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8/4/2019 Adaptive Controls
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ADAPTIVE CONTROLSCONTINGENCY APPROACH
STRATEGY & CONTROL
SYSTEMSCOMPETITIVE ADVANTAGEREFERENCES: ICMR (2003) CHAPTER 5, 6; G&A CHAPTER 3
Ananya Rajender, Yesha Upadhayay,
SD Ram, Arijiya Ray, Shweta
Set D
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Adaptive Controls
The culture of an organization should be flexible
enough to permit changes
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Features of an Adaptive Organization
More implicit Control Mechanism
Employees internalize it through:
Training programs
Extensive acculturation
Socialization
High level of awareness, skill and integrity within the
work group
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The Formal Side
Structures that can be easily formed and dissolved
Use of ad-hoc teams, projects and world wide
purchasing
Processes should focus on organizations vision,
strategy, information flows, and other formal
procedures
Motivating reward system
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Divisional Autonomy
Organizations today require flexibility, innovation
and creativity
This makes levels of autonomy a crucial decision
Management must design a tool to help it gain
congruence between levels of autonomy and its
extent (i.e. degree of decentralization of decision
making)
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Determinants of Levels of Autonomy
1. Management Style and Processes
2. Responsibility Structure
3. Reward Systems
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Management Style and Processes
The level of centralization required to run a business
The level of involvement of corporate managers in
business
Interaction of corporate managers with other managers
Level of trust and confidence of the manager in the
ability of his subordinates
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Responsibility Structure
1. It consists of Responsibility Centers and relatedperformance measurement systems
2. It includes an accounting system that helps
managers to record the plans and performancesof the center
3. The measurement of performance is done throughcost, profit, revenue, investment and quality goals
4. It can be considered the second line of influencethat the top management has over profit centermanagers
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Methods of Measuring Performance
of a Responsibility Structure
a. The Efficiency Measure: i.e. in terms of inputs
received over specified period of time for a given
level of output
b. The Process Measure: pertains to production
process
c. The Effectiveness Measure: gauges output in terms
of goals and objectives
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ROI as a Measure of Responsibility
Structure
Elements such as cost, quality, revenue and
investment are assigned to a responsibility center
and are hence used to calculate ROI
The contribution of each center to ROI depends on
allocation of resources to center manager
To calculate ROI, it is important to define the
revenue, expense and investment allocated
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Reward Systems
1. It is determined on the basis of the performance
of a particular center
2. The amount and method of allocating bonuses
depends upon the managers autonomy
3. Rewards can be tangible and intangible
4. These are the third line of influence that top
management has over profit center manager
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Inter Profit Center Relations
It is important to integrate the activities of different
responsibility centers
One major concern is determination of prices for
goods and services (transfer pricing) that are
transferred between divisions
One solution to transfer pricing problem is to stop
business transactions between divisions but thisforgoes the benefits of economies of scale
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Setting Transfer Price
Transfer price is defined as the value of transfer of
services between two or more profit centers
It enables management to enjoy benefits of
centralization and decentralization
The process of setting Transfer Price is governed by
two criteria
Goal congruence Fairness
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Goal Congruence: i.e. if the buying and sellingdivisions make decisions regarding price and quantityof transfers, which would have been the same even if
made by central managementFairness: i.e. profit center gives divisional managers therequired autonomy to pursue their objectives
A transfer pricing system is said to be efficient if it
encourages managers to pursue decentralization ofautonomy while not forgoing the benefits ofcentralization
It should allow the divisional managers to achieve thegoals while maintaining a congruence withorganizational goals
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Approaches to Management ControlSystems
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Contingency Approach to Control
Universalistic approach argues that there is an optical schemefor control design which is applicable to all settings and firms.
Classical approach talks about the scientific managementapproach that states the division of labor based onspecialization
and thedelegation of authority
andhierarchy
system and their roles.
Contingency theory is similar to classical theory which is alsobased on scientific management approach.
This theory states that appropriateness of different controlsystems depends on the business setting.
This theory says that the organization IMPORTS energy andresources from the environment and CONVERTS them into goods,services and by-products.
Several factors which have encouraged the formation ofcontingency theory , described as below:
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What is the need for the Contingency Approach?/
Factors for the formation of contingency approach
1) Technology:
Influences the design of control systems
Enables the CHANGE in the organization
Refashion the corporate policies rapidly
Analysis of incentive plans
Development of new incentive plans
Quick implementation of those plans
Collects data for strategic and operational decision
making
Helps finding specific problems in the administration
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2) Organizational Structure:
According to theory , the organization structure should be
such that can cope with high degree of uncertainty .
The ORGANIC organizational structure adapts easily to
unstable conditions in a rapidly changing environment.
The management control systems for organic
organizations is complex because of the expansion and
growth in business.
The contingency approach helps in designing the control
system that meets the demand of complex
organizational structure.
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3) Environment:
Management controls are greatly influenced by the type of
competition faced by firms.
Contingency approach helps to develop a highly sophisticated controlsystem for competition faced by the firm.
It also expands the scope of strategy.
Emphasizes the fit between the external factors and internal
resources of the company.
Analyzes the organizational structure, culture and processes so as to
adopt technical and structural changes.
Fisher`s approaches focus on the unique characteristics of
management control systems as well as the changing environment.
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Fishers says that the contingency theory enabled researchers
to develop general suggestions about control systems
relative to business and organizational settings.
He identified the different five contingent control variables:
1) Technology & interdependence
2) Industry & firm
3) Competitive strategy4) Mission and
5) Observability factors/ Vision
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They can be either external or internal and can affectoutcomes, performances, resource allocation anddistribution.
He also suggested potential research areas in
contingency control which are casual relationships ofmultiple variables and human resource policies andcultural systems.
Some non-financial factors such as cycle time, leadtime, frequency of orders and productionperformance factors are also included.
Financial factors includes budgeting and standardcost systems.
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Strategy and Control Systems
An organization can gain competitive advantage by integrating the
usually separate functions of strategy and control.
Management control systems are the tools which help in the effective
implementation of strategy.
Two levels of strategy: 1) Corporate strategy 2) Business Unit
strategy
For Corporate strategy, there is a suitability criteria and for Business
Unit strategy, there is mission and purpose of each unit.
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What is Corporate Strategy?
Corporate Strategy relates to firm as a whole.
In corporate strategy, control refers to the styles or
behaviors by which the corporate executives influence the
strategic direction as well as the objectives of the firm.
Strategy and controls should be integratedso as to keep
employee`s behavior in congruence with managerial
goals. The organization should be well-alignedand it refers to its
hierarchies and reporting patterns.
Planning and control requirements should be designed
under a corporate strategy.
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Executive managers should have enough knowledge about
various departments and processes and they should make a plan
to implement the strategies into their action.
There are three types of companies according to the corporatestrategy, which are mentioned below.
1) Single business firm: The firm focuses on the single business.
E.g. DELL COMPUTERS
2. Relateddiversification firm: The firm is diversifiedinto
businesses that are related to one another and have common
set of core competences. E.g. LG ELECTRONICS
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3) Unrelated Diversification firm: The firm operates indifferent areas of businesses which are unrelatedtoeach other. E.g. HINDUSTAN UNILIVER LTD.
Single business and Related diversification firm should
have good communication channels so as to allowinterdependence among the different units.
In case of unrelated diversified firm, the requirements ofthe knowledge management and expertise of theemployees are more.
As a firm becomes more diversified, control systemsshould be altered to foster better co-operation amongdiverse units and to encourage their entrepreneurialspirits unlike undiversified firms.
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Designing Different Corporate Strategies
1) Strategic planning:
Conglomerate business requires vertical plans. E. g. Differen
Units prepare the plans which are reviewed by senior
management.
Diversified firms need horizontal plan that involves the
preparation plan on behalf of a group or unit by one
executive with inputs from different units. These plan
helps getting a feedback as its generated in the whole
firm.
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2) Incentives and Compensation:
In single business firms, compensation is according
to the performance of the whole firm.
In business unit firms, compensation is according to
the performance of the unit andnot the whole firm.
Linking performance with the whole firm,
increases team work and interdepen
dencies.
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Segmented business units
Individual strategy Aspects: Mission & Competitive advantages
MISSION A broad organizational goal
Trade-off b/n short term & long term goals
Business unit strategy
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Factors of planning decisions:
Internal & external factors
Competitive variation of ability
Attractiveness of industry
Two planning approaches:
Two by two growth share matrix(BGC)
Three by three industry attractiveness-business strenght
matrix(GEC)
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Single Business Related
Diversified
Unrelated Diversif
Programing Verticsl/Horizontal ---------------> Vertical only
Budgeting --------------->
Relative control of business unit
manager over budget formulation
Low ---------------> High
Importance attached to meeting
the budget
Low ---------------> High
Tranfer pricing
--------------->
Imprtance to transfer pricing High ---------------> Low
Sourcing flexibility Constrained ---------------> Arm`s length mark
pricing
Incentive compensation --------------->
Bonus criteria Finacial & non-financial
critetria
---------------> Primarily financial
criteria
Bonus determination approach Primarily subjective ---------------> Primarily formulabased
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Action of organization
Build
Hold
Harvest Divest
Form and structure of control
Strategic planning process
Budgeting Incentive compensation system
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Strategy level Key strategic issues Generic Strategy
optins
Primary organisation
leve;s involved
Corparate Level Are we in the right mix of
business ?
Single business related
diversification
unrelated
diversification
Corporate office
What set of businessindustries or industries
should we be in ?
Business unit level What should be mission of
business unit?
Build,Hold,Harvest,Dive
st
Corporate office and
general manager
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COMPETITIVE ADVANTAGE
Competitive advantage is defined as the strategic advantage
one business entity has over its rival entities within its
competitive industry. Achieving competitive advantage
strengthens and positions a business better within the business
environment.
In order to accomplish its mission, every business unit should
develop a competitive advantage. In order to identify its
competitive advantage, a business unit should analyze the
competitive structure of the industry in which it plans tooperate.
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Porters Five Forces Model analyzes the competitive
structure on the basis of the following factors:
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Alternative generic strategies may be developed
in terms of:
Low cost-primary focus is to achieve lowcost relative to competitors.
Differentiation- the goal is to differentiate the
product with that of competitors product.
Focus- it helps the unit to achieve core
competency by narrowing its market segment.
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The controller is a person who is responsible for designing and
operating the management control system.
In many organisations, title of this person is ChiefFinancial Officer.
The controller usually performs the following functions:
Designing and operating information and control systems.
Preparing financial statements and financial reports for share holdersand other external parties .
Functions of the Controller
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Preparing and analyzing performance reports ,interpreting these
reports for managers, and analyzing program and budget proposals
from various segments of the company and consolidating them
into an overall annual budget .
Supervising internal audit and accounting control procedures to
ensure the validity of information, establishing adequate
safeguards against theft and fraud ,and performing operational
audits .
Developing personnel in the controller organisation and
participating in the education of management personnel in matters
relating to the controller function.
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The controllership function is a staff function .
The controller is responsible for the design and operation of the systems
which collects and report information , the use of this information is the
responsibility of line management .
The controller is responsible for developing and analyzing control
measurement and for recommending actions to management .
Other possible charges which includes monitoring adherence to the
spending limitations laid down by the chief executive, controlling the
integrity of the accounting system, and safeguarding company assets
from theft and fraud.
RELATION TO LINE ORGANISATION
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Business unit controllers inescapably have divided loyalty.
On the one hand,they owe some allegiance to the corporate controller,
who is presumably responsible for the overall operation of the control
system .
On the other hand they owe allegiance to the managers of their own
units ,for whom they provide staff assistance .
In some companies, the business unit controller reports to the businessunit manager , and has what is called a dotted line relationship with the
corporate controller. Here, the business unit general manager is the
controllers immediate boss, and has ultimate authority in the hiring,
training, transferal, compensation, promotion, and firing of controllers
within that business unit.
THE BUSINESS UNIT CONTROLLER
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The controllers also play an important role in the preparation of
strategic plans and budgets .
In other companies, business unit controllers report directly to the
corporate controller that is, the corporate controller is their boss,
which is indicated by a solid line on the organization chart.
There are problems with each of these relationships, regardless of
the reporting relationships, it is expected that controller will notparticipate in the transmission of misleading information or in the
concealment of unfavorable information.
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ThankYou!!