13 - Controls for Differentiate Strategies.ppt

Chapter 13

Controls for Differentiated Strategies

Formal Control Process Goals and strategies (Chp 2 & 13)

Rules (Chp 3)

Other information Reward (feedback)

Strategic Planning (Chp 8)

Revise

Budgeting (Chp 9)

Revise

Responsibility center Performance (Chp 10 & 11)

Corrective action

Report actual vs plan

Was performance satisfactory? (Chp 11 & 12)

Measurement Feedback Communication

Yes No

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

Related Diversified Business units

Unrelated Diversified

Organizational Structure

Functional

Holding company

Industry familiarity of corporate management

High

Low

Functional background of corporate management

Relevant operating experience

Mainly finance

Decision-making authority

More centralized

More decentralized

Size of corporate staff

High

Low

Reliance on internal promotions

High

Low

Use of lateral transfer

High

Low

Corporate Culture

Strong

Weak

Implications for Management Control Single Industry Strategic planning

Vertical-cumhorizontal

Related Diversified

Unrelated Diversified Vertical only

Budgeting: Low Relative control of business unit manager over budget formulation

High

Importance attached to meeting the budget

Low

High

Transfer pricing: Importance of transfer pricing

High

Low

Sourcing flexibility

Constrained

Arm’s-length market pricing

Continued… Single Industry

Related Diversified

Unrelated Diversified

Incentive compensation: Bonus criteria

Financial & nonfinancial criteria

Primarily financial criteria

Bonus determination approach

Primarily subjective

Primarily formulabased

Bonus basis

Based both on business unit & corporate performance

Based primarily on business unit 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 longterm profit trade-offs.

Implications for Strategic Planning Process Build

Hold

Harvest

Importance of strategic planning

Relatively high

Relatively low

Formalization of capital expenditure decisions

Less formal

More formal

Capital expenditure evaluation criteria

More emphasis on nonfinancial data

More emphasis on financial data

Discount rate

Relatively low

Relatively high

Capital investment analysis

More subjective & qualitative

More objective & quantitative

Project approval limits at the business-unit level

Relatively high

Relatively low

Different Strategic Missions: Implications for Budgeting Build

Hold

Harvest

Role of the budget

More a short-term planning tool

More a control tool

Business unit manager’s influence in preparing the budget

Relatively high

Relatively low

Revisions to the budget during Relatively easy the year

Relatively difficult

Frequency of informal reporting & contacts with superiors

More frequent on policy issues; less frequent on operating issues

Less frequent on policy issues; more frequent on operating issues

Frequency of feedback from superiors on actual performance versus the budget

Less often

More often

Continued… Build

Hold

Harvest

“Control limit” used on periodic Relatively high evaluation against the budget

Relatively low

Importance attached to meeting the budget

Relatively low

Relatively high

Output versus behavior control

Behavior control

Output control

Different Strategic Missions: Implications for Incentive Compensation Build

Hold

Harvest

Percent compensation as bonus

Relatively high

Relatively low

Bonus criteria

More emphasis on nonfinancial criteria

More emphasis on financial criteria

Bonus determination approach

More subjective

More formula-based

Frequency of bonus payment

Less frequent

More frequent

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

Differentiation

Low-cost

Product innovation

Product offering stable

Broad set of products

Narrow product lines

Produce competing products

Produce no-frill commodity products

Top Management Style Influenced by manager‟s background & personality.  Style affect management control process how the control system “actually” operates. 