Page 47 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes 3.9 Types of Management Control Systems

Control systems in an organization fall under two broad areas: formal and informal. Formal
controls are laid out in writing by the management, whereas informal controls arise as a result
of employees’ behavior.

Example: Formal controls are plans, budgets, regulations and quotas. Informal controls
include group norms and organizational culture.

Formal controls are framed by the managers, whereas informal controls often originate with
employees and are affected by general socio-cultural factors.
Formal Control System: Formal control systems are written, management-initiated mechanisms
that influence the behavior of employees in achieving the organization’s goals.
Formal controls can be classified into three types, based on the nature of management intervention.
They are:

1. Input controls: These are the actions taken by the company before a planned activity is
implemented. These measures help the company to select the right way to undertake the
activity. Input controls include selection criteria, recruitment and training programs,
manpower allotments, strategic plans and resource allocations.

2. Process controls: Process controls involve tracking certain variables and taking corrective
action whenever there is any deviation from specified parameters in the variables.
The control action takes place before the process of transformation is completed and the
output is produced. Process control is exercised when the firm attempts to influence the
ongoing activity to achieve the desired ends.
The control is applied to the behavior or activities rather than the end results.

Example: Under a feed-forward system of inventory control, the factors that affect
inventory levels of finished goods, such as the rate of sales or dispatch delays, are tracked.
When the sales begin to decline or there is a dispatch bottleneck, this information is fed
forward, and the level of the finished goods inventory is controlled by reducing production.
Thus, the inventory levels are prevented from exceeding required levels. Alternatively,
the managers may realize that the original standards for sales or dispatch delays are no
longer appropriate and must be revised. This again feeds into a loop, which leads to the
inventory objectives or plans being updated. Process control can also be illustrated using
the example of a salesperson’s job. The management may direct the salesperson to follow
certain procedures for new market development, but may not hold the salesperson
responsible for the extent of new business generated i.e. the end result. In such a case,
process control has been exercised.
3. Output controls: Output control is exercised when performance standards are set and
monitored, and the results are evaluated. Output control takes place when the control
activity is based on the comparison of actual and planned outcomes.
Such controls are applicable when it is easy and inexpensive to measure the output and
when there are few elements of uncertainty.

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