Question

What is a management control system (MCS), what are its components and what are its major purposes?

Answer 1

A management control system (MCS) is a system which gathers and uses information to evaluate the performance of different organizational resources like human, physical, financial and also the organization as a whole in light of the organizational strategies pursued.

Management control system influences the behaviour of organizational resources to implement organizational strategies. Management control system might be formal or informal

Components of MCS:

1. A detector or sensor, which is a measuring device that identifies what is actually happening in the process being controlled.

2. An assessor, which is a device for determining the significance of what is happening. Usually, significance is assessed by comparing the information on what is actually happening with some standard or expectation of what should be happening.

3. An effector, which is a device that alters behaviour if the assessor indicates the need for doing so. This device is often called “feedback.”

4. A communications network, which transmits information between the detector and the assessor and between the assessor and the effector.

It is through these system elements that information about actual organizational occurrences is gathered, comparisons are made against plans, changes are effected when necessary, and communications take place among appropriate parties. For example, source documents (detectors) gather information about sales that is compared to the budgets (assessor). If sales revenues are below budget, management may issue (communications network) a variance report (effector) to encourage the sales staff to increase volume.

However, even given the same information, different managers may interpret it differently and respond accordingly. In this respect, a management control system is not merely mechanical, it requires judgment. Thus, a management control system may be referred to as a black box: an operation whose exact nature cannot be observed.

Regardless of the specific actions taken, a management control system should serve to guide organizations in designing and implementing strategies such that organizational goals and objectives are achieved.

Purposes of MCS:

We find that there are three important aspects in which organizations with a desire to become purpose-driven need to consider.

First, operationalizing purpose in an organization’s MCS is a laborious process. This implies that perseverance is a key factor.

Second, organizational purpose must be operationalized in ways that are tangible for employees. The purpose should be articulated as an explicit statement, and should be operationalized in the MCS in ways that are understandable to employees.

Third, we find that organizational purpose has the ability to spur organizational commitment and employee engagement. Potential consequences for organizations may be reduced turnover, higher level of innovation, and enhanced employee performance. However, our findings also suggest that organizations may face a challenge in making employees’ commitment to the purpose cascade from upper management down to lower hierarchical levels.