Management Control Systems (2nd Edition)

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Chapter Code: MCS02

Pages : 528; Paperback;
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Management Control Systems Textbook

Design of Organization Structure and Control Systems : Overview

Organization structure refers to the role-responsibility relationships of different employees in an organization along with their pre-defined interaction patterns. It facilitates the flow of information both vertically and horizontally in an organization.

The structural dimensions of organization design are - formalization, specialization, hierarchy of authority, centralization, professionalism, and personnel ratios. Some of the contextual dimensions of organization design are - organization size; the technology it uses; and the environment in which it operates.

An organization should be structured in such a way as to go beyond maximizing performance levels and effectiveness of operations. It should encourage participation and innovation throughout the organization.

The various types of organization structures include - functional, divisional, matrix, horizontal, and hybrid structures. The functional structure is characterized by grouping people based on their expertise and skills. In the divisional structure, the divisions are formed based on an organization's product range, the specific markets the organization caters to, or the geographic locations in which it operates. The matrix organization tries to integrate the desired features of both the functional and divisional structures. In this structure, an employee reports simultaneously to two different supervisors. One of these supervisors represents a functional department and the other represents the division, product, market, geography, or project. The horizontal structure prevents the rigidity and departmentalization existing in a vertical system by grouping the managers and employees into synergistic teams for problem solving. When organizations use a combination of any two structures (say, functional and divisional or functional and horizontal), the resulting structure is called a hybrid structure. It combines the strengths of the structures being merged.

A responsibility structure is a collection of responsibility centers. A responsibility center is a function, division, or unit of an organization under a specified authority with a specified responsibility. Responsibility accounting can be defined as a system of management accounting under which accountability is determined according to the responsibility allotted to various levels of management. In an organizational setting, it is necessary that the performance measurement systems are designed to be fair. Two major aspects to be considered are controllability and goal congruence. The controllability principle says that each manager should be assessed and rewarded only for those factors that are under his/her control. Goal congruence is achieved when managers (and employees), while working toward their best self-interest as perceived by themselves, take decisions that are successful in attaining the overall goals of the organization. This happens when their individual objectives are aligned with the organizational goals. Transfer pricing is a tool used in responsibility accounting to assign monetary values to transactions taking place between two or more responsibility centers.

According to the nature of monetary inputs and outputs, responsibility centers can be classified into four types. They are cost centers, revenue centers, profit centers, and investment centers. Cost centers are further divided into standard cost centers and discretionary expense centers.

Designing an optimal management control system involves determining the specific control measures to be used and the degree of tightness or looseness of control required to provide the desired level of certainty of achievement of objectives. An organization may choose any one or a combination of action control, results control, and personnel/cultural control. The decision on the choice and degree of tightness of control is made on the basis of a cost-benefit analysis. Costs include the consumption of available resources, harmful behavioral side-effects, and the development of negative attitudes among employees. Benefit refers to the level of certainty that the organization is able to achieve by implementing the control system.

Complexities and uncertainties in the business environment make it necessary to design the organization structure and management control system in such a way that the benefits earned from operating in numerous countries are higher than the costs incurred. Three main aspects have to be considered for designing the organization structure of an MNC. These are the strategy of international business, extent of centralization, and the division of an MNC into subsidiaries based on product, operational location, or function.

Organizations can choose from one of the following four strategies for doing international business - international strategy, multi-domestic strategy, global strategy, or transnational strategy. This strategic choice depends on the pressure on cost competitiveness, pressure for local responsiveness, and the need for worldwide learning. The extent of centralization of decision-making in different areas such as product development, marketing, production, etc., depends on the choice of strategy for doing international business. In terms of organization structure of the MNC, global structures based on area or product, are common. Limitations in these structures resulted in MNCs adapting the transnational strategy which uses a global matrix structure. A flexible matrix structure can be used to overcome the rigidities of a global matrix structure through the use of informal networks between managers.

The controllability of a subsidiary's results goes from high to low as we move from the multi-domestic strategy to international strategy to global strategy to transnational strategy, as the interdependencies and the costs of control go from low to high. For multi-domestic strategy and international strategy, results controls are therefore more appropriate. For global strategy and transnational strategy, it is more appropriate to use action controls and personnel/cultural controls.

Management control of non-profit organizations is an area distinguishable from that in for-profit organizations because of the inherent difference with respect to source of funds, features of service, the strategies for selling the service, the mode of delivering the services, reward systems for employees, etc. According to Geert Hofstede, four criteria which help in better management control of non-profit organizations are clear objectives, quantifiable results, predictable interfaces, and activities that can be repeated. For different combinations of the four criteria, the organization can adopt different types of controls - routine control, expert control, trial and error control, intuitive control, judgmental control, and political control.

Managers must find ways to encourage employees to be creative and to initiate process improvements, but must still retain enough control to ensure that employee creativity benefits the organization. The concept of "levers of control" proposed by Robert Simons is relevant here. The four levers of control are diagnostic control systems, beliefs systems, boundary systems, and interactive control systems. Diagnostic control systems use quantitative data, statistical analyses, and variance analyses to scan for anything unusual that might indicate a potential problem. Diagnostic systems work well if the goals are reasonable and attainable. Beliefs systems are used to communicate the doctrines of corporate culture to every employee of the organization. Boundary systems are based on the principle that in an age of empowered employees, it is easier and more effective to set the rules regarding what is inappropriate rather than what is appropriate. The effect of this kind of thinking is to allow employees to create and define new solutions and methods within defined constraints. Interactive control systems are futuristic and involve frequent communication between top managers. The interactive control system helps organizations in positioning themselves strategically in the rapidly changing market.

Chapter 2 : Overview

Organization Structure
Structural Dimensions of Organization Design
Types of Organization Structures

Responsibility Structure
Controllability, Goal Congruence, and Transfer Pricing
Responsibility Centers

Designing Control Systems
Control Alternatives

Management Control of International Businesses
Strategy of International Business

Centralization Decision in International Business
Choice of Organization Structure for International Business
Designing Control Systems for International Business

Management Control of Non-Profit Organizations

Control Systems for Empowerment, Innovation, and Creativity
Diagnostic Control Systems
Beliefs Systems
Boundary Systems
Interactive Control Systems