USING DIAGNOSTIC AND

INTERACTIVE CONTROL SYSTEMS

Novi Kusumasari F0315062
Yunia Adriana Devi F0315
 Two Levers of Control
To understand how to communicate and control strategy effectively, we differentiate
between two different types of control systems :

Business Strategy

Critical
Strategic
Performance
Uncertainties
Variabel

Interactive Diagnostic
Control Control
Systems Systems
 Diagnostic Control Systems
Diagnostic control system is used as a lever to communicate critical
performance variables and monitoring the implementation of the intended strategy.
Or it can be defined as a formal information systems that managers use to monitor
organizational outcomes and correct deviations from preset standards of
performance. 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.
 Why Use Control Systems
Diagnostically?
Two principal reasons for using a system diagnostically :

• To implementing strategy effectively

Critical performance variables : those factors that must be achieved or
implemented successfully for the intended strategy of the business to succeed.
Because of the important of these systems, managers must ensure 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

• Conserve scarce management attention

In organization, managers can put organizations in autopilot mode, where
managers receive reports every period from accounting staff. If everything is on track, the
reports can be riviewed quickly and managers can move on to other issues. If there is a
problem, then the manager need time to investigate the cause of the deviation and initiate
appropriate remedial actions. This process is called management by exception.
Linking Strategy to Diagnostic Control Systems

Business
Strategy

Critical
Performance
Variables

Goals

Inputs Process Outputs

 Using Diagnostic Control Systems
Effectively
To operate diagnostic control systems effectively, managers must ensure that they
devote sufficient attention to five areas :
1) Setting and negotiating goals : managers must personally ensure that goals
are appropriate both in terms of desired direction and level of achievement.
2) Aligning performance measures : diagnostic control measures define the
span of accountability – that is, the performance variables for which a
manager is accountable
3) Designing incentives : managers who wish to maximize their ROM use
formula-based incentives as a way of powering up, or motivating, goal
achievement.
4) Reviewing exception reports : managers can review monthly and
quarterlyexception reports as soon as they are released to gain confidence
that strategy implementation is on trac
5) Following up significant exceptions : although managers use diagnostic
control systems to conserve attention, when a significant deviation appears,
they must initiate action quickly to get things back on track.
 Risks in Using Diagnostic Control
Systems
1) Measuring the wrong variables
2) Building slack into targets
3) Gaming the system
4) Other common distortionswhen relying on diagnostic control systems for goal
achievement include :
- Smoothing
- Biasing
- Illegal acts
5) Whenever diagnostic control system are used for evaluation and reward, managers
must install good control systems and be alert for the underlying organizational
pressures that may cause well-intentioned people to bend the rules to distort
diagnostic measures.
 Interactive Control Systems

Underlying the interactive control system is the strategic uncertainties, which is

the assumption that a strategy must change to deal with changes in the future that is not
previously known.

TABLE 10-1 Distinction Between Critical Performance Variables and Strategic

Uncertainties
Critical Performance Variables Strategic Uncertainties

Recurring question What must we do well to achieve our What changes in assumptions could
intended strategy? alter the way we achieve our vision for
the future?
Focus on Implementing intended strategy Testing and identifying new strategies

Driven by Goal achievement Top management unease and focus

Search for Efficiency and effectiveness Disruptive change

 Interactive Control Systems
In an interactive control systems, managers use formal information
to engange in influencing the decisions of their subordinates. In this system
the strategy is also not applied comprehensively but depends on how the
senior directives in the use of the system.

FIGURE 10-3 Using the Interactive Control Process for Learning

Senior
Management
Vision

Business Strategic
Strategies Uncertainties

Learning Choice

Debate Interactive
and Control
Dialogue Signalling System
Top-Down Pressure : Bottom-Up Strategy
 Design Features of Interactive Control
Systems
For a system to be eligible for use as an interactive
control system, four criteria must be satisfied:
1. The information contained in an interactive control
system must be simple to understand.
2. Interactive control systems must provide
information about strategic uncertainties.
3. Interactive control systems must be used by
managers at multiple levels of the organization.
4. Interactive control systems must generate new
action plans.
 Choosing Which System to Use
Interactively
Given the many systems in an organization that could
be used interactively, we can analyze the factors that
influence which systems managers select. At least
four factors influence the choice of systems to which
managers devote their attention:
1. Technological Dependence
2. Regulation
3. Complexity of Value Creation
4. Ease of Tactical Response
 Factors Affecting the Design and Choice of
Interactive Control Systems
Strategic Uncertainty If Uncertainty is High, then If Uncertainty is Low, then
Interactive Cntrol System Interactive Cntrol System

Technological Dependence Focuses on emerging new Focuses on changing

technologies customer needs

Regulation and Market Focuses on sociopolitical Focuses on competitive

Protection threats and threats and opportunities
opportunities

Value Chain Complexity Uses accounting-based Uses input/output unit-

measures based measures

Ease of Tactical Response Uses short planning Uses long planning horizon
horizon
Choosing How many Control System to
Use Interactively
Any medium to large size business has a multitude
of formal performance measurement and control
systems. At the extreme managers will generally
use only one these systems interactively and of
those systems in a diagnostic, management-by-
exception way. Managers choose to use only one
system interactively for three reasons:
1. Economic
2. Cognitive, and
3. Strategic
 Interactive Control Systems and
Formal Incentives
• If managers want to use a control system interactively to
stimulate information sharing and learning, incentive are
necessary but must be designed differently. Linking
incentives with predetermined formulas will not work. If
formula-based incentive are used, people may attempt to
game the system and withhold information, thereby
subverting the desired learning.
• Incentive for interactive control system must, therefor, be
designed to reward an individual’s innovative efforts and
contribution. This can only be done by subjective rewards
provide the flexibility to reward creativity in the face of
unanticipated threats and opportunities.
Subjective rewards yield three outcomes that help
stimulate organizational learning:
• Rewarding contribution and effort provides
incentives for employees to make their efforts
visible to their superiors.
• Rewarding contribution and effort, rather than
result, reduces information biasing that is a
constant concern in diagnostic control systems.
• Rewarding contribution subjectively demands
that superiors have the ability to calibrate the
efforts of subordinates accurately.
 Contingencies
• Managers who wish to use their profit plans
interactively solve this dilemma by adding
contingency buffers to the profit plan to protect
key diagnostic targets.
• These contingencies provide a cushion that allows
managers to reforecast profits during the year as
part of an interactive process, while at the same
time they ensure that key targets are not
jeopardized. For example, managers may set a $10
million profit goal for the upcoming year. This
target would typically be monitored in a diagnostic
fashion, and incentive would be tied by formula to
the achievement of this profit plan goal.
 RETURN ON MANAGEMENT
• In taking charge of a business, one of the most
important tasks for managers is to find ways to
leverage their time and attention effectively. In
chapter 1, wedefined ROM as:
Amount of Productive Organizational
Energy Released
ROM =
Amount of Management Time and
Attention Invested
• One of the key managers to maximize ROM is to
understand what he can do personally and what he
can delegate to a staff group.
 Managers Staff Groups
Periodically set or negotiate Design and maintain systems
performance targets
Receive and review exception Interpret data
reports
Diagnostic Control Systems
Follow up significant Prepare exception reports
exceptions
Ensure integrity and reliability
of data
Choose which system to use Gather and compile data
interactively
Schedule frequent face-to- Faciliate interactive process
face meetings with
subordinates to discuss data
Interactive Control Systems contained in system
Demand that operating
managers troughout the
organization respond to
information contained in the
systems
THANKYOU