designing the control process and

8/8/2019 Designing the Control Process And

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MANAGEMENT CONTROL SYSTEMSL GM 601

Designing the ControlProcess andManagerial Controls

ICFAI BUSINESS SCHOOLClass of 2011

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Three levels of strategy

12/13/10 Class of 2009Business Strategy 1

2

Functional

LevelProduct/ R

&DStrategies

Financial/AccountingStrategies

MarketingStrategies

HumanRelations

Strategies

Corporate /Business

Level

Business 1 Business 2 Business 3BusinessLevel


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Two Levels of StrategyStrategy Level Key Strategic

IssuesGenericStrategicOptions

PrimaryOrganisationalLevel StrategiesInvolved

Corporate Level Are we in the right mixof industries

What industries of subindustries should webe in

Single Industry

RelatedDiversification

UnrelatedDiversification

CorporateOffice

Business UnitLevel

What should be missionof the Business UnitHow should the businessunit compete to realiseits mission

Build; Hold; Harvest;Divest

Low CostDifferentiation

Corporate Office andBU General Manager

BU GM

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Concept of CoreCompetence

Must relate to an activity or processthat fundamentally underpins the valuein the product or service features asseen through the eyes of the customer

Leads to levels of performance from anactivity or process that are significantlybetter than competitors

Robustness Rarity who owns it?; is it easily

transferrable?; Complexity

Causal ambiguity01/06/2010 Class of 2011 SL GM 601 4


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Core Competencce andCorporateDiversification

Single Industry Related Diversification Unrelated Diversification

Who will perform best?

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Competition in differenttypes of organisations

Single Industry Firms Unrelated Diversified Firms Related Diversified Firms

Corporate Level or UnitLevel?

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BCG

Based on use of industry growth andrelative market share as proxies for

the competitive position of a firm sbusiness unit in its industry

the resulting net cash flow required tooperate the business unit

Underlying assumption Experience curve is operating

firm with largest relative share = lowestcost producer

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BCG

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8

Stars Question marks

Cash cows Dogs

A select few (netusers of resources)

(net suppliers of resources)

Remainder divested

Market GrowthRate

Low

LowHigh

High

Relative Market Share ( Cash Generation)

C a s

h

u s e


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GE-McKINSEY-SHELL

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9

High Medium Low

H i g h

M e d i u m

L o

wDivest

Invest

Selectively

Invest

Industry Attractiveness

SizeGrowth

SharePositionProfitabilityMargins

Tech PosStren/Weak

ImagePollutionPeople

SizeMarket GrowthPricing

Market DiversityCompetitive StructureIndustry Profitability

Technical RoleSocialEnvironmentalLegalHuman

1.Identify Industry attractiveness factors2.Assign weight to each factor3.Obtain weighted composite score4.Classify the score into ratings H/M/L5.Classify business units into different categories


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BCG -- Disadvantages

Markets defined properly to account for importantshared experience and other interdependencies withother markets. This is often a subtle problem andrequires a great deal of analysis

The structure of the industry and within industry aresuch that relative market share is a good proxy forcompetitive position and relative costs. This is oftennot true

Market growth is a good proxy for required cashinvestment. Yet profits (and cash flow) depend on alot of other things.

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Goal Congruence

Perceived Interests of the people inalignment with the Best Interests of theorganisation

Does perfect congruence exist?

At least control system should notencourage individuals to act against theinterests of the organisation

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Goal Congruence (2)

Two questions to be answered What actions does it motivate

people to take in their own self-

interest? Are these actions in the bestinterest of the organisation

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Formal Vs Informal

Formal Control Systems Strategic Plans Budgets Reports

Informal Processes Work ethic Management style

Organisational culture01/06/2010 Class of 2011 SL GM601 14


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Informal Forces Affecting GoalCongruence

External Internal

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Informal ForcesAffecting GoalCongruence (2)

External Work ethic

Employee loyalty Employee Diligence Employee Aspirations Employee Pride in doing a good job

These could be Local, National , IndustrySpecific

Examples ???01/06/2010 Class of 2011 SL GM601 16


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Informal ForcesAffecting GoalCongruence (3)

Internal Culture

Common Beliefs Shared Values Norms of behaviour Implicitly accepted and explicitlymanifested assumptions

Management Style The Informal Organisation Perception and Communication

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Formal Control System

Rules Formal Control Process

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Formal Control System(2)

Rules All types of formal instructions and controls Remains in force till they are modified Some rules are guidelines though stated as

rules, it is expected that, on occasions, theserules may be overlooked

Positive actions to be taken Prohibitions

Physical Controls Manuals System Safeguards

Task Control Systems01/06/2010 Class of 2011 SL GM601 19


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Formal Control Process

Rules

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Goals &Strategies

OtherInformation

StrategicPlanning

BudgetingResponsibilityCentrePerformance

ReportsWasPerformanceSastisfactory

Measurement

Y e s

N o

FeedbackCommunication

CorrectiveAction

Revise

Revise

Rewar

d


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Types of Organisations

Functional Organisation Business Unit Structure Matrix Structure

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Functional Organisation

Each functional Manager is specialised in afunction and he/she brings in that knowledgeto that function

Advantage Efficiency

Disadvantage No unambiguous way of measuring the

effectiveness of each functional unit Minor conflicts at lower level tend to go right up

to the top Diversified or multi-product companies Tend to form silos for each function

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Business Units

BU may also be viewed as a Division Responsible for all function Profits can be directly allocated Business Unit managers have broad authority, but

still report to HQ Advantages

Training for generalists ( head of a business unit is a CEO) BU is closer to the market sounder decisions than HQ

Disadvantages Duplication of work between BU and HQ No functional level disputes; But disputes between BUs

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Implications of SystemDesign

Ease of Control Business Units Efficiency Functional Units

Which system is to be followed?It should fit the organisation

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Controller

In many organisations it is the CFO Functions of the controller Design and operate information and control systems Prepare financial statements and financial reports (including tax

returns) for shareholders and other external parties Prepare and analyse the performance reports, intepreting these

reports for managers and analysing program and budget proposalsfor various segments of the company and consolidating them intoan overall annual budget

Supervising internal audit and accounting control procedures toensure the validityof information, establishing adequate safeguardsagainst theft and fraud, and performing operational audits

Developing personnel to controller organisation and participating inthe education of management personnel in matters relating tocontroller functions

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Relation to LineOrganisation

Business UnitManager

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CorporateController

CorporateContoller

Business UnitManager

Business UnitController

Business UnitController


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Logic For Linking Controlsto Strategy

Different Organisations will have different strategic contexts Different strategies require different task priorities, key success

factors, skills, perspectives, and behaviours for effectiveexecution

Control systems are measurement systems and influence thebehaviour of the people whose activities are being measured

Thus, a continuing concern in the design of control systemsshould be whether the behaviour induced by the system isconsistent with the strategy

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Types of Organisation andUncertainty?

Is there any difference in uncertainty of business between an organisation followinga Build strategy and another following a Harvest strategy?

Build strategies undertaken during growth and Harvest strategyundertaken during periods of mature or decline stage

Build aims to increase market share. Harvest aims to hold the

market share Dependency on inputs and outputs higher for build managers

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Different CorporateStrategies: OrganisationalStructure ImplicationSingleIndustry RelatedDiversification UnrelatedDiversification

OrganisationalStructure

Functional Business Units Holding Company

Industry familiarity of

CorporateManagement

High Low

Functional Backgroundof CorporateManagement

Relevant operating experience MainlyFinance(mfg, mktg, r&d)

Decision MakingAuthority

More centralised MoreDecentralised

Corporate Staff Size High Low

Reliance on internal

promotions

High Low

Use of lateral transfers Hi h Low01/ 06/2010 Class of 2011 SL GM 601 29

Different Corporate


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Different CorporateStrategies: ManagementControl ImplicationSingle

IndustryRelatedDiversification

UnrelatedDiversification

Strategic Planning Vertical cumhorizontal

Vertical only

Budgeting: Relative control of BU manager of budgetformulation

Low High

Importance attached tomeeting the budget

Low High

Importance of transfer pricing High Low

Sourcing flexibility Constrained Arms Length

transfer pricing

Incentive Compensation :Bonus criterion

Financial and Primarilynon financial

FinancialCriteriaCriteria

Bonus determination approachPrimarily Subjective Primarily formula based01/06/2010 Class of 2011 SL GM 601 30


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Different StrategicMissions : Implication forStrategic Planning Process

Build Hold Harvest

Importance of StrategicPlanning

Relatively high Relatively Low

Formalisation of CapitalExpenditure Decisions

Less formal DCFanalysis, longer pay

back

More formal DCFanalysis shorter pay

backCapital ExpenditureEvaluation Criteria

More emphasis onnon-financial data(mkt shr, efficientuse of R&Dexpenditure, etc)

More emphasis onfinancial data (costefficiency, straightcash on cashincremental returns )

Discount Rates Relatively low Relatively high

Capital Investment Analysis More subjective andqualitative

More objective andquantitative

Project Appraisal limits at thebusiness unit level


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ff


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Different StrategicMissions : Implication for

BudgetingBuild Hold Harvest

Role of Budget More of a shortterm planning tool

More a control toolA document of restraint

BU Managers role in preparingthe budget


Revisions to budget during theyear Relatively easy Relatively difficult

Frequency of informal reportingand contacts with seniors

More frequent onpolicy issues andless frequent onoperating issues

Less frequent on policyissues and morefrequent on operatingissues

Frequency of feedback fromsuperiors on actual performancevs budget

Less Often More often

Control Limit used on periodicevaluation against the budget

Relatively high(i.e., more flexible)

Relatively high (i.e.,more flexible)

Importance attached to meetingthe budget

Relatively low Relatively High01/06/2010 Class of 2011 SL GM 60 1 32


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Different StrategicMissions: Implication forIncentive Compensation

Build Hold Harvest

Percent compensation as bonus Relatively high Relatively Low

Bonus Criteria More emphasis onnon-financialcriteria

More emphasis onfinancial criteria

Bonus Determination Approach More subjective More formula based

Frequency of Bonus Payment Less frequent More frequentFrequency of feedback fromsuperiors on actual performancevs budget

Less Often More often

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Management Style

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designing the control process and

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