Control Systems, Reaction Paper Example

This course has taught me the very basic idea about management as an activity to bring various productive resources together in the most efficient manner. In order to achieve business success, four functions of management are to be performed correctly and professionally. These functions include planning, organizing, leading, and controlling. All four of these management stages are closely interrelated and codependent. It would be incorrect to state that any of the management functions is of greater or lower importance. This paper, however, will focus more on the control aspect of management. Control is the process of evaluation of how well the organization has been achieving its goals, identifying areas that need improvement and taking certain steps to ensure that the final results actually do match the plan. With the help of the control process, the organizational effectiveness can be measured rather precisely and regulated according to the current needs (Jones-George, 2007). Control, being the last stage of the management cycle should not be considered a one-action step. As any other management functions, it is an ongoing procedure that is constantly repeated within an organization. Various types of control systems largely predetermine the pattern of the future business operations and involves all activities inside the company, which makes this topic one of the major ones for a detailed study.

Effective control is impossible without a clearly set procedure and an algorithm. In order to receive actual results and make any progress, the manager has to perform the control function according to some clear plan. In order to help managers in this rather complicated task, various management control systems have been created. MCS is a system that accumulates information, and uses it to evaluate the performance in any organization. Such an assessment involves studying the inflow of the resources, be it financial, physical or human ones, further transformation of these resources and  processing of the final products. Management control systems may be presented in various ways: both formal and informal ones, but regardless of their form, the entire organization operates accordingly. It is very hard to determine which control systems are functional and which are dysfunctional. Initially, any MCS is meant to increase the effectiveness and therefore is expected to be functional. Depending on the way the system is used and whether the choice of the MCS corresponds with the organizational structure, any control system may turn out to be functional or dysfunctional. A more detailed analysis of the various MCS types is presented below.

Management control systems are based on different methods, which evaluate and control various aspects of the organization’s operations. One of the most basic and popular control systems is the balanced scorecard. It is a strategic management control tool which allows checking whether the current business structure aligns with the pro­­spected growth in the operational scales. The main idea in the balanced scorecard lies in providing a highly comprehensive view over the entire business. Vision is settled based on the customers’ perceptions, shareholders’ profit expectations, and obligations in front of the staff. The balanced scorecard method uses four perspectives:

• Financial perspective – return on investments and return on capital are the basic criteria used
• Customer perspective – is a combination of two main groups of factors. The first is the aggregated value delivered to the customer (quality, service, etc) and the second is the return for these efforts (volumes of sales, dynamics in sales, etc.)
• Innovation perspective – human capital, information and technologies are assessed to ensure sustainable development of an enterprise
• Internal perspective – The “value-adding” process is estimated, or otherwise how does the organization transform its inflow of resources into final product.

The balanced scorecard is widely used in most of the successful organization, especially in large multinational companies, as it allows summarizing information about all the basic areas of operations. The recent trends in the development of this MCS demonstrate that another area of control is now considered by this control method – the influence of the organization on the environment (Cobbold, I. and Lawrie, G. 2002). This fact makes the balanced scorecard an important control system.

Activity-based Costing or ABC is the second functional control system that I would like to discuss in this paper. The idea of the control tools is extremely simple, but nevertheless rather helpful. In order to determine the real effectiveness of the business, the actual cost of the good has to be calculated. This may be rather complicated for large enterprises, which have massive indirect costs. The fact that these costs are not directly assigned to any product makes it hard to calculate which type of good or service generates most (or least) profit. ABC is an invaluable tool for large companies, like Procter and Gamble, which is supposed to bear research and development, HR and marketing costs. While using automatic Activity-based-Costing systems an organization often figures out serious disproportions in the pricing schemes and is forced to rethink them. Rather often it turns out that the leading product development is associated with massive indirect costs and generates an insignificant share of the revenue, while a non-priority good plays a major role. Without such a cost control system, managing an enterprise on large scales would be very complicated.

Some economists claim that the ABC system is outdated and does not consider one of the main resource types – human. This fact almost made ABC entirely dysfunctional, but that is actually wrong, as the recent studies have proven the possibility if updating the model to consider time consumed per a unit of product, as well as the overall employee satisfaction (Kaplan R.S. Anderson S.R, 2005).

The third type of functional MCS is based on the target costing principle. Combined with the Activity-based-Costing, this tool may help many organizations improve their pricing strategies. This control system does no need many accounting changes, massive restructuring or complicated software. Target costing is based on pure logic and simple estimations (Focus Magazine). The main goal of this control system is to ensure that the quality of the good matches its price and that the product is competitive on the market. Traditional pricing implies changes in design in case the price requirements can not be met. This frequently lowers the quality of the final product and the company, manufacturing it will eventually fail to keep up with the market.

Target costing techniques offers a more successful strategy (Crow, C. 2002):

• Reorienting culture and attitude inside the organization
• Establishing a market-driven price
• Figuring out an exact target price
• Identifying essential disciplines that affect the product price (marketing, research and development, finance, etc)
• Analyze alternatives for the cost reduction
• Reduce the indirect costs
• Assess the results

Correctly implied target costing control systems gives the manager full and detailed information over the possibilities of the price reduction and help form an ideal piece-quality combination.

The last functional control system that is going to be discussed today is capital budgeting. This tool allows looking into the effectiveness of the capital involved in the operations of the company. Managing the available financial assets to their top efficiency is one of the core responsibilities of any managers. Capital budgeting determines whether the possible investment options or purchases are reasonable and will provide a higher profitability than the basic highly liquid and secure assets.  Capital budgeting as a control system uses such criteria and methods as internal rate of return, profitability index, net present value, etc.

This control system involves econometrics and mathematics and is combination of formulas and rates. Net Present Value (NPV) and Internal rate of return are two most frequently used and absolutely superior tools for the capital budgeting model (Ryan, P.A. 2002). This control system is the most precise one and therefore is obviously a functional MCS.

All of the Management Control Systems, described above are meant to increase the organizational effectiveness and maximize the final results. These tools are helping to improve the pricing and cost assigning processes, as well as investigate the alternatives for capital investments. Control systems in management are supposed to rationalize the decision-making process and automate it to the maximum extent possible. This usually works while managing capital, financial resources, or the engineering the production process. Such completely functional models, however, often prove to be absolutely inappropriate if applied to the management of people. Formal, bureaucratic control mechanisms are likely to be dysfunctional. The most obvious reason for such a paradox is that extra supervision is always stressful and very few people actually like being thoroughly controlled.

There also is a separate list of possible reasons why the control systems fail while managing human resources:

• Expertise in various fields is being automated, which poses a threat for the potential employment.
• Control systems are too objective and may present some people unfavorably
• The amount of autonomy is also greatly reduced.

A paragraph above proves that the control systems need to be carefully engineered and analyzed, concerning various sides of operations. This is necessary as a seemingly perfectly functional system may fail to generate the anticipated results due to the human factor. In order to design an effective management control system, several control characteristics and criteria need to be considered:

1. Control system should allow making managerial decision
2. As the control process is continuous, the system needs to have a certain cycle that can easily be repeated.
3. Different hierarchal levels of the organization have to be controlled
4. All types of resources and processes need to be analyzed
5. Control system should be closely linked with strategic planning.
6. Control system should be inexpensive and efficient
7. The developed control system should remain a motivating factor for all of the employees

Control function of management is related to the personal attitude of people towards their work to a greatest extent. A person usually does not like to be evaluated and most commonly dislikes anyone who is going to perform the assessment. In order to make the person feel better about the entire control system, human behavior patterns are to be considered and implemented into the control process. The first stage is setting the performance standards. Employees should see direct connections between the results they achieve and praise that comes from the organization in both material and nonmaterial means. Moreover, if the worker is to some extent involved in the process, he/she is likely to work with greater effort.

The second stage involves measuring the achieved results and comparing them with the target. At this time is very important to makes sure that the manager that is responsible for gathering the information is impartial and adequate. A great number of employees are disappointed with their current employer because of the boss’s prejudices and personal qualities (Accel-Team).  During the final stage – giving feedback for the job done, the manager that will be providing the feedback should remain positive and attentive and never critic the employee in public (Accel-Team). Taking behavioral patterns into consideration can significantly improve the control systems’ efficiency.

Of all the control systems, I would like to stress the two most popular and perhaps most efficient ones today: benchmarking and knowledge management. Both practices are not exactly control systems, but great methods to exercise control. Benchmarking is a relatively old practice, which is still gaining multiple supporters in the management field due to its speed relatively low costs and consistently high results. The idea lies in comparing the given company with the leaders in the field. This is especially useful for strategic management, as the long-run goals as well as development vectors can be figured out.

Previously, benchmarking was only applied to actual manufacturing process and was aimed at uncovering some now-how’s. The situation has changed significantly today, as some large companies try to compare everything, starting with research and development, investment structure, pricing strategies, operational process, marketing, and even compensation policies (Reh, J.). Benchmarking process has a number of stages, starting with realizing the organization’s weak and strong sides, then identifying the strongest competitors on the market, comparing the operational results, figuring out the area where underperformance is present and working to improve it.

The most recent trend in the discipline is the so-called knowledge management. Any organization has to clearly realize what volume of information concerning the market state and internal operations is accessible and can be analyzed. Previously, all of enterprises were focused on the tangible assets, and only recently have they realized the true value of information as a resource. The two main questions that need to be answered during the knowledge control process are: what information is currently available to the organization and how this knowledge can be implied to improve the effectiveness of its operations.

The variety of control systems described in this paper demonstrate that control function I an extremely important, but a rather complicated matter. Seemingly functional control systems may lead to serious malfunctions if improperly implemented. Moreover, each control system assesses a certain part of the operations, but is often not able to consider all the business sides that need to e controlled, which urges for a combination of several ones.

References

Cobbold, I. and Lawrie, G. “The Development of the Balanced Scorecard as a Strategic Management Tool”Performance Measurement Association2002. Retrieved July 15, 2009 at: http://www.2gc.co.uk/pdf/2GC-PMA02-1f.pdf

Kaplan R.S. Anderson S.R, 2005 “Rethinking Activity-Based Costing” Working knowledge Retrieved July 8, 2009 at: http://hbswk.hbs.edu/item/4587.html

Focus Magazine “Delighting Your Customers While Making a Profit”. Accessed July 9, 2009 at: http://www.focusmag.com/pages/targetcosting.htm

Crow, C. 2002 “Target costing” DRM Associates. Retrieved July 10, 2009 from: http://www.npd-solutions.com/target.html

Ryan, P.A. 2002 Capital budgeting practices of the Fortune 1000: How have things changed? Bnet.Com. Retrieved July 15, 2009 from:            http://findarticles.com/p/articles/mi_qa5495/is_200210/ai_n21323489/?tag=content;c  ol1

“Management Planning and Control Systems”  Accel-Team. Retrieved July 15, 2009 from: http://www.accel-team.com/control_systems/h_control_03.html

Reh, J. ‘How to Use Benchmarking in Business” Retrieved July 15, 2009 from: http://management.about.com/cs/benchmarking/a/Benchmarking.htm