ACHIEVING ORGANIZATION

OBJECTIVES OF EFFECTIVENESS,
EFFICIENCY AND COMPLIANCE.
 Points to Discuss
• Operationalizing a Management control System
• Organizational roles Involved in
Implementation
• Challenges in implementation
• Impact of Organizational Life
Cycle on control Systems
 Operationalizing a
Management control System

To be effective, management controls should be integrated

into the organization's Activities. Management controls
should be integrated into the organization’s activities to
influence the organization’s capability to achieve its objectives
and to improve the quality of its business operations.
The different activities are:

1) Control Activities
2) Communication
3) Monitoring the Control System
 Control Activities

 It refers to the policies and procedures that are used in an

organizations.

 To provide a reasonable assurance that the directions and

instructions given by the management are followed appropriately.

 It differ from business to business, according to the environment, objectives,

business operation, people involved and organizational structure and culture.
 Control Activities in Management
Controls
Control Activity Description
Top level reviews Review of organization’s performance (against fore cast,
benchmarks) and the progress of strategic initiatives.
Direct functional/activity Review of operational performance, reconciliation of
management records etc.
Information processing Include control activities about the transactions
information
Documentation It includes Policy manual, standard operating procedures,
evidence of ongoing use of control system.
Segregation of duties Dividing the duties in the organization among employees.
Physical controls Include physical security of assets and periodic
verification
Analysis of performance Data analysis to identify trends, deviations etc.
Indicators
Meetings For coordination, problem solving strategic planning and
performance review, innovation etc.
 1. Meetings
 Meetings are an important programs in an
organization for creating coordination among the
employees, problem solving, strategic planning and
performance review and innovation programs.

 Meetings helps improving decision-making and

reduces the time taken for the decision-making
process.

 Types of meetings are:

i) Daily check-in
ii) Weekly tactical
iii) Monthly strategic
iv) Quarterly off-site review
 Features of the Different Types of
Meetings
Meeting Time Purpose and Format Key to Success
Types Required
Daily 5 min. Share daily schedules and i) Keep it administrative
Check-in activities ii) Don’t cancel even when
some people can’t be there
Weekly 45-90 min. Review weekly activities and i) Don’t set agenda until
Tactical metrics and resolve tactical after initial reporting
obstacles and issues ii) Post pone strategies
discussions
Monthly 2-4 hrs. Discuss, analyze, brainstorm, i) Limit to 1 or 2 topics
Strategic and decide upon critical issues ii) Prepare and do research
affecting long term success ii) Engage in good conflict
Quarterly 1-2 days Review strategy, industry i) Get out of office
off –site trends, competitive landscape, ii) Focus on work, limit
Review key personnel, team social activities
development iii) Don’t over structure or
overburden the schedule
 2. Communication
 Is required to pass on the information.

 Necessary for the coordination of the work, assigning

responsibilities, etc.

 There are two types of communication-

i) Internal communication

ii) External communication

 Internal Communication
 Internal communication is a formal communication (oral/written) of the
consistency/inconsistency of the management behavior, to the employees.

 Spreading the organizational culture and values to the new and existing employees by
employees, also a kind of internal communication. Internal communication includes –

i) Informing the employees about the importance and functioning of the control system
and the role which they have to play with in the control system.

ii) Making employees aware of the problems that may arise and the ways to handle them.

iii) Letting employees know how their activities would affect the job of other employees.

iv) Collecting and processing employee feed back and ideas related to business functions ,
products, continuous process improvement.

v) Ensuring proper, two-way communication between the management and the board of
the directors; this helps the board in carrying out it’s functions properly.
 External Communication

 It includes communication with the suppliers, customers, external auditors etc.

 It provides customer’s feed back regarding the quality of products and services.

 A lot of business process are outsourced and that too to organizations to the different
parts of the world.

 In outsourcing, managers face issues in controlling all the aspects of the business in
terms of time and costs, as they cannot be physically present at all the out source
locations and to handle these issues the organization takes help of different software
and technology.

WebEx^Tm is a technology which facilitate higher productivity an cost

efficiency throughout the organization.
 Monitoring the Control System

 The organizations should develop controls in such a way

that they are flexible to adapt to changes and to incorporate
any changes in plans when required.

 As organizations are operating highly volatile environments, so

these control systems are reviewed and monitored regularly as
they are relevant to the organization at given point of time.

 Control systems require continuous monitoring activities ;like

regular management and supervisory activities, periodic audits-
both internal and external.
 Organizational Roles Involved
Implementation

The management control systems of an organization consist of

different procedures to help in proper monitoring and control of its
various operations. Management control implemented by a number
of people both internal and external to the organization.

Each of them plays a different role and has

different responsibilities towards effective
implementation of management control system.
 Internal Entities
 The responsibilities of the employees depend upon
their roles and position they hold in the organization.
Some of the internal entities and their roles are discussed as-

Management-
 It comprises the CEO, managers of different departments, financial officers, etc.
 CEO is the highest authority in the organization that is responsible for the management
control system, and is responsible for deciding the values and standard operating
procedures.

 Chief financial officers and controllers are responsible for devising budgets, and are also
responsible for monitoring the performance on all fronts-operation, financial and
compliance.

 Departmental Managers and the managers for specific activity are responsible for the
controls in their specific departments and for specific activities. And these managers
devise the departmental and functional control.
 The manager is responsible for determining the discrepancies and other issues and to
communicate problems to the higher level of management.
 Board of Directors- It is the body which is responsible for supervising and
directing the management of the organization and the management of the
organization is answerable to the board of directors for its activities. Some of the
functions of board of the directors are-

 Selecting the key members of the top management.

 Guiding the organization in making certain critical decisions regarding objectives and
strategies.

 Helping in implementing appropriate controls by providing proper super vision.

Internal Auditors- They are responsible for evaluating the controls and suggesting
improvements in them. They are responsible for the following-

 Assessing whether the financial and operating information is reliable and the methods
used for obtaining information are appropriate.

 Assessing whether the control systems conform to the set standards and regulations.
 Assessing the operations to check whether the outcomes of the operations are
matching with the set objectives of the organization.

 Protecting the assets & ensuring the proper utilization of resources.

Employees- Each employee, within his/her role and responsibility, contributes to

the control process.

EX- Through maintaining records regarding inventories, sales reports etc.; monitoring
variances; and trying to find the reasons for variances and rectifying them.
 Project Control System
Implementation Process
The success of the project control system depends on the degree to which its
implementation is viable and effective with in the framework of the project’s
requirement. The direct participation and support from the top management is very
important while implementing the project control system and while implementing, it
is necessary to let people involved in the project to know the different controls that
will be in place. The implementation of a project control system involves the
following human elements-

 Participation and support from the top management .

 Involvement of the other members and communication.

 Project control engineer’s effectiveness i.e. he is responsible for maintaining the

control system and its implementation on daily basis.
 External Entities
These are the entities, who influence the
effectiveness of the control system. Some
of the external entities and their roles are
discussed as-

External auditors-
 They play an important role in the financial statement audit of any organization .
 They helps in ensuring the financial statements are fairly presented.
 They should have appropriate knowledge of the organization‘s internal control
systems
so as to conduct an effective audit.
Customers and Suppliers-

 They help organizations in improving their activities to meet the operational, financial, as
well as compliance objectives.
 The organization should take care that proper processes are in place to take all this feed
back in to consideration and rectify issues on a timely basis.
Legislators and Regulators-

 They develop rules that the organization have to abide by while developing and
implementing the control systems that comply with the law of the land.

 Important laws and regulation generally relate to financial statements; in certain cases,
they also relate to the compliance aspects of operational and environmental issues.

Financial analysts-

 They assist whether the organization’s effectiveness- current performance as well as

potential for future performance- is good enough from the perspectives of investors
and/ or lenders.

 The information provided by them helps the organizations to know how their
performance is rated; the environmental risks that it may be subject to; and the newer
strategies that it can adopt to improve performance.
 Challenges in
Implementation
 For control systems to be effective, they must
be designed and implemented appropriately.

 The issues faced while implementing

controls can be of two types-

i) Issue which hinder the management control process .

ii) Dysfunctional consequences of implementing the management control systems.

i) Hindrances to The Management Control Process- In any
organization, the management should continuously monitor the implementation and
administration of management control systems.

Also may have to intervene and take suitable actions when the control system is not
able to handle a specific situation. Some of the issues that hinder the management
control process are as :

 There could be problem in the control environments like organizational values,

management styles and management’s priorities.

 When an organization doesn’t have a proper organizational structure and the hierarchy
is not clear it may face an issue in implementing control systems.

 There could be deficiencies in training & developing employees to perform their

activities satisfactorily.

 There could be lack of proper two-way communication between the supervisor and
subordinate as they may fail what is expected of him/her.

 The management may abuse it’s authority to bypass procedures and policies for
personal gain or to show the organization’s performance to be better than actually it is.
 AGENCY THEORY

It is defined as the analysis of principal-agent relationship

in which one person, an agent, acts on behalf of another
person, a principal; that is, the principal assigns work and
delegates decision making to the agent. It assumes that
agents are opportunistic in nature.
 Dysfunctional Consequences of
Management Control System
During ideal situations, management control systems should help organizations
to achieve their objectives effectively, efficiently and with compliance of top
mgmt. But in real world, the implementation and administration of mgmt. control
systems can lead to dysfunctional consequences that are counter productive to the
systems achievement of organizational objectives. Some of the possible
dysfunctional
consequences of control
Systems are as :-

 The control systems which emphasizes negative

reinforcement rather than positive reinforcement,
managers and employees direct their intelligence
on how to divert the blame on others rather than
trying to find the ways to correct problems.

 Tight control can lead to negative emotions such

as fear and resentment and counter productive
behavior such as active or passive resistance to
 Overemphasis on quantification and an attempt to measure all possible parameters may
simply increase the cost of control without corresponding benefits.

 The presence of standard operating procedures and rules may not allow employees to
think innovately and creatively and hence hinder adaptability.

 The setting of goals and standards can sometimes lead to an ‘inversion of means and
ends’, especially if the performance parameters are decided on ease of quantification
and measurement.

Ex- In a sales organization with lengthy sales cycles, if the ‘number of new prospects
in a month’ is set as the criterion for performance assessment, the sales representatives
may try to meet the maximum number of prospects rather than increasing sales among
existing prospects and customers.

 If the control system holds managers responsible for achieving targets which are not in
their control but are subject to significant influence of the environment, it reduces the
credibility of the top management and the control system.

 An employee has to perform multiple activities. For a control system design, the
employee has to put more focus on the activity which gives him more returns, rather
than giving attention to each of his responsibilities.
 Impact of Organizational Life
Cycle on Control Systems
 For any organization, there is a life cycle and the control requirements change
depending on which stage of the life cycle the organization is in.

 According to Larry E. Greiner, organization goes through five different phases of

development and growth. These are :-

1. CREATIVITY PHASE
2. DIRECTION PHASE
3. DECENTRALIZATION PHASE
4. COORDINATION PHASE
5. COLLABORATION PHASE
 Creativity Phase
 This phase begins at the inception of the organization and
is characterized by high focus on developing products and
services to compete with the existing players in the market.

 There is higher level of informal communication within the organization.

 Owners of the organization focus on technical & operational

aspects rather than the management aspects.

 Decision regarding the business of the organization are influenced by the market
condition and the external environment and which are taken by the owners.

 As organization grows, the focus on innovation and creativity may not always pay off.
The org. has to achieve economies of scale and financial control has to enhanced with
newer accounting systems and controls.

 In this transition phase, the organization phase needs a better leader who would help
in managing this transition.
 Direction Phase
 In this phase the organization appoints a leader who directs the performance of the org.
and takes it on to a path of controlled growth.

 Organization adopts a functional structure and employees get specialize in their areas.

 Departments are viewed as revenue centers or cost centers and standard operating
procedures and formal reward systems are devised and implemented.

 Communication becomes formal as more levels are introduced in the hierarchy and
decision-making authority lies with the senior management team.

 With higher number of hierarchical levels and functional

departments, it becomes difficult to manage and control.

 Lack of autonomy leads to increased dissatisfaction

among the lower level managers and employees and
they are frustrated that they are not allowed to apply
their expertise and to take decisions on their own.
 Decentralization Phase
 In this the lower level managers are given the authority to take decisions and the
responsibility for growing the business.

 Direct communication between the top mgmt. and lower levels decreases through
occasional site visits, circulars, etc.

 The organization tries to increase the motivation levels by introducing the concept of
profit center and by giving incentives which in turn motivates manager
to perform better.

 The issues in this phase arise when the managers do not

comply with the plans and budgets of the organization
and choose to use their own discretion in decision making.
 Coordination Phase
 There is an extensive use of formal monitoring and control systems,
and these systems are created and implemented by the top mgmt.

 In this phase the functional or geographical organizational structure is changed to form a

a divisional or product based structure.

 The staff functions are strengthened to close the monitor the activities and out comes of
line managers.

 Decisions regarding investments are thoroughly evaluated by head quarters.

 Divisions are considered to be investment centers and resource allocation is done

considering the return that each center generates on the investment made.

 The presence of large number of standard procedures to be followed hampers the

innovativeness of the employees.
 Collaboration Phase
 It is characterized by increased level of collaboration between the
line and staff functions.

 The emphasis is on social controls and self discipline rather than

formal control mechanisms.

 Organizations may further change there structure from a

divisional to a matrix structure.

 Employees are trained to work in cross functional teams and

manage conflicts constructively.

 Incentive systems are modified to reward team efforts rather than

individual accomplishments which in turn fosters innovation.
Control Systems and Organizational
Decline or Change
 According to Kim S. Cameron, Myung Kim, and David A.
Whetton, organizational decline is defined as ‘a condition in
which a substantial, absolute decrease in an organization’s
resource base occurs over a period of time.’

• A lot of issues arise when the organization is on a decline.

These include more conflicts , greater resistance towards
change, decrease in the credibility of the top management,
downsizing, lack of motivation among employees, and exit
of key employees.

• To handle these situation organization need to increase its

efforts towards making employees understand the strategies
through better and more frequent communication.
 The “Towards One Philips
(TOP)” Initiative
 This program was initiated by Philips, an electronics company who was facing bankruptcy
when it posted losses of $2.6 billion.

 The aim of this restructuring program is to encourage greater cooperation between the
different divisions and to unify Philips as one organization, changing the bureaucratic
work culture, and fostering team work.

 Further, the initiative also aimed at cost cutting, developing innovative products, and
improving customer relationship.

 The bureaucratic work culture helps in enhancing the knowledge

sharing between different divisions, which in turn reduces the
time-to-market for new products.
Issues While Implementing New Control
Systems And Modifying Existing one

 All employees would not agree for a change. The implementation of change
change should begin with people who are optimistic about the new system.

 Control system change may require changes to the organizational

structure and processes. It is necessary for organizations to know
how much of a change has to be brought about and how much it will help in meeting the
organization’s objectives.

 The required training regarding the new system should be imparted appropriately to the
managers and employees .

 If it is a project control system, the new control system has to be tried and tested using
pilot projects to validate the advantages of the system to the stake holder.