Management Control Systems

1. Management Control Systems Prof. Naik,

2. Flow of lecture 1 Relation of course with overall MMS/PGDM syllabus Newspaper cuttings Measurement Taxi Riksha fares Third wave-Alvin Toffler Cost centre-Responsibility Centre Profit centre Transfer price Controller

3. A few months from now, most of you will be working or having your own set up • Some of you may work for a large organisation, some for small; some for MNCs, some in family business • But no matter where you work, all organisations will have something in common • WHAT IS IT?

4. Where does MCS stand in your education? Cost & Mgmt Accounting Persp I FMI OB & HRM Persp Mgmt II MCS Business Policy

5. Admission Mania • It is that time of the year which brings anxiety to parents and students seeking college admissions. • Government of Maharashtra brought another scheme this year - 85% or abovePercentage reserved for students appearing for SSC board to compensate for the extra marks being allegedly awarded by ICSE and other boards. • Our correspondents moved from South Mumbai colleges to Central and Western Suburban Colleges and finally to colleges in the Eastern suburbs.

6. Admission Mania • Here is what they found out. Students appear to prefer Commerce streamsover Art and Science.

7. What Counts gets measured What gets rewarded really counts What gets measured gets done Strategy What gets done gets rewarded

8. MCS Understanding Strategies Perspective of Management Control Systems. Basic concepts Boundaries of Management Controls Goals The concept of Corporate and Business Unit Strategies

9. Financial Goal Setting EVA, Free Cash Flow market Gap, RONW, P/E, EPS and their Inter- relationship, ROI and Sensitivity Analysis. Organization Hierarchies and Behavior Goal Congruence, Information Factors that influence Goal Congruence, Types of Organization and the Formal Control Systems, Functions of Controller

10. Responsibility Centers Responsibility Centre, Revenue, Expenses and Investment Centers, Administrative Support and R and D Centers, Responsibility Budgeting

11. Profit Centers General Consideration, concept, Identification and Creation Matrix Structure, Profit Centers for Control and Decentralization

12. Transfer Pricing Objectives, Cost, Market and Margin based Methods, Pricing Corporate Services, Administration of TPs

13. Measuring and Controlling Profits and Assets EVA, Free Flow, ROI and Residual Income Measuring Assets Employed, Alternatives for Managerial Performance Management

14. Performance Measurement and Control Information for performance control, Interactive Control, Balance Scorecard

15. MCS in Service and Non Profit Organizations Service Organizations in General, Professional and Non-Profit Organizations

16. Summing Up Controls for Differentiated Strategies, Top Management Styles, Summing up

17. Audit Efficiency Audit and Management Audit

18. Case Study: West Port Electric Company • Case Study: North Country Auto or any Other Similar Case • Case Study: Birch Paper Company • Case Study: Quality Metal Service • Case Study: General Electric B

19. Suggested Readings Management Control systems by Rober Antony and Vijay Govindrajan (Tata McGraw Hill) Management Control Systems Dr. R.S Aurora and Prof S R kale (Jaico Publishing House) OTHER INFORMATION Each session of 90 Minute duration. For Quantitative topics, basis application knowledge required but advanced techniques topics, basic application knowledge is required but advanced techniques are not expected to be covered Emphasis should be covering the subject of Management Control as a “Process” (and not as Techniques) Due attention would be given to behavioral aspects of all the topics

20. Strategy and Strategic Management • Concept of Strategy • Strategic Managent

21. Concept of strategy • Strategy indicates the general direction in which an organisation plans ot move to attain its goals • In some organisations it may not be stated explicitly • Strategy is usually developed by matching core competencies with industry oportunities. Another school of thought-NOT MATCH STRETCH

22. Strategic Management • Develop vision, mission • Set objectives • Craft strategy to achieve objectives • Implement and execute strategy • Monitor, evaluate, take corrective action

23. MCS • Management Control Systems are systems intended to help implement strategies. • In your First Semester Perspective Management course, you have covered that control cannot exist without planning and that planning and control are two sides of the same coin • Control includes Planning and Control processes

24. MCS • Course is designed to help you to think through how you would manage strategy implementation dilemas in which operating managers find themselves. In particular, course is meant for you to gain knowledge, insights and analytical skills related to how managers go about designing and implementing formal systems for strategy implementation

25. KEY IDEAS • Obviously different organisations ,even in the same industry have different strategies • Different Control Systems are required to effectively implement strategies

26. MCS The following material is based on correspondence with Dr Anthony • Any technological process should and does bring about improvement • Obviously technology will lead to improvements in the effectiveness and efficiency of management control in ways not foreseen

27. Dr Anthony (contd) • Framework for MCS was developed in the 60s • Much technological changes, particularly in the field of IT have taken place since • However, MCS framework has not changed and is unlikely to change in the immediate future BECAUSE IT IS GROUNDED ON HUMAN NATURE

28. Dr Anthony(contd) • Management Control Proces is behavioural-involving interactions among managers, between managers and their subordinates • Because managers differ from one another in their ability, leadership qualities, interpersonal skills, experience, approach to decision making, understanding ability and affinity to numbers and in other ways the DETAILS of management control process varies from organisation to organisation and among centres

29. Dr Anthony(contd) • The differences relate to the way the control system is USED. However, to function effectively, the FORMAL system must be basically the same THROUGHT the organisation • The importance of the subject matter covered in this subject is captured well in the widely accepted truism among management consultants- that over 90%of business and (nonprofit organisations) keep foundering on the rocks of implementation---

30. Dr Anthony(contd) ----either strategies never come into being, or get distorted or the implementation is much more costly and time consuming than anticipated. However laudable strategic intentions maybe—to change the product mix, to improve the quality of products, to become the lowest cost producer, to build market share or to maximise short term earnings and cash flow—if the strategies do not get converted into reality, they are usually not the paper they are written on

31. Dr Anthony (contd) • Soon most of you will be soon in positions, where you will be directly responsible for strategy implementation, material in this course is of high relevance to you BUT

32. Dr Anthony(contd) • The topic is completely new,and the early reaction of students is one of frustration • In particular, first two topics (covered in Chapters 1 and 2)in which some of the ‘givens’ must be recognised and dealt with in the design of a control system, frequently don’t make the impact on the students (AT THE TIME) that is desirable

33. Dr Anthony (contd) • The Gap between student achievement and faculty expectation reduces in Chapters 3 &4 when students begin to fit the earlier pieces together in specific CASE contexts. • The delayed student appreciation of the intellectual content and administrative importance of the course is unavoidable • Additional Case Studies(10 marks in paper and 20 marks in internal assessment plus theory is reinforced) • Class participation • Regularity in attendence/studies • Perseverance