Management Control Systems Twelfth Edition PDF

Preview

Summary

Management Control Systems Twelfth Edition Robert N. Anthony Ross Graham Walker  Profes sor oflvlanagemenLCo ntrol. Emeritus  Graduate S chool of' Business A.dm inistration  Harvard  Uniuersity  Vijay Govindarajan Earl  C. DaUln  Professor of International Business  Director; William  F.  Achtme...

Description

Management Control Systems Twelfth Edition

Robert N. Anthony Ross Graham Walker Profes sor oflvlanagemenLCo ntrol. Emeritus Graduate S chool of' Business A.dm inistration Harvard Uniuersity

Vijay Govindarajan Earl C. DaUln Professor of International Business Director; William F. Achtme-:ver Center f'or Global L eadership The Tuck Schoo! of Basiness DartmoLi tIL CoLleg e

ra McGraw-Hili ti1JlIi Irwin

Bos ton Burr Ridge , IL Dubuque , IA Madison . WI New yr rk San Francisco St. LOuis

Bangkok Bogota Caracas Kuala Lumpur lisbon London rvladna Mexico City

Milan Montreal New Deih l Santiago Seoul Singapore Sydney Taloei Toronto

Management Control Systems Twelfth Edition

Robert N. Anthony R oss Graham Walk er Professor of Management Control. Emeritus Graduate S chool of Business .4.dministratio n Harvard Uni versity

Vijay Govindarajan Ea rl C. Daum Professor nf In ternational Business Director; Will iam F A:htmeyer Center far Global Leadership The Tuck School of Business Dartmouth College

fa McGraw-Hili tnftIiIij Irwin

80ston 8urr Ridge . IL DUbUque IA Madison. WI New York San Frane sec St. LOUIs Bangkok Bogota Caracas Kuala L.Jmpur Lisbon London Maorid Mex,co City I'an :Vlontreal f'Jew Delhi Santiaao Seoul Singapore Sydr.ey Taloel ~oront

Chapter

The Nature of Management Control Systems The central focus of tIlls book is strategy implementation. In particular. the book provides knowledg~, insight, and analytical skill.:; related to how a corpc'­ ratiou·s senior executives design and implement the ongoing management sys­ tems that are used to plan and control the firm's performance . Elements of managem ent control systems include strategic planning; budgeting: resource allocation; performance measurement, evaluation, and reward; responsibili t center aJlocation; and lransfer pricing. The book builds on concepts from strat­ egy, organizationa.l behavior, human resources, and managerial accounting . Management control is a must in any organization t hat practices decentral­ izati on . One 'view argues that management control systems must fit th e firm ·s strategy. This implies the strategy is first developed through a formal and rational process, and tlllS strategy then dictates the design of the firm 's man­ agement systems. An alternative perspective is that strategies emerge through xperimentation , which are in.fluenced by th e firm 's management systems . In this vi ew, management control systems can affect the development of strate­ gies. We wi ll consider both points of view, as well as their implications in terms of the design and operation of management con trol systems. When firms operate in industry contexts where environmental changes are predictable, th ey can use a formal and rational process to develop the strategy fir. /IIS

strategies never come intu b~ing UI' get Liistorted. or the implementation is much more costly and time-comiUming than anticipated. However laudable strategic intentions may be. if they do not become reality. they usually are nol worth the paper on which they aTe \NritLen. Conversely, high-perfoml i11g com­ panies excel at execution. This book provides concepts. frameworks, and tool­ to help the reader gain that "execution advantage." Consider the collapse of companies such as T.vco, Global Crossing, WorldCom, and Enron. Part of the reason for their demise was the lapse ill controls. CEO und top management compensation in these companies was so heavily tied to stock options that executives were motivated to manipulate financials to buoy the short-term stock price Consider world-cl ass companies such as Emerson Electric. Lincoln Electric, New York Times. Worthington Industries , 3M Corporation, N ucor Corpora­ tion , Dell Computer, Wal-Mart, Southwest Airlines, Cisco Systems, Corning, Hasbro, and Analog Devi ces. Their long-term success lS not just because they have developed good strategies: more importantly, t.hey have designed sys­ tems and processes that energize their employees tu execu te those s l rategies effectively. This book includes case studies on these (;ompanies to dr ive home the power of these companies' impl ementation capabilities We begin this chapter by defining the thl-ee terms i.n t he book's title : control, management, and systems . In the second section of the chapter, we distin ­ guish the management control funcbon, whjch is ow.' focus, from two other func­ ti ons that also involve planning and control: strategy formulation and task control. The thiTd section of this chapter contains a r uad map pruviding an overview of the wh ole book and a brief description ofthe contents of each ch apter.

Basic Concepts Control Press the accelerator, and your car goes faster. Rotate the steering wheel, an d it changes direction. Press t he brake pedaL and the car sl ows or stops. With these devices, you control speed and direction; if any of them is ino perative, the car does not do what you want it to . In other words. it is out of control. An organization must also be con trolled: that is. devices must be in place to ensure that its strategic intentions are achieved. But controlling an organiza­ bon is mu ch more compli caLedthan controlling a car. We will begin by describ­ ing the control process in simpler systems.

Elements of a Control System Every control system has at least foUl' elements : 1. A detector or sensor- a device that measures what is actually happen ­ ing in the process being controlled. 2. An assessor-a device that detennines the significance of what is actu­ ally h appening by comparing i t with some standard or expectation of what should happen. 3. An effector- a device (often called "feedback") that alters behavior if the assessor indicates the need to do so . 4 . Acomm unications netw ork-devices that transmit information be tween the detector and the assessor a nd between the assessor and the effector.

C h ~pte r

I

Tire.:' .,Yut111'1'

EXHIBIT 1.1 C.mtJ"nl

Elements of the Control Process

L I

)" Jfana,~ , 'nlL' n [ COl/lt 'u! ." Y:j t,:lI U:l

2 . Assessor. •

3

rllmparl~nn

I ~

3. Effector. Behavior alteratlon. if needed

1. Detector. InformatIOn about what.is happening

Entitv heing controlled

These four basic elements of any control system are diagrammed in Exhibit 1.1. We shall describe their functioning ill three examples of increasing complexity: the thermostat, which regulates room temperatme; the biological process that regulates body temperature; and the driver of an automobile, who regulates the direction and speed of the vehicle.

Thermostat The components of the thermostat are (1) a thermometer (the detector), whi ch measures the current temperature of a room; (2) an assessor which compares the current temperatme with the accepted standard for what the temper atme should be; (3) an effector, which prompts a furnace to emit heat (if the actual temperatme is lower than "he standard) or activates an ai r conditioner (if the actual temperature is higher than th e standard ) and which also shuts off these appliances when the temperature reaches the stan­ dard leveL and (4) a communications network, which transm it s informa tion from the therm ometer to the assessor and from the assessor to the heating or cooli ng element. Body Te mperature Most mammals are born wi th a built-in standard of desir­ able body temperature; in human~ that standard is 98.6°F. The elements of the control mechanism by wlUch the body strives to maintain that standard are (1 ) the sensory nerves (detectors) scattered throughout the body; (2) the hypo­ . thalamus cen ter in the brain rassessor ), wbich compares i.nformation received fromdetectors with the 98 .6°F standard: (3 ) the muscles and organs (effectors ) that reduce the temperature when it exceeds the standard (via panting and weating, and opening the skin pores) and raise the temperatme wh en it falls below the standard (via shivering and closing the skin pores ); and (4 ) tbe over­ all communications system of nerves. This biological con trol system is homeostatic-that is, self-reguJating. If the system is functi oning properly. it automatically corrects fo r deviations from the standard without r equiring conscious effort. The body temperature control system is more complex than the thermostat, with body sensors scattered throughout the body and hypothalam us directing actions t.hat involve a variety of muscles and organs. It is also more mysteri­ ous; scientists know wha t the hypothalamus does but not hou.· it does it. A utom obile Driuer Assume you are driving on a highway where the legal (i.e., standard ) speed is 65 mph. Your control system acts as follows: (1) Your eyes

4

Cha pter One

TIl(' .\"lItlil"o.' "{.1!i, ,ltl f',,-,,'l/cnl l 'ulI l' ·"i 8y"/o'lils

;';cnsors ' me:15UrC actual speed by ubsen ing the ;:--pcedIJDlt'ter: 12 1 your brain assessor) compares actual speed with desired speed. and upon detecting a de­ viation from the staDdard, 13) directs your fuot (effector ) to ease up 01' pres,,; down on the accelerator: and 14 ) as in body temperature regulation, your nerves tOl'm the communit:atiun system Lhat transmits infol'mabon from eyes to brain and brain to foot. But just as body temperature regula Lion is more comphcated than the ther­ mostat, so Lhe regulation of a car is more complicated than the regulation of body temperature . This is because there can be no certainty as to what acbon the brain will direct after receiving and evaluaLing information ['rom the detector For example. once they determine that Lhe car'5 actual speed exceeds 65 mph, some drivers, wan ting to stay within the legal limit, will ease up on the acceleraLor, while others. for any number of l'easom. will not. In this sys­ tem. conLrol is not automatic; one would bave to know something about the personality and circumstances of the driver to predict. \-vhat the actual speed of the automobile would be at the end point of the process. I

1

Management An organization consists of a group of people who vy·ork together to achieve cer­ tain common goals (in a business organization a major goal is to earn a satis­ fact ory profit) . Orgaruzations are led by a hierarchy of managers, with the chief executive officer (CEO) at th e top, and the managers of business units, departments, functions, and other subunits ranked be low him or her in the or­ ganizational chart. The complexity of the organization determines the number oflayers in the hierarchy All managers other than the CEO are both superiors and suborclinaLes; they ::;upen'ise the people in their own units, ancl they are supervised by the man...