What Is Management Control Systems ?

Management Control Systems (MCS) theory is a useful integrative tool for

organizing, explaining, and understanding the jargon and concepts of performance
measurement. MCS theory can help make sense of the criteria by providing a way
of organizing and remembering the criteria and the related jargon and concepts. A
good place to start in understanding the relationship between the criteria and MCS
theory is with the stated objective of the criteria:
To provide an adequate basis for responsible decision-making by both contractor
management and DoD Components, contractors internal management control
systems must provide data which
(a) indicate work progress,
(b) properly relate cost, schedule and technical accomplishment,
(c) are valid, timely and auditable, and
(d) supply DoD managers with information at practicable level of summarization.
The phrases responsible decision-making and management control systems
are important. The criteria are intended to foster responsible decision making by
setting minimally adequate standards for the contractors MCS. But just what is
responsible decision decision-making, what is the relationship with the criteria, and
what is MCS? This paper answers these questions. The intent is to build a
conceptual framework useful for explaining and understanding the criteria.
A MCS is a system. A system is an aggregate of machines and people that work
toward a common objective. A system can be described as a series of steps or
phases consisting of an input phase, a processing phase, and an output phase. A
control system adds measurement, analysis and reporting phases to the system.
Output is measured, compared against a plan, analyzed if judged significant, and
then reported back to the appropriate earlier phases of the system in the form of
positive or negative reinforcement.
In a management control system, data/information is typically fed back to
managers of the various system phases. Responsible managers will then
take appropriate action based on the data/information provided.
To help insure that the data/information supplied is of high quality, the MCS must
have certain characteristics. Every MCS has certain generic components.
. There must be a reliable performance measurement system. Realistic standards
should be planned and maintained.
The standards should be consistently and regularly compared with performance
measurement data.
Any variances that exceed predetermined thresholds should be enthusiastically
investigated and reported to the people who have responsibility and authority to
make appropriate and timely adjustments.
All adjustments should be controlled, especially any adjustments that affect
predetermined standards and thresholds.
A management control system (MCS) is a system which gathers and uses
information to evaluate the performance of different organizational resources like
human, physical, financial and also the organization as a whole considering the
organizational strategies. Finally, MCS influences the behavior of organizational
resources to implement organizational strategies. MCS might be formal or
informal. The term management control was given of its current connotations by
Robert N. Anthony (Otley, 1994).
Robert N. Anthony (2007) defined Management Control as the process by which
managers influence other members of the organization to implement the
organizations strategies. Management control systems are tools to aid
management for steering an organization toward its strategic objectives and
competitive advantage. Management controls are only one of the tools which
managers use in implementing desired strategies. However strategies get
implemented through management controls, organizational structure, human
resources management and culture. Anthony & Young (1999) showed
management control system as a black box. The term black box is used to describe
an operation whose exact nature cannot be observed. MCS involves the behavior of
managers and these behaviors cannot be expressed by equations. Anthony &
Young (1999) showed that management accounting has three major
subdivisions: full cost accounting, differential accounting and management control
or responsibility accounting.
According to Horngren et al. (2005), management control system is an integrated
technique for collecting and using information to motivate employee behavior and
to evaluate performance. According to Simons (1995), Management Control
Systems are the formal, information-based routines and procedures managers use
to maintain or alter patterns in organizational activities.
Chenhall (2003) mentioned that the terms management accounting (MA),
management accounting systems (MAS), management control systems (MCS), and
organizational controls (OC) are sometimes used interchangeably. In this case, MA
refers to a collection of practices such as budgeting or product costing. But MAS
refers to the systematic use of MA to achieve some goal and MCS is a broader
term that encompasses MAS and also includes other controls such as personal or
clan controls. Finally OC is sometimes used to refer to controls built into activities
and processes such as statistical quality control, just-in-time management.
According to Maciariello et al. (1994), management control is concerned with
coordination, resource allocation, motivation, and performance measurement. The
practice of management control and the design of management control systems
draws upon a number of academic disciplines. Management control involves
extensive measurement and it is therefore related to and requires contributions
from accounting especially management accounting. Second, it involves resource
allocation decisions and is therefore related to and requires contribution from
economics especially managerial economics. Third, it involves communication,
and motivation which means it is related to and must draw contributions from
social psychology especially organizational behavior .


Exhibit#1: Management control as an interdisciplinary subject
Management control systems use many techniques such as
Balanced scorecard
Total quality management (TQM)
Kaizen (Continuous Improvement)
Activity-based costing
Target costing
Benchmarking and Benchtrending
JIT
Budgeting
Capital budgeting
Program management techniques, etc.






What is Strategy Formulation & its Implementation?


Strategy formulation is vital to the well-being of a company or organization. There
are two major types of strategy: (1) corporate strategy, in which companies decide
which line or lines of business to engage in; and (2) business or competitive
strategy, which sets the framework for achieving success in a particular business.
While business strategy often receives more attention than corporate strategy, both
forms of strategy involve planning, industry/market analysis, goal setting,
commitment of resources, and monitoring
Strategy formulation refers to the process of choosing the most appropriate course
of action for the realization of organizational goals and objectives and thereby
achieving the organizational vision.

The process of strategy formulation basically involves six main steps. Though
these steps do not follow a rigid chronological order, however they are very
rational and can be easily followed in this order.
1. Setting Organizations objectives - The key component of any strategy
statement is to set the long-term objectives of the organization. It is known
that strategy is generally a medium for realization of organizational
objectives. Objectives stress the state of being there whereas Strategy
stresses upon the process of reaching there. Strategy includes both the
fixation of objectives as well the medium to be used to realize those
objectives. Thus, strategy is a wider term which believes in the manner of
deployment of resources so as to achieve the objectives.
While fixing the organizational objectives, it is essential that the factors
which influence the selection of objectives must be analyzed before the
selection of objectives. Once the objectives and the factors influencing
strategic decisions have been determined, it is easy to take strategic
decisions.
2. Evaluating the Organizational Environment - The next step is to evaluate
the general economic and industrial environment in which the organization
operates. This includes a review of the organizations competitive position. It
is essential to conduct a qualitative and quantitative review of an
organizations existing product line. The purpose of such a review is to make
sure that the factors important for competitive success in the market can be
discovered so that the management can identify their own strengths and
weaknesses as well as their competitors strengths and weaknesses.
After identifying its strengths and weaknesses, an organization must keep a
track of competitors moves and actions so as to discover probable
opportunities of threats to its market or supply sources.
3. Setting Quantitative Targets - In this step, an organization must practically
fix the quantitative target values for some of the organizational objectives.
The idea behind this is to compare with long term customers, so as to
evaluate the contribution that might be made by various product zones or
operating departments.
4. Aiming in context with the divisional plans - In this step, the contributions
made by each department or division or product category within the
organization is identified and accordingly strategic planning is done for each
sub-unit. This requires a careful analysis of macroeconomic trends.
5. Performance Analysis - Performance analysis includes discovering and
analyzing the gap between the planned or desired performance. A critical
evaluation of the organizations past performance, present condition and the
desired future conditions must be done by the organization. This critical
evaluation identifies the degree of gap that persists between the actual reality
and the long-term aspirations of the organization. An attempt is made by the
organization to estimate its probable future condition if the current trends
persist.
6. Choice of Strategy - This is the ultimate step in Strategy Formulation. The
best course of action is actually chosen after considering organizational
goals, organizational strengths, potential and limitations as well as the
external opportunities.

Strategy implementation is the translation of chosen strategy into organizational action so as to
achieve strategic goals and objectives.
Strategy implementation is also defined as the manner in which an organization should develop,
utilize, and amalgamate organizational structure, control systems, and culture to follow
strategies that lead to competitive advantage and a better performance. Organizational structure
allocates special value developing tasks and roles to the employees and states how these tasks
and roles can be correlated so as maximize efficiency, quality, and customer satisfaction-the
pillars of competitive advantage. But, organizational structure is not sufficient in itself to
motivate the employees.
An organizational control system is also required. This control system equips managers with
motivational incentives for employees as well as feedback on employees and organizational
performance. Organizational culture refers to the specialized collection of values, attitudes,
norms and beliefs shared by organizational members and groups.


Following are the main steps in implementing a strategy:

Developing an organization having potential of carrying out strategy successfully.

Disbursement of abundant resources to strategy-essential activities.

Creating strategy-encouraging policies.

Employing best policies and programs for constant improvement.

Linking reward structure to accomplishment of results.

Making use of strategic leadership.
Excellently formulated strategies will fail if they are not properly implemented.
Also, it is essential to note that strategy implementation is not possible unless there
is stability between strategy and each organizational dimension such as
organizational structure, reward structure, resource-allocation process, etc.
Strategy implementation poses a threat to many managers and employees in an
organization. New power relationships are predicted and achieved. New groups
(formal as well as informal) are formed whose values, attitudes, beliefs and
concerns may not be known. With the change in power and status roles, the
managers and employees may employ confrontation behaviour.

Strategy Formulation vs Strategy Implementation
Following are the main differences between Strategy Formulation and Strategy
Implementation-
Strategy Formulation Strategy Implementation
Strategy Formulation includes planning
and decision-making involved in
developing organizations strategic
goals and plans.
Strategy Implementation involves all
those means related to executing the
strategic plans.
In short, Strategy Formulation
is placing the Forces before the
action.
In short, Strategy Implementation
is managing forces during the action.
Strategy Formulation is
an Entrepreneurial Activity based on
Strategic Implementation is mainly
an Administrative Taskbased on
strategic decision-making. strategic and operational decisions.
Strategy Formulation emphasizes
on effectiveness.
Strategy Implementation emphasizes
on efficiency.
Strategy Formulation is a rational
process.
Strategy Implementation is basically
an operational process.
Strategy Formulation requires co-
ordination among few individuals.
Strategy Implementation requires co-
ordination among many individuals.
Strategy Formulation requires a great
deal of initiative and logical skills.
Strategy Implementation requires
specific motivational and leadership
traits.
Strategic Formulation precedes Strategy
Implementation.
Strategy Implementation follows
Strategy Formulation.





What is goal congruence?
The term goal congruence is applied to an organization to insure that all its
operations and activities are set up in support of the organization's goals. This
means that the organization will review all its operations and activities to insure
that none of them (those operations and activities) work in a way that limits or
inhibits the organization's ability to reach its goals, whatever they may be.
The integration of multiple goals, either within an organization or between
multiple groups. Congruence is a result of the alignment of goals to achieve an
overarching mission
Goal congruence term used when the same goals are shared by top managers and
their subordinates. This is one of the many criteria used to judge the performance
of an accounting system. The system can achieve its goal more effectively and
perform better when organizational goals can be well aligned with the personal and
group goals of subordinates and superiors. The goals of the company should be the
same as the goals of the individual business segments. Corporate goals can be
communicated by budgets, organization charts, and job descriptions.
Factors affecting goal congruence?
Factor affecting goal congruence as follows:
1. organizational effectiveness
2. productivity
3. organizational leadership
4. morale
5. organizational efficiency
6. organizational stability
7. organizational reputation