We begin with three terms : Introduction We begin with three terms : Control Management Systems Management control is a must in any organization that practices decentralization

Basic Concepts An organization must be controlled, that is, devices that ensure it goes where its leaders want it to go must be operative Control

Elements of a Control System Basic Concepts Elements of a Control System 1. Detector/Sensor A device that measures what is actually happening in the process being controlled

Basic Concepts 2. Assessor Significance is assessed by comparing the information on what is actually happening with some standard or expectation of what should be happening 2. Assessor A device that determines the significance of what is actually happening by comparing it with some standard of what should happen

The device is often called “feedback” Basic Concepts The device is often called “feedback” 3. Effector A device that alters behavior if the assessor indicates the need to do so

Communication network Basic Concepts Communication network 4. Communication network Devices that transmits information between the detector and the assessor and between assessor and the effector

Basic Concepts Elements of the Control Process device 2.Assessor, comparison with standar 1.Detector, observed information about what is happening 3. Effector, behavior altering communication if needed Entity being controlled

Basic Concepts The management control process is the process by which managers at all levels ensure that the people they supervise implement their intended strategies Management

Basic Concepts A system is a prescribed and usually repetitious way of carrying out an activity or a set of activities Systems

Boundaries of Management Control Management control fits between strategy formulation and task control in several respects

Boundaries of Management Control General Relationships among Planning and Control Functions Activity Nature of End Product Goals, Strategies and Policies Strategy Formulation Implementation of Strategies Management Control Efficient and Effective Performance of Individual Tasks Task Control

Boundaries of Management Control Management control is the process by which managers influence other members of the organization to implement the organization’s strategies 24

Boundaries of Management Control 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

Boundaries of Management Control Goal Congruence Goal congruence means that, insofar as is feasible, the goals of an organization’s individual members should be consistent with the goals of the organization itself. Tool for Implementing Strategy Management control focuses primarily on strategy execution. Management control are only one of the tools managers use in implementing desired strategies. Strategies are also implemented through the organization’s structure, its management of human resources and its particular culture.

Framework for Strategy Implementation Implementation Mechanism Basic Concepts Framework for Strategy Implementation Implementation Mechanism Management Controls Strategy Performance Organization Structure HR Management Culture

Boundaries of Management Control Strategy formulation is the process of deciding on the goals of the organization and the strategies for attaining these goals Strategy Formulation ?

Boundaries of Management Control Distinctions between strategy formulation and Management Control Strategy Formulation is the process of deciding on new strategies Management Control is the process of implementing those strategies

Boundaries of Management Control Task control is the process of assuring that specified tasks are carried out effectively and efficiently Task Control ?

Boundaries of Management Control Task Control Transaction oriented Scientific The focus is on specific tasks Management Control Involves the behavior of managers Can never be reduced to science The focus is on organizational units Concerned with the broadly activities of managers Distinctions between Task Control and Management Control

Boundaries of Management Control Examples of Decisions in Planning and Control Functions Strategy Formulation Management Control Task Control Acquire an unrelated business Introduce new product or brand within product line Coordinate order entry Enter a new business Expand a plant Schedule production Add direct mail selling Determine advertising budget Book TV commercials Change debt/equity ratio Issue new debt Manage cash flows Devise inventory speculation policy Decide inventory levels Reorder an item

Boundaries of Management Control Impact of the Internet on Management Control Instant access Multi targeted communication Costless communication Ability to display images Shifting power and control to the individual

The Concept of Strategy Strategy Formulation Environmental analysis Competitor Supplier Regulatory Social/Political Internal analysis Technology know how Manufacturing know how Marketing know how Distribution know how Logistics know how Opportunities and threats Identify opportunities Strengths and weaknesses Identify core competencies Fix internal competencies Firm’s strategies

Business Unit Strategies Business Unit Mission : The BCG Model Cash source High Low Hold “ Star “ Build “ Question mark “ Harvest “ Cash cow “ Divest “ Dog “ High High Market growth rate Cash use Low Low Relative market share High Low

Business Unit Strategies Business Unit Competitive Advantage Industry Structure Analysis : Porter’s Five Forces Model New Entrants Suppliers Industry Competitors Customers Substitutes

Types of Organizations A firm’s strategy has a major influence on its structure. Their structures can be grouped into three general categories : A functional structure In which each manager is responsible for a specified function such as production or marketing. 2. A business unit structure In which business unit managers are responsible for most the activities of their particular unit, and the business unit functions as a semi independent part of the company 3. A matrix structure In which functional units have dual responsibilities

Types of Organizations A. Functional Organizations

The Types of Organizations Disadvantages of a functional structure There is no unambiguous way of determining the effectiveness of the separate functional managers A dispute between managers of different functions can be resolved only at the top, even though it may have originated at a much lower organizational level. Functional structures are inadequate for a firm with diversified products and markets The important advantage of a functional structure is efficiency

Types of Organizations B. Business Unit Organizations A business unit, also called a division, is responsible for all the functions involved in producing and marketing a specified product line.

The Types of Organizations Advantages of a business unit organizations : Provides a training ground in general management. The business unit manager should demonstrate the same entrepreneurial spirit that characterizes the CEO of an independent company. Its manager may make sounder production and marketing decisions than headquarters might, and unit as a whole can react to new threats or opportunities more quickly Disadvantage of a business unit organizations are : 1. Each business unit staff may duplicate some work that in a functional organization is done at headquarters. 2. The disputes between functional specialists in a functional organization may be replaced by disputes between business units in a business unit organization.

Types of Organizations C. Matrix Organizations CEO Staff Function A Manager Project X Manager Project Y Manager Function B Manager Project Z Manager Function C Manager

The Types of Organizations Implications for System Design Once management has decided that a given structure is best, all things considered, then the system designer must take that structure as given

Responsibility Centers Nature of Responsibility Centers A responsibility center exists to accomplish one or more purposes, these purposes are its objectives. The objectives of responsibility centers are to help implement the strategies. The goods and services produced by a responsibility centers may be furnished either to another responsibility centers or to the outside marketplace

Responsibility Centers The Core Operation of Responsibility Center Work Output Input Goods or services Resources used, measured by cost Capital The products produced by a responsibility center may be furnished either to another responsibility center (as input) or to the outside marketplace (as output)

Responsibility Centers Types of Responsibility Centers Engineered Expense Centers Examples Optimal relationship can be establish Work Outputs Inputs Manufacturing function (Dollar) (Physical)

Responsibility Centers Types of Responsibility Centers Discretionary Expense Centers Examples …… …….. Optimal relationship cannot be establish . . Work Outputs Inputs R&D function (Dollar) (Physical)

Responsibility Centers Types of Responsibility Centers Revenue Centers Examples …… …….. Input do not related to outputs . . Work Outputs Inputs Marketing function (Dollar revenue) (Dollar only for costs directly incurred

Responsibility Centers Types of Responsibility Centers Profit Centers Examples …… …….. Input are related to outputs . . Work Outputs Inputs Business unit (Dollar costs) (Dollar profits)

Responsibility Centers Types of Responsibility Centers Investment Centers Examples …… …….. Profits are related to capital employed . . Capital Employed Outputs Inputs Business unit (Dollar costs) (Dollar profits)

Transfer Pricing Methods Transfer Price is to refer to the amount used in accounting for any transfer of goods and services between responsibility centers.

Transfer Pricing Methods Fundamental Principles The fundamental principle is that the transfer price should be similar to the price that would be charged if the product were sold to outside customers or purchased from outside vendors When profit centers of a company buy products from, and sell to, one another, two decisions must be made periodically for each product : Should the company produce the product inside the company or purchase it from an outside vendor ?. This is the sourcing decision. If produced inside, at what price should the product be transferred between profit centers ?. This is the transfer price decision.

Transfer Pricing Methods Upstream Fixed Costs and Profits a. Agreement Among Business Units Some companies establish a formal mechanism whereby representatives from the buying and selling units meet periodically to decide on outside selling prices and the sharing of profits for products with significant upstream fixed costs and profit

Transfer Pricing Methods Upstream Fixed Costs and Profits b. Two Step Pricing Establish a transfer price that includes two charges : For each unit sold, a charge is made that is equal to the standard variable cost of production. A periodic charge is made that is equal to the fixed costs associated with the facilities reserved for the buying unit.

Transfer Pricing Methods Business Unit X (manufacturer) Product A Expected monthly sales to business unit Y 5,000 units Variable cost per unit $ 5 Monthly fixed costs assigned to product 20,000 Investment in working capital and facilities 1,200,000 Competitive return on investment per year 10 % One way to transfer product A to business unit Y is at price per unit, calculated as follows : Transfer price for product A Variable cost per unit $ 5 Plus fixed cost per unit $ 4 Pus profit per unit $ 2 Transfer price per unit $ 11

Transfer Pricing Methods Correction by two step pricing : Transfer price for product “A” $ 5 + $ 20,000/month fixed cost + $ 10,000 per month for profit : $ 1,200,000 x 0.10 = 10,000 12 Unit “Y” will pay the variable cost of (5,000 unit x $ 5/unit) : $ 25,000 Plus fixed cost and profit : $ 30,000 Total $ 55,000 Unit “X” will pay $ 11/unit (5.000 unit x $ 11 = $ 55,000) If transfers in another month were 4,000 units, Unit “Y” would pay $ 50,000 [(4,000 unit x $ %) + $ 30,000], under two step pricing, compared with $ 44,000 ($ 11 x 4,000 unit). The difference is penalty for not using a portion of unit X’s capacity that it has reserved.

Transfer Pricing Methods Upstream Fixed Costs and Profits c. Profit Sharing The system operates as follows : The product is transferred to the marketing unit at standard variable cost After the product is sold, the business units share the contribution earned, which is the selling price minus the variable manufacturing and marketing costs.

Transfer Pricing Methods Upstream Fixed Costs and Profits d. Two Sets of Prices The manufacturing unit’s revenue is credited at the outside sales price and the buying unit is charged the total standard costs. The difference is charged to a headquarters account and eliminated when the business unit statements are consolidated.