mod7_Management control systems

1、Management control systems LESSON7Chen YuanhongMA2 Chen Yuanhong1Introduction of lesson 7looks at the impact of control systems on decision making and costs within an organization. learn how management control systems help organizations achieve overall goals. focuses on management control systems fr

2、om the perspective of levels in a company, and describes types of controls.MA2 Chen Yuanhong2Contents of the MA2Strategy, management accounting, and decision makingVariance and customer profitability analysisQuality and timeInventory managementKaizen, activity-based, and capital budgetingTransfer pr

3、icingManagement control systemsPerformance measurement and compensationBalanced ScorecardEmerging issues and integrationMA2 Chen Yuanhong3Lesson 7 Topics outlineManagement control systems: IntroductionAgency theory and control Management control and strategyCorporate-level strategies Business-unit s

4、trategiesManagement control and goal congruenceTypes of controlsEvaluating design and use of MCSMA2 Chen Yuanhong4Topic 1: Management controlsystems: IntroductionLEARNING OBJECTIVE Describe how management control systems help in achieving organizational goals. (Level 2)Required readingChapter 22, pa

5、ges 797-798MA2 Chen Yuanhong5Management controlsystems: IntroductionManagement control systems guide management decision making and behaviour by coordinating the processes of planning and control.Control systems are often used in conjunction with performance measurement systems. A good system uses i

6、nformation from both inside and outside the organization.Topic 1: Management control systems: IntroductionMA2 Chen Yuanhong6Management Control SystemsMany management control systems contain some or all of the balanced scorecard perspectives:FinancialCustomerInternal Business ProcessLearning and Grow

7、thTopic 1: Management control systems: IntroductionMA2 Chen Yuanhong7Management Control SystemsMost (if not all) companies will have the formal management control systems and the informal systems.Formal systems include explicit rules, procedures, performance measures, and incentive plans that guide

8、the behavior of its managers and other employeesInformal systems include shared values, loyalties, and mutual commitments among members of the company, corporate culture, and unwritten norms about acceptable behaviorTopic 1: Management control systems: IntroductionMA2 Chen Yuanhong8Evaluating Manage

9、ment Control SystemsEffective management control systems should beclosely aligned with organizational strategy and goalsdesigned to fit the organizational structure and decision-making formatdesigned to motivate managers and promote goal congruenceTopic 1: Management control systems: IntroductionMA2

10、 Chen Yuanhong9Two Aspects of MotivationMotivation is the desire to attain a selected goal (goal-congruence) combined with the resulting pursuit of that goal (effort)Goal Congruence exists when individuals and groups work toward achieving the organizations goals managers working in their own best in

11、terest take actions that align with the overall goals of top managementEffort is exertions toward reaching a goal, including both physical and mental actionsTopic 1: Management control systems: IntroductionMA2 Chen Yuanhong10Topic 2: Agency theory and controlLEARNING OBJECTIVES Describe the fundamen

12、tal concepts of agency theory, and explain how they are used to control operations. (Level 2)No Required readingMA2 Chen Yuanhong11Agency theory: definitionAgency theory presents a model of the relationship between an agent and principal, and can usually be expressed in the form of a contract. The p

13、rincipals roles are to supply capital, bear risk, and construct incentives.The roles of the agent are to make decisions on the principals behalf and also to bear risk.Topic 2: Agency theory and controlMA2 Chen Yuanhong12Agency theory: definitionAgency theory suggests that the firm can be viewed as a

14、 nexus of contracts ( loosely defined) between resource holders.Examples of agency contracts:Contract between managers and owners, or between a firm and its creditors.Topic 2: Agency theory and controlMA2 Chen Yuanhong13Agency theory assumptionsSimplifying assumptionsRational Self-interest Utility m

15、aximization and wealth maximization Goal congruenceTopic 2: Agency theory and controlMA2 Chen Yuanhong14Assumption: rational Assumes people are rational As a term, it is related to the idea of reason.Rationality is the state of having good sense and sound judgment. It is the quality of being consist

16、ent with or based on logic (Gibbons 1992).Economists usually assume that people are rational. Rational people systematically and purposely do the best they can to achieve their objective, given the available opportunities (Sugden 1991). Topic 2: Agency theory and controlMA2 Chen Yuanhong15Assumption

17、: rational Assumes people are rational (continued)In rational choice theory all decisions, mad or sane, are arrived at by a rational process of weighing costs against benefits. Assuming humans make decisions in a rational process implies that their behavior can be modeled and thus, predictions can b

18、e made about future actions (Cooter 1998).Topic 2: Agency theory and controlMA2 Chen Yuanhong16Assumption: self-interestAssumes people are self-interest Evidence of self-interested managerial behavior :the consumption of some corporate resources in the form of perquisites and the avoidance of optima

19、l risk positions, whereby risk-averse managers bypass profitable opportunities in which the firms shareholders would prefer they invest. Outside investors recognize that the firm will make decisions contrary to their best interests. Accordingly, investors will discount the prices they are willing to

20、 pay for the firms securities. Topic 2: Agency theory and controlMA2 Chen Yuanhong17Assumption: utility maximization and wealth maximization Tend to equate utility maximization to wealth maximization If a firm is a sole proprietorship managed by the owner, the owner-manager will undertake actions to

21、 maximize his or her own welfare. The owner-manager will probably measure utility by personal wealth, but may trade off other considerations, such as leisure and perquisites, against personal wealth.Topic 2: Agency theory and controlMA2 Chen Yuanhong18Assumption: utility maximization and wealth maxi

22、mization In the majority of large publicly traded corporations, agency conflicts are potentially quite significant because the firms managers generally own only a small percentage of the common stock. Therefore, shareholder wealth maximization could be subordinated to an assortment of other manageri

23、al goals. managers may have a fundamental objective of maximizing the size of the firm. By creating a large, rapidly growing firm, executives increase their own status, create more opportunities for lower- and middle-level managers and salaries, and enhance their job security because an unfriendly t

24、akeover is less likely. Topic 2: Agency theory and controlMA2 Chen Yuanhong19Assumption: Goal congruencePromotes goal congruenceA corporations managers may have personal goals that compete with the owners goal of maximization of shareholder wealth. Since the shareholders authorize managers to admini

25、ster the firms assets, a potential conflict of interest exists between the two groups. Topic 2: Agency theory and controlMA2 Chen Yuanhong20agency problem Agency theory is concerned with resolving two problems that can occur in agency relationships. The first is the agency problem that arises when (

26、a) the desires or goals of the principal and agent conflict and (b) it is difficult or expensive for the principal to verify that the agent has behaved appropriately. The second is the problem of risk sharing that arises when the principal and agent have different attitudes towards risk. the princip

27、le and the agent may prefer different actions because of the different risk preferences. Topic 2: Agency theory and controlMA2 Chen Yuanhong21agency problem and controlManagers can be encouraged to act in the stockholders best interests through incentives, constraints, and punishments. These methods

28、, however, are effective only if shareholders can observe all of the actions taken by managers. A moral hazard problem, whereby agents take unobserved actions in their own self-interests, originates because it is infeasible for shareholders to monitor all managerial actions. To reduce the moral haza

29、rd problem, stockholders must incur agency costs. Topic 2: Agency theory and controlMA2 Chen Yuanhong22categories of agency costsTopic 2: Agency theory and controlControl costmonitoringIncentivecompensationbondingCost that cannot bereasonably reducedto zeroExamples: Supervision Accounting informatio

30、nExamples: includes payments for risk assumed by agents may be based on accounting informationResidual loss of the agencyExamples: employee theft consumption of perquisites (“perks”) by agents shirking Lower profits resulting from poor decisionsMA2 Chen Yuanhong23Risk aversion: Example 7-1According

31、to Head office is planning, your expected compensation = (1/3) x 35000 + (1/3) x 45000 + (1/3) x 55000= 45,000You negotiate to have the penalty reduced to 5,000, the certain equivalent of this alternative bonus= (1/3) x 40000 + (1/3) x 45000 + (1/3) x 55000= 46,667Risk premium = 46,667 - 45,000 = 1,

32、667Topic 2: Agency theory and controlAssume each of these three outcomes is equally probable,MA2 Chen Yuanhong24Risk aversionRisk aversion describes the attitude of most people toward their employment compensationPrincipals (head office) are assumed to be risk neutralCompensation for risk is an agen

33、cy cost or not?Go to example 7-2Topic 2: Agency theory and controlMA2 Chen Yuanhong25Decision rights and rights systemsAgency theory views a firm as a nexus of contracts that determines where decision rights lie in the organization.The parties to these contracts are all individual decision makers, w

34、ith their own interests to promote.Topic 2: Agency theory and controlMA2 Chen Yuanhong26Organizational architectureOrganizational architecture refers to the following three administrative systems: Performance measurement Performance reward and punishment Decision rights partitioningTopic 2: Agency t

35、heory and controlMA2 Chen Yuanhong27Models of firmsTopic 2: Agency theory and controlIn the conventional model, the entity known as the firm is well defined by boundaries. Classes of participants exist within the firm owners, managers,and employees and are set apart from one another as a group and f

36、rom external parties, thesuppliers and customers.In the nexus-of-contracts model, everyone is anindividual, and contracts individually with other participants. Each contract involvesmonetary compensation, and may or may not include a delegation of decision rights from aprincipal to an agent.MA2 Chen

37、 Yuanhong28Contracts: Between principals and agentsTopic 2: Agency theory and controlThe owner is designated as a principal who contracts with three experts, each having unique,specialized knowledge of some value to the firm. Experts 1 and 2 are given decision rightsover some area of their expertise

38、; Expert 3 does not receive decision rights from the owner. MA2 Chen Yuanhong29Contracts: Between expertsTopic 2: Agency theory and controlThe experts also contract with each other, distributing decision rights in a variety of ways. Ineach of these contracts, one expert will act as a principal and t

39、he other will assume the role ofan agent. Each expert performs many tasks, so there is no limit to the number of contracts youmight observe.MA2 Chen Yuanhong30Outsourcing and agency theoryReasons to outsourceReduce and control operating costsdo not need to incur costs of motivating employees to perf

40、orm as desired by principals.sharing risk with external service providersDrawbacks of outsourcingLess flexibleTopic 2: Agency theory and controlMA2 Chen Yuanhong31Decision management and decision controlAgents can engage in two forms of opportunism:Adverse-Selection and Moral-Hazarddecision manageme

41、nt (or decision making) is normally separated from decision control (monitoring).Topic 2: Agency theory and controlMA2 Chen Yuanhong32Decision management and decision controlTopic 2: Agency theory and controlExhibit 7-3MA2 Chen Yuanhong33Topic 3: Management control andstrategyLEARNING OBJECTIVEExpla

42、in the connection between management control and strategy. (Level 1)No required readingMA2 Chen Yuanhong34Strategy formulation and management controlsStrategy formulation is the process of deciding which corporate- and business-level strategies to pursueManagement control is the process of implement

43、ing and evaluating the implementation of the strategyTask control is the process of ensuring the implementation is carried out effectively and efficiently. Task controls are more process and transaction oriented.Topic 3: Management control and strategyMA2 Chen Yuanhong35Management control and strate

44、gyMCS focuses on both long-term (strategic) and short-term (task) control. An MCS should help an organization develop, implement, and evaluate both corporate and business-level strategies,and provide information for both financial and nonfinancial performance measuresTopic 3: Management control and

45、strategyMA2 Chen Yuanhong36Management controlThe components of MCS are as follows:Management A group of people working together to achieve certain common goalsControl Systems used to manage operationsSystemA prescribed and usually repetitious way of carrying out an activity or set of activitiesTopic

46、 3: Management control and strategyMA2 Chen Yuanhong37Management controlIn organizations that are decentralized, where management decision making is allocated to lower levels of the organization, a properly implemented MCS is especially important to control operations and focus management attention

47、on attaining overall organizational goals.Topic 3: Management control and strategyMA2 Chen Yuanhong38Types of control devicesDetectorto measure what actually happened (B/S,I/S)Assessorto determine the significance of what has happened by comparing to a standard or expectation (variance analysis)Effe

48、ctora device or feedback system that alters behaviour (root-cause analysis)Communication networkto transmit informationTopic 3: Management control and strategyMA2 Chen Yuanhong39Topic 4: Corporate-level strategiesLEARNING OBJECTIVEDescribe corporate-level strategies. (Level 2)No Required readingMA2

49、Chen Yuanhong40Corporate-level strategiesStrategies are developed at two levels: corporate and business.All organizations, including not-for-profits, must have overall long-term goals and objectives.Corporate-level strategy development asks the question: What business do we want to be in?Topic 4: Co

50、rporate-level strategiesMA2 Chen Yuanhong41Corporate-level strategiesTo decide on what type of business will provide a suitable return for shareholders, management must look at both the external and internal environments of the organization through:PEST analysisSWOT analysisTopic 4: Corporate-level

51、strategiesMA2 Chen Yuanhong42Corporate-level strategiesDeveloping corporate-level strategies also includes making decisions about the companys mix of businesses and allocation of resources between and among businesses.The MCS should help managers make decisions about diversification and outsourcing

52、parts of the business or entire processes.Topic 4: Corporate-level strategiesMA2 Chen Yuanhong43Topic 5: Business-unit strategiesLEARNING OBJECTIVEDescribe business-unit strategies. (Level 2)No Required readingMA2 Chen Yuanhong44Business-unit strategiesA companys business-level strategy is one step

53、down from the corporate-level strategy.Once the company decides on which business(es) to operate within, principals must decide how the company will provide shareholder value within the business. Generally, the business-level decision is a choice between two strategies cost leadership and differenti

54、ation.Topic 5: Business-unit strategiesMA2 Chen Yuanhong45Business-unit strategiesCost leadershipa cost leadership strategy is intended to generate competitive advantage by achieving costs that are lower than all competitors.Based on operational efficiencyDifferentiationBased on the ability to disti

55、nguish your product or service from competitors.focused or niche strategyThis is either a cost-leadership or differentiated strategy that focuses on a small subsection of the overall market or niche.Topic 5: Business-unit strategiesMA2 Chen Yuanhong46Business-unit strategiesAn analysis of Porters 5

56、Forces is required to determine the best business-level strategyTopic 5: Business-unit strategiesMA2 Chen Yuanhong47Business-unit strategiesThe Five Forces Analysis allows determining the attractiveness of an industry. It provides insights on profitability. It supports decisions about entry to or ex

57、it from and industry or a market segment. It can be used to compare the impact of competitive forces on the own organization with their impact on competitors. Competitors may have different options to react to changes in competitive forces from their different resources and competences. This may inf

58、luence the structure of the whole industry.Topic 5: Business-unit strategiesMA2 Chen Yuanhong48Business Unit MissionThe nature of a business is often expressed in terms of its Mission which indicates the purpose and activities of the businessfor example, to design, develop, manufacture and market sp

59、ecific product lines for sale on the basis of certain features to meet the identified needs of specified customer groups via certain distribution channels in particular geographic areas. A statement along these lines indicates what the business is about and is infinitely clearer than saying, for ins

60、tance, were in electronics or worse still, we are in business to make money (assuming that the business is not a mint !). Topic 5: Business-unit strategiesMA2 Chen Yuanhong49BCGs growth-share matrixThe BCG matrix (or B.C.G. analysis, BCG-matrix, Boston Box, Boston Matrix, Boston Consulting Group ana