effectors4. A communication network

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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.

Example: You are driving a car

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Detectors= Your eyesAssessor= Your brainEffector= Your footCommunication network= Your nerves

system

5Your 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).

Boundaries of Management Control6

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.

Distinctions between strategy formulation and management control:7

Characteristics Strategy Formulation Control Management

System design Unsystematic, Strategic decision may be made any time

Rhythmic, predetermined procedures

Nature of information

Tailored-made to faced problems, more external and predictive, less accurate

Integrated, more internal and historical, more accurate

Communication of information

Simple Difficult

Involved people Top management and staffs

Top management and line managers

Distinctions between strategy formulation and management

control:8

Characteristics Strategy Formulation Control Management

Number of involved people

Few people Many people

Mental activity Creative and analytic Administrative and persuasive

Discipline Economics Social psychology

Time horizon Tend to long-term Tend to short-term

End products Goals, strategies Strategy implementation

Distinctions between management and task controls:

9Characteristics Control Management Task Control

Focus of activity

The whole of operation Individual task or transaction

Nature of information

Integrated, many financial data

Tailored-made to individual task, more non-financial data

Involved people Management Supervisor or none

Mental activity Administrative and persuasive

Follow direction or none

End products Strategy implementation Tasks are carried out effectively and efficiently

Distinctions between management and task controls:

10Characteristics Control Management Task Control

Mental activity Administrative and persuasive

Follow direction or none

Discipline Social psychology Economics, physics

Time horizon Weekly, monthly, annually

Daily

Type of cost Discretionary costs Engineered costs

Examples of decisions in planning and control function:

11Strategy Formulation

Management Control

Task Control

Enter a new business Expand a plant Schedule production

Change debt to equity ratio

Issue new debt Manage cash flows

Add direct mail selling

Determine advertising budget

Book TV commercials

Decide magnitude and direction of research

Control of research organization

Run individual research project

Acquire an unrelated business

Introduce new product or brand within product line

Coordinate order entry