Controls for Differentiated Strategies

Prepared by-: Jaydeep Gosai Hiren Gadhavi

Introduction

1.

2.
3. 4.

Different strategies influence the management control process. Corporate strategy Business level The form & structure of control system. Management Style

Corporate Strategy

Different strategy different task priorities, key success factors, skill, perspectives & behaviors.

Strategy

Control Systems

Measurement

Implication for Organization Structure

Single Industry
Organizational Structure Industry familiarity of corporate management Functional background of corporate management Decision-making authority Size of corporate staff Reliance on internal promotions Use of lateral transfer Corporate Culture Functional High Relevant operating experience More centralized High High High Strong

Related Diversified
Business units

Unrelated Diversified
Holding company Low Mainly finance More decentralized Low Low Low Weak

Implications for Management Control

Single Industry Strategic planning Vertical-cumhorizontal Related Diversified Unrelated Diversified Vertical only High

Budgeting: Low Relative control of business unit manager over budget formulation Importance attached to meeting the budget Transfer pricing: Importance of transfer pricing Sourcing flexibility Low High

High Low

Constrained

Arms-length market pricing

Continued
Single Industry Incentive compensation: Bonus criteria Bonus determination approach Bonus basis Financial & nonfinancial criteria Primarily subjective Related Diversified Unrelated Diversified Primarily financial criteria Primarily formulabased Based primarily on business unit performance

Based both on business unit & corporate performance

Business Unit Strategy

Strategy of business unit depends on two interrelated aspects:

1.

2.

Its mission: build, hold, harvest Its competitive advantage: low cost & differentiation

Mission
Pure Build Pure Harvest

Builds unit tend to face greater environmental uncertainty than harvest. The choice of build & harvest strategies has implication for short-term vs long-term profit tradeoffs.

Implications for Strategic Planning Process

Build Importance of strategic planning Formalization of capital expenditure decisions Relatively high Less formal Hold Harvest Relatively low More formal

Capital expenditure evaluation criteria

Discount rate Capital investment analysis Project approval limits at the business-unit level

More emphasis on nonfinancial data

Relatively low More subjective & qualitative Relatively high

More emphasis on financial data

Relatively high More objective & quantitative Relatively low

Different Strategic Missions: Implications for Budgeting

Build Hold Harvest

Role of the budget

Business unit managers influence in preparing the budget

More a short-term planning tool

Relatively high

More a control tool

Relatively low

Revisions to the budget during Relatively easy the year Frequency of informal reporting & contacts with superiors Frequency of feedback from superiors on actual performance versus the budget More frequent on policy issues; less frequent on operating issues Less often

Relatively difficult Less frequent on policy issues; more frequent on operating issues More often

Continued
Build
Control limit used on periodic Relatively high evaluation against the budget

Hold

Harvest
Relatively low

Importance attached to meeting the budget

Output versus behavior control

Relatively low
Behavior control

Relatively high
Output control

Different Strategic Missions: Implications for Incentive Compensation

Build Hold Harvest

Percent compensation as bonus

Bonus criteria

Relatively high
More emphasis on nonfinancial criteria More subjective

Relatively low
More emphasis on financial criteria More formula-based

Bonus determination approach

Frequency of bonus payment

Less frequent

More frequent

Competitive Advantage
Choosing differentiation approach, rather than a low-cost approach, increases uncertainty in a business units task environment.

Differentiation
Product innovation Broad set of products Produce competing products

Low-cost
Product offering stable Narrow product lines Produce no-frill commodity products

Top Management Style

Influenced by managers background & personality. Style affect management control process how the control system actually operates.

Implication for management control

Personal Vs. impersonal control:

Managers differ on the relative importance that they attach to formal

budget and reports, contrasted with informal conversation and other

personal contacts. Some managers are number oriented and some are people oriented

Cont..

Tight vs. loose control

The manager of routine production responsibility center can be controlled either relatively tightly or relatively loosely, and the actual

control reflects the style of the managers superior.