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Chapter 10

Chapter 10 Notes

3 Pages
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Department
Financial Accounting
Course Code
MGAD40H3
Professor
Prof.Jan Klakurka

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Chapter 10 – Using Diagnostic and Interactive Control Systems
-To achieve financial and nonfinancial goals, managers must rely on the efforts and initiatives of employees. Employees must understand the businesss
strategy and their role in achieving strategically important goals. Using performance measurement and control systems effectively becomes critical to success
-Success is determined by the ability to effectively communicate strategy to employees and control strategy implementations, To communicate and control
strategy effectively, there are two different types of control systems:
oDiagnostic control systems
oInteractive control systems
-The difference between diagnostic and interactive control systems is not in their technical design features, but in the way the managers use these systems
DIAGNOSTIC CONTROL SYSTEMS
-Defined as the formal information systems that managers use to monitor organizational outcomes and correct deviations from preset standards of
performance
-Used as levers to communicate critical performance variables and monitor the implementation of intended strategies
-Any formal information system can be used diagnostically if it is possible to (1) set a goal in advance, (2) measure outputs, (3) compute or calculate
performance variances, and (4) use that variance information as feedback to alter inputs and or processes to bring performance back in line with preset goals and
standards
-Managers use control systems diagnostically to implement strategy effectively and conserve scarce management attention
Implementing Strategy
-Managers are interested in monitoring diagnostic control systems that report variance information about critical performance variables (factors that must
be achieved or implemented successfully for the intended strategy of the business to succeed)
-It is a top down monitoring tool for implementing strategy as plan
-They link strategy with critical performance goals and targets and monitor their successful implementation
-Managers must insure that (1) critical performance variables have been analyzed and identified, (2) appropriate goals have been set, and (3) feedback
systems are adequate to track performance
Conserving Attention
-Instead of constantly monitoring a variety of internal processes and comparing results with preset targets and goals, managers receive periodic exception
reports from staff accountants. If significant deviations are identified, managers need to invest time and attention to investigate the cause and initiate the
appropriate remedial actions (aka management by exception)
Operating Diagnostic Control Systems Efficiently
To operate diagnostic control systems effectively, managers must ensure they devote attention to:
1. Setting and Negotiating Goals
Managers must ensure goals are appropriate in terms of desired direction and level of achievement. Goals should not require any additional adjustment or
attention ad managers can monitor progress during the operating period by a quick scan of exception reports
2. Aligning Performance Measures
Managers rely on diagnostic control systems for assurance that strategy is on track, hence they must make sure that performance measures truly reflect strategic
goals and priorities (ex. Balanced scorecards)
3. Designing Incentives
Managers who wish to maximize their ROM use formula based incentives to power up, or motivate, goal achievement. These incentives provide extrinsic
motivation so managers do not have to monitor daily.
4. Reviewing Exception Reports
Managers can review monthly and quarterly reports as soon as they are released to gain confidence that strategy implementation is on track. If measurement
systems are well designed, review could be done quickly, increasing ROM.
5. Following up Significant Exceptions
When a significant deviation appears, managers must initiate action quickly to get things back on track. Managers then need to initiate brief discussions to
confirm that problems have been identified and resolved.
Risks in Using Diagnostic Control Systems
Managers who use diagnostic control systems must guard against the following
1. Measuring the Wrong Variables
Misaligned control systems in business can do more harm than good.
2. Building Slack into Targets
Employees may try to build slack into their performance targets. Managers need to ensure goals are set at a challenging level
3. Gaming the System
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Description
Chapter 10 Using Diagnostic and Interactive Control Systems - To achieve financial and nonfinancial goals, managers must rely on the efforts and initiatives of employees. Employees must understand the businesss strategy and their role in achieving strategically important goals. Using performance measurement and control systems effectively becomes critical to success - Success is determined by the ability to effectively communicate strategy to employees and control strategy implementations, To communicate and control strategy effectively, there are two different types of control systems: o Diagnostic control systems o Interactive control systems - The difference between diagnostic and interactive control systems is not in their technical design features, but in the way the managers use these systems DIAGNOSTIC CONTROL SYSTEMS - Defined as the formal information systems that managers use to monitor organizational outcomes and correct deviations from preset standards of performance - Used as levers to communicate critical performance variables and monitor the implementation of intended strategies - Any formal information system can be used diagnostically if it is possible to (1) set a goal in advance, (2) measure outputs, (3) compute or calculate performance variances, and (4) use that variance information as feedback to alter inputs and or processes to bring performance back in line with preset goals and standards - Managers use control systems diagnostically to implement strategy effectively and conserve scarce management attention Implementing Strategy - Managers are interested in monitoring diagnostic control systems that report variance information about critical performance variables (factors that must be achieved or implemented successfully for the intended strategy of the business to succeed) - It is a top down monitoring tool for implementing strategy as plan - They link strategy with critical performance goals and targets and monitor their successful implementation - Managers must insure that (1) critical performance variables have been analyzed and identified, (2) appropriate goals have been set, and (3) feedback systems are adequate to track performance Conserving Attention -
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