Management Control System- Meaning, Functions & Characteristics
Meaning of Management Control System (MNS)
One of the first definitions of MCSs is from 1972 when Ernest Anthony Lowe, professor at the University of Sheffield, published an article called On the Idea of a Management Control System. According to Anthony Lowe, an organization would need to establish a specific system to control and plan the different operations it is going through. He identified four reasons for the necessity of the systematic management control:
- All organisations have definable organisational objectives.
- Management has hierarchy, with managers being in sub-units. Each manager has to define personal goals, which are aligned with the organisation’s objectives.
- Organisational situations, together with human behaviour, create an uncertain situation and this uncertainty is present in internal and external circumstances.
In essence, while strategic planning is about giving your organization the direction in which it should go, and operational control provides the management the authority to perform the strategic functions, MCS is about ensuring the above two happen in the first place. Without proper MCS in place, you don’t know if the business can achieve its goals and if the strategies you’ve chosen will work according to plan. You might notice a pattern here: the management control system is about providing the check and balances to the system.
Other theorists began building on top of Anthony Lowe’s writings. Horngreen, Datar and Foster have defined MSCs “as means of gathering and using information to aid and coordinate the process of making planning and control decisions throughout the organization and to guide the behavior of its managers and employees”.
Essentially what they are saying is that a management control system is a tool businesses can use to measure its performance and to compare its desired objectives against its actual objectives. By establishing a management control system, the business makes it easier to align individual decision making with the larger organizational objectives. The system is rather comprehensive, creating a framework in which not only are the internal aspects controlled and monitored, but the external behaviors and environments are also looked after.
An example of both would be the control of internal actors such as accounting and human resources as an internal factor, with external changes represented by industry developments like new regulations for products.
Functions of Management Control System
It essentially allows you to perform the following functions:
Document operational objectives –
You are able to outline what the organization wants to achieve in terms of short- and long-term goals. This could be directly related to financial performance, but it could also entail social objectives such as waste reduction, for example.
Document the operational strategies and policies –
Of course, you also need to ensure you are aware of the how. How will you achieve the above? You will need to document the policies in place in the organization, the different equipment and resources needed, and the strategies you implement. This could deal with things like employee management (salary, working hours, etc.)
Assess the performance of organizational processes –
You then need the tools to assess the performance of what you are trying to achieve and how. This includes gathering information from different sources, whether financial or non-financial. We’ll look at these more in the next section. At this point, you are looking closer to the organization and checking what it is doing and how. you are detailing and outlining what the result of your policies and strategies are.
Compare performance in relation to the objectives and policies-
Finally, you compare the actual performance to the objectives you set at the start. You can clearly notice this is the essence of the business system, You have the structures in place, you add the resources, and you see what the result is, after which you can check what you got in comparison to what you wanted to get.
Characteristics of Management Control System
Structure of the MCS-
The MCS refers to the structure, either organizational or the relationship of different components, of the different responsibility structures within the company. It further outlines the performance measures and how the information moves within and between the different responsibility structures. For example, in a complex and large organization, such as a production facility for creating different car parts, the responsibility would be divided into multiple units. The management would therefore be in charge of different aspects of the organization, and there would be a number of sub-units. On the other hand, a small business, like a family bakery, is unlikely to have many responsibility centers. MCSs core characteristic is the organizing and planning of the relationship between these different structures and centers of responsibility.
The other core characteristic, on the other hand, is about the processes or set of activities the organization takes in order to achieve its objectives. This part of the system refers to the steps the organization, and especially its management, needs to perform in order to set objectives, allocate resources to achieving these objectives, and to achieve the objective. The different processes that MCS performs and monitors is essentially looking at these phases and creating the right ways of going about the processes. This could involve things like monitoring the budgeting, measuring the performance of subordinates and so on.
Essentially, the first characteristic is about the structure of the MCS and the second characteristic refers to the processes. To understand it, you can consider it like this:
Finally, you should notice the distinction between financial-based functions and non-financial functions. Most of MCSs are actually use accounting and other financial metrics as the key evaluation metric. This means you have an emphasis on financial measures, such as how many sales were made or what it cost to hire a new person.
The reason for using these as the basis is rather obvious. Measuring performance with a real data set, such as a financial metric, is easy and straightforward. The management can tell a lot about performance by understanding the underlying financial factors of a specific behavior. If you were to sell 1,000 pairs of shoes, while your other peers sold only 400, the manager would want to focus on your specific behaviors to boost overall performance.
But there are certain essential non-financial factors at play as well. These can be measured with surveys and other feedback forms, and they include things such as customer satisfaction and product quality. The management can learn more, improve planning, and enhance control with information they receive directly from the customers. What makes them happy? What has disappointed them in the past?
Knowing, for instance, how customers continuously complain about waiting times will help the management direct the organization’s resources much better. The other example of these non-financial functions of MCS would be product quality. This can be an important tool for managers, as it reveals how well certain development strategies are working. If your products are constantly breaking down, you can take corrective action and find out where in the production line the quality is compromised.
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