Management Control System (MCS) at Western Digital Corporation - Term Paper Example

Management Control System (MCS) at Western Digital Corporation Management control system is a set of informal and formal systems to provide assistance to the management in steering the organization towards its goal. Management control provides guidance to the employees towards the accomplishment of the organizational goal. Technological advancements and globalization have changed the business environment in which the organizations operate. Management control system mainly aims to monitor the strategic progress of organizations to ensure effectiveness and efficiency in both strategy development and implementation (Yau 1). Western Digital Corporation has been a hard disk drive storage manufacturing pioneer. The product line of the company includes external drives for mobile desktops, laptops and other digital home entertainment products Structure (By Decentralization) One of the major features of the overall management control system is the presence of decentralization. Western Digital has understood the importance of the decentralization in the decision making system so that the sub-goals can be set and achieved. In this way each and every decision maker has become responsible for a small portion of the overall organizational objectives. The Do-it-Yourself, or DIY, culture has been intent on home grown tooling and development. Despite of the decentralization, the implementation of MCS ensures that the organizations develop rules to ensure that supervisors are aware of the authority and the subordinates are aware of the tasks to be performed and respective expectations (Ng and Dastmalchian 18). (organizationstructure.org) Technological, regulatory, political and economic forces are changing the competitive environment (Jensen 1). Hence organizations are looking to use technology in itself to get business insights. WD is also not an exception. However, the application of technology by the organization is quite unique to say the least. The use of a home-grown job scheduling system is one example of it. The company does not use commercial Extract, Transform and Load tools. The DIY culture is not an issue of cost as the company already has expensive business intelligence tools in the form of statistical analysis software. But the internally developed solution of the company has been more responsive. The main objective of the introduction of the decentralization by WD is to tie the subunits of the company together. In order to complement such decentralization, the company has adopted a product or divisional organizational structure. Here it is be added that instead of going for process intervention, the organization has decided to go for structural intervention by looking to change organizational design, job design, the performance review system , etc (Sisaye 54). Planning System As far as the planning system is concerned, the company wished to restore the confidence of the employees through informal and formal communication. The organization wishes to develop a plan to incline capability beyond 40 M units. The organization expects to meet the product costs targets that achieve more than 25%; the company is set to support a quality initiative on AFR improvement. The company also has plans to review and overhaul the process control system as needed (Anthony 101). Review and Measurement System When a control system designer undertakes to review and measure the performance of the decentralized process, a number of issues are needed to be considered. The main issue is the involvement of the measurement of the performance with regard to the interdivisional transactions and profit. The technique used to review and measure the performance is quite similar to the ROIC performance management. The company uses the ROIC approach to assess the efficiency of capital allocation. In this way, through the return on invested capital, the company gets a sense of how well the company is actually using money to generate returns (Dent 84). However, the performance of each of the responsibility centres or product divisions depends upon the resource allocated to the centre manager (Ng and Dastmalchian 20). To calculate the ROIC of each of the responsibility centres, the managers proceed to define expenses, investments and revenues properly. As usual, the managers calculate the ROIC as a percentage value. Investments are usually based on the assets to be assigned to the division. Each and every division or responsibility centre is responsible for the forecasting of profits. The managers use this figure to determine the decisive factor while investing in assets. The invested capital could be project machineries used, etc. ROIC measure also plays an important role in determining corporate objectives. For the last three years, the company has implemented task goal objective measurement with 90% and 10% of the core value of the company. After the flood, the WD core values persuaded the employees to deliver, and hence the company increased the core value to be 50%. Incentive System The incentive system is a major motivational tool used by Western Digital to secure participation of the employees to achieve the organizational goals. The organization understands that the reward systems are an important source of communication and feedback. The incentive systems actually communicate what the firm values for an employee. Incentives and rewards create a sense of belongingness that makes the employee feel a lot more committed towards the work. Reward systems match the interests of the stakeholders and the managers. Western Digital Corporation has an incentive compensation plan, or ICP. ICP or a bonus is paid when the target funding by the individual and the company performance with specified performance objectives are met. This program is targeted to inspire the employees to set and achieve higher performance levels. Before the flood, the company used to pay ICP twice a year to motivate the employees and maintain a healthy organizational atmosphere. However after the flood, the company now pays ICP on a quarterly basis rather than semi-annual basis. This shows that the ICP has been instrumental in the pay for performance philosophy of WD. The company decided to provide reward to the employees for their more than expected performance. The reward is a long-term incentive compensation award to the employees and it consists of a stock option grant and a restricted stock unit grant. This LTI award is totally based on the basic salary of an employee and eligibility for grant percentage. The company has announced the total unit grant of restricted stock as 94 and the value of this grant on the date of grant is $3,973.79. RSUs for this LTI program carry a 3-year vesting time period and it will be paid in share of the company’s stock 100% at the end of the 3rd year of vesting. Now the declared number of stock option grant is 223 and the total value on the date of grant is $3,973.79b with the strike price of option grant as $43.11 on the date of grant. This stock option carries a 4-year vesting period for standard stock option: 25%. It will be revised after one year as 6.25% per quarter thereafter. Therefore, the total value of this LTI award at the date of grant is $7,947.58. Key Issues Reason behind Implementation The QA management control system is a strategic system that gathers and utilizes information in order to evaluate the performance of several organizational resources such as physical, financial, and human resources. An effective management control system helps to influence the behaviour of several organizational resources in order to implement effective organizational strategies. Western Digital should implement self-regulation process as it will help to explore the organisational culture (Prabhu and Hegde 132). This management control system might be informal or formal. Western Digital has followed this management control system in order to achieve several potential advantages. This system will help the organization to undertake an effective decision making strategy. Management control decisions always consider both quality and quantity of the available resources. Implementation of a management control system will help the managers to take rhythmic and systematic decisions. It will help Western Digital to balance their distribution and operational activities. The organization is suffering from several issues within these departments. Therefore, this management control system will be effective to overcome the supply chain management issues. It is an effective strategy implementation tool. This system will help the organization to measure an appropriate budget for future business operation. Thus, it can be stated that an effective management control system will help the organization to achieve its future goals in a systematic way. Another issue could be related to transferring of work. Amidst the pressure of international competition, organizations are looking to transfer some of the works. However, so far the WD has not done so. Hence, WD may have to decide to transfer some of the operations to ensure robustness in the operation (Yu 121). Here it must be added that due to increased global competitive pressure, companies are increasingly getting into international Joint Ventures (Le 3). Western Digital is also following the same footsteps. Western Digital announced the buying of the Hitachi Global Storage technology. This would also allow the company to give away some of its business operations to Toshiba. In this way this would provide the organization the much required robustness also. Criteria for Effectiveness of MCS Several supply chain management issues have affected the business performance of Western Digital. The organization has faced problems starting from the raw material collection to the finished good delivery to its clients and customers (Flamholtz 139). Due to the unique nature of Western Digital’s business structure, the issues of the organization span diverse sectors such as asset utilization, warranty management, manufacturing, supplier management, process and product development, product engineering, field quality engineering, and customer support or customer service. Western Digital should focus on the diagnostic management system. This diagnostic management system needs to be supplemented by an interactive control system, belief system and boundary control systems. The necessity of starting a management control system design with the specification of a belief system can help to define the value and direction of the organization (Shogo and Panos 1–5). However, in order to achieve overall organizational goal congruence, a management control system should satisfy certain instrumental criteria: To what degree does the management control system constantly lead to similar behaviour? To what degree does the management control system tend to control each and every relevant performance aspect or goal? To what degree does the management control system guide to behaviour to which it is purported to lead? (Flamholtz 140) Western Digital needs to identify all the relevant goals that are required to overcome the issues. It can be termed as the behavioural comprehensiveness. Lack of behavioural comprehensiveness in the management control system has created several problems in the supply the chain management system of Western Digital. Moreover, the organization has to implement behavioural validity in order to achieve personal development and budgeted profit. These are the major criteria of a management control system. It is recommended that the informal management control system structure should be implemented in order to bring reliability and consistency in the productivity. Strategy Implementation Western Digital is facing several problems in its supply chain management. Rapid change in the customer requirement for extra storage space, better performance and faster access to hardware is creating challenge for the organization. Moreover, rapid obsolescence and short product life cycle are another business challenge. Excess inventory, bad scheduling, product returns and avoiding business disruption are creating major issues in the supply chain management of Western Digital. Therefore, it is important for Western Digital to implement the strategy. It will help the organization to implement the strategy by influencing the managers. Internal Audit System The employees of Western Digital need to review, monitor, and set individual and departmental task goals in every quarter. It will help them to align with the organizational performance goal. This strategy will help the organization to increase its core value and influence the managers in order to bring integrity, collaboration, passion and innovation in the control system and performance of the organization. The managers need to communicate with the employees in order to understand the reason of subjective measurement implementation. Findings The organization is suffering from several management control system. Therefore, it is important for the organization to implement an agency theory. The values of agent and work related norms are different between the cultures. The agency theory will help the organization to analyze and control the managerial issues in different cultures (Samson 53). Looking into the issues in the supply chain management in Western Digital, it can be recommended that the organization should implement organizational life cycle theory in order to develop the structure and performance of organization. According to Richard Draft, organizational life cycle theory comprises four stages such as entrepreneurial stage, collective stage, formalization stage, and elaboration stage. Understanding OLC theory will help Western Digital to manage crisis within the organizational process. The entrepreneurial stage reflects the need for leadership. The collective stage reflects the need for delegation. The elaboration stage reflects the need for revitalization. Modernization of the management control system will positively impact the business and organizational performance of Western Digital (Morris et al. 473). The traditional management control system is not that much effective to control the issues as they are time consuming. Therefore, it is suggested that Western Digital should implement a modern management control system. The organization can use software like SPSS 17. It will help Western Digital to pursue the goals and accomplish the objectives through test the nature of relationship between practices and variables of management control and performance (Ahsina 92). An effective management control system will help to embody the mechanism and techniques. The organization can use software like SPSS 17. It will help Western Digital to pursue the goals and accomplish the objectives through test the nature of relationship between practices and variables of management control and performance (Auzir 237). Effective management control system integration will help the organization to control the overall organizational process through successful management control practices. It is suggested that Western Digital needs to identify all the relevant approaches that are required to overcome the issues within the organizational process. It can be termed as the behavioural comprehensiveness (Chow, Shields, and Chan 209). An effective management control system will help the organization to capitalize on the opportunities that have been developed due to globalization and implementation of advanced technology in the management control system. Key financial performance indicators of a company reflect the financial health, efficiency and also the effectiveness of the management control system of the organization. Here, the key financial indicators show the efficiency of MCS through the following values. The annual gross margin of the company stays between 27% and 32%. It indicates that the business is not much efficient in terms cost effectiveness, production and selling. Though the operating expenses vary between 10% and 12%, still the operating income is quite lower than what it should be due to the high percentage of cost of sales of the total revenue. For this reason pre-tax profit and net profit of the company are also much lower, indicating lower profitability and inefficient business operation. Therefore, the major issue in management controlling systems reflects through the financial status of the company. Conclusion To conclude, it can be said that a management control system is designed to provide assistance towards the achievement of the organizational goal. One of the major features of the MCS of Western Digital Corporation is the introduction of the decentralized structure through which the management expects to improve employee involvement. The company also uses the ROIC approach while reviewing and managing performance. The organization also uses an incentive system which reflects the pay for performance culture of the organization. The organization also has a holistic planning approach to support the organizational vision and objectives. Apart from this, the organization has also faced certain problems regarding the supply chain management in the western Asian division. The problem consists of allocation of raw materials as well as the delivery of the finished products to the customers. Therefore, the implementation of a MCS would actually help the organization in overall organizational diagnosis. Several supply chain management issues have affected the business performance of Western Digital. The organization has faced problems starting from the raw material collection to the finished good delivery to its clients and customers. Works Cited Ahsina, Khalifa. “Change in management Control Systems and Differential Impact on Performance: A Test Modeling.” Business management and Strategy 3.2 (2012): 92. 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