The Nature of Management Control Systems

Basic Concepts
Elements of a control system consists of: 1. A detector 2. An assessor 3. An effector 4. A communication network

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.
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Example: You are driving a car

Detectors= Your eyes Assessor= Your brain Effector= Your foot Communication network= Your nerves system

 Your 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).
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Boundaries of Management Control

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 organizations strategies. Task control is the process of ensuring that specified tasks are carried out effectively and efficiently.
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Distinctions between strategy formulation and management control:

Characteristics System design Strategy Formulation Control Management Unsystematic, Strategic Rhythmic, decision may be made any predetermined time procedures Tailored-made to faced problems, more external and predictive, less accurate Integrated, more internal and historical, more accurate Difficult Top management and line managers 7

Nature of information

Communication of Simple information Involved people Top management and staffs

Distinctions between strategy formulation and management control:

Characteristics Number of involved people Mental activity Discipline Time horizon End products Strategy Formulation Few people Creative and analytic Economics Tend to long-term Goals, strategies Control Management Many people Administrative and persuasive Social psychology Tend to short-term Strategy implementation
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Distinctions between management and task controls:

Characteristics Control Management Task Control Individual task or transaction Tailored-made to individual task, more non-financial data Supervisor or none Follow direction or none Tasks are carried out effectively and efficiently
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Focus of activity The whole of operation Nature of information Integrated, many financial data

Involved people Management Mental activity End products Administrative and persuasive Strategy implementation

Characteristics Mental activity

Distinctions between management and task controls:

Control Management Administrative and persuasive Social psychology Weekly, monthly, annually Discretionary costs

Task Control

Follow direction or none Economics, physics Daily Engineered costs

Discipline Time horizon Type of cost

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Examples of decisions in planning and control function:

Strategy Formulation Management Control Enter a new business Expand a plant Task Control Schedule production Manage cash flows

Change debt to equity Issue new debt ratio

Add direct mail selling Determine advertising Book TV commercials budget Decide magnitude and Control of research direction of research organization Acquire an unrelated business Run individual research project

Introduce new product Coordinate order entry or brand within product line
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