Controls for Differentiated Strategies

5/27/2018 Controls for Differentiated Strategies

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Presented by: Group 9

Aparna Iyer 126 Swapnil Joshi 130Sandeep JR 127 Anamika Kashyap 131Roopak Jain 128 Shweta Nair 142

Anoop Janardanan 129


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Management control systems help managers implement andevaluate a companys strategies.

Why strategies influence the management control process:

Different organizations operate in different strategic contexts

Different strategies require different task priorities, key successfactors, skills, perspectives and behaviours for effectiveexecution.

Control systems are measurement systems that influencebehaviour of people whose activities are being measured.

Thus while designing control systems we need to considerwhether the behaviour induced by the system is consistent withthe strategy

Introduction


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Contingency Theory :Organization Structure and Management Control process arealso contingent upon various external and internal factors.

PESTLE analysis -External Factors SWOT analysis- Internal & External Factors

Hence system designers must

consider strategies as well asinternal and external factors while

designing control systems.

PESTLE:External SWOT:InternalExternal


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Control

System

Design

Corporate

Strategy

Business unit

Strategy

Management

Style


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Corporate StrategyCorporate-level strategy development asks the question:What business do we want to be in? Corporate level strategies includes making decisions about the company's

mix of businesses and allocation of resources between and amongbusinesses.

The extent and type of diversification are key issues to the design of the

control system because diversification affects the company structure andresource allocation.

Corporate strategy is a continnum with:1.Single industry 2.Related Diversified 3.Unrelated diversified


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Parameter Single Industry Related Diversified Unrelated

DiversifiedOrganizational

StructureFunctional Business units Holding company

Industry familiarity ofcorporate

management

High Low

Functionalbackground of

corporatemanagement

Relevantoperatingexperience

(mfg,mktg.R&D)

Mainly Finance

Set of corporate staff High Low

Reliance on internalpromotions High Low

Use of lateral transfer High Low

Corporate Culture Strong Weak


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Single-industry and related diversified firms

possess corporate-wide core competencieson which strategies of most BUs are based.Communication channels and transfer of

competencies across BU are therefore criticalhere More diversification means lower

interdependence. Corporate managers may

not have significant knowledge or experiencein activities across various BU hence there islack of intimate knowledge of workings.


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HEADING SINGLEINDUSTRY

RELATEDDIVERSIFIED

UNRELATEDDIVERSIFIED

STRATEGICPLANNING

VERTICAL-Cum-HORIZONTAL

VERTICAL ONLY

BUDGETING:RELATIVECONTROL OFBUSINESS UNITMANAGER OVERBUDGET

FORMATION

LOW HIGH

IMP ATTACHED TOMEETING THEBUDGET

LOW HIGH

TRANFER PRICING:

IMPORTANCE

HIGH LOW

SOURCINGFLEXIBILITY

CONSTRAINED ARMS-LENGTHMARKET PRICING

INCENTIVECOMPENSATION:B

ONUS CRITERIA

FINANCIAL ANDNONFINANCIAL

CRITERIA

PRIMARILYFINANCIAL

CRITERIABONUS PRIMARILY PRIMARILY


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Concerns intrafirm differences in control systems.

Diversified corporations segment themselves into business unitsand assign different strategies to the individual business units

As we have learnt in 2ndchapter the strategy of business unitdepends on two interrelated aspects:

Mission (what are its overall objectives?)

Competitive advantage (How should the business unitcompete in its industry to accomplish its mission?)

Business units choose from four missions typically: build, hold,harvest and divest.

Business Unit Strategy


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To implement the mission effectively, there should be acongruence between the mission chosen and the type of controlsused.

Mission influences uncertainties and short-term vs long-term

tradeoffs that managers make.

Management Control systems can be systematically varied tohelp motivate the manager to cope effectively with uncertaintyand make appropriate short-term vs long-term trade-offs

Different systems thus require different MCS.

Mission


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Mission and Uncertainty

Build strategies undertaken during growth stage whereas harveststrategies are undertaken during mature/declins stage if the PLC.

Factors like manufacturing process, product technology, marketdemand, suppliers, buyers, distributors, competition change morerapidly in growth rather than mature/decline stage.

Objective of build business unit is market share.

Build units face greater environmental uncertainty than harvest

units because of the following reasons:

Build managers tend to experience greater dependencies on externalindividuals and organizations. Also they have less experience in their

industries than harvest managers.


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Mission and Time SpanThe share-building strategy includes (a) price cutting, (b) major R&D

expenditures, and (c) major market development expenditures.

The above actions aim at increasing market leadership but theydepress short- term profits

Thus actions of a build manager may reap benefits in the futureperiod. A harvest strategy, on the other hand concentrates on

maximizing short-term profits.


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Parameter Build Hold HarvestImportance ofStrategic

planning

Relatively High Relatively low

Formalization ofcapital

expenditure

decisions

Less formal,DCF analysis,

longer payback

More formal,DCF analysis,

shorter payback

Capitalexpenditureevaluation

criteria

More emphasison non financial

data

More emphasison financial data

Discount Rate Relatively low Relatively HighCapital

investment andAnalysis

More subjectiveand qualitative

More objectiveand quantitative

Project approval

limits atbusiness level

Relatively high Relatively low


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Parameter Build Hold HarvestRole of the budget More a short term

planning toolMore a control tool

BU managersinfluence

Relatively high Relatively low

Revisions during theyear

Relatively easy Relatively difficult

Frequency ofinformal reporting

More on policy, lesson operating issues

Less on policy, moreon operating issues

Frequency offeedback on actual

Vs budgetedperformance

Less often More often

Control limit onperiodic evaluation

against budget

Relatively high, moreflexible

Relatively low

Importance ofmeeting budget

Relatively low Relatively high

Output Vs Behaviorcontrol

Behavior control Output control


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Incentive compensation systemWhile designing Incentive compensation package system belowfactors are taken into account -> Incentive bonus payment related to general managers base salary Incentive bonus limit Performance measures (EVA, sales, profit, market share, product

development etc.) and their weights in determining incentivebonus

Reliability of subjective judgement in deciding the bonus amount Frequency of incentive awards ( quarterly, semi annual, annual etc.

)


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Implications for IncentiveCompensationParameter Build Hold HarvestPercentage

Compensationas Bonus

Relatively High Relatively low

Bonus Criteria More Emphasison nonfinancial

criteria

More Emphasison financial

criteria

BonusDetermination

Approach More Subjective

More Formula

Based

Frequency ofBonus Payment

Less Frequent More Frequent


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Style of the Chief Executive officer affects the management control process inthe entire organization.

Style of functional department managers and Business unit managers alsoaffects the management control process.

Designers should hence consider management style in designing and operatingcontrol systems, if feasible.


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Quality Style 1 Style 2Reliability on Reports, Formal

documentsConversations,Informal documents

Thinking Concrete terms Abstract terms

Approach Analytical Trial and error

Risk appetite Risk takers Risk averse

Nature Friendly Aloof

Orientation Long term Short term

Decision making Dominating, enforcing Participative

Rewards Monetary Broader set


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Other influencing factors :BackgroundAge, Education, ExperiencePersonalityRisk taking ability, Ambiguity toleranceImplications for Management control : Same reports with same set of data may be viewed very

differently.

Eg Transformation in GE when Jack Welch succeeded

Reginald Jones as CEO

Ways of using information, Ways of conducting performancereview meetings


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Personal vs Impersonal contacts Number oriented as opposed to People oriented Formal reports Amount of details, Frequency of reports, Preference

for graphs over tables, Written comments.

Tight vs Loose controls Degree of tightness/looseness is not revealed by the content of

formal reports, it is a factor of how these formal devises are used. Degree of looseness tends to increase at successively higher levels in

the organization.

Higher level managers are concerned about ottom lineresults.


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Other Management styles : Autocratic

Consultative Persuasive

Democratic

Chaotic

Delegative or Laissez-faire

Final points : Style of CEO has a profound impact on the Management control.

System changes as new managers with a different style replace

existing managers. In case of incongruity in Managers style and the Organizations

management control, manager will have to change his/her styleaccordingly.

In worst cases, changing the manager would be the only solution left.


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Founded in 1902 More than 60000 products

Nearly 35% revenues from new products

500 new products created every year

More than 75000 employees In year 2000,

$16.7 billion revenues

Asia Pacific, Europe and Latin American double digitgrowth

Non-US 53% of total net sales and 63% of total operatingincome


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6 Business Segments Industrial(Tapes, Abrasives and Adhesives) Transportation, Graphics and Safety Healthcare Consumer and Office Electro and Communications Specialty Materials

Fortune Magazine (1985-2000) In top 10 rankings of Americas Most Admired Corporations

(10 out of 15 times) In top 3 rankings - Innovativeness

Awarded National Medal of Technology (U.S.government top award for innovation)


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15 Option spend 15% of work time on individual projects 30 Rule 30% of business revenues must come from products

introduced in last 4 years.

Dual Ladder Career Path Equal advancement opportunities fortechnical/management ladder

Seed Capital Grant of $50000 to conduct independent businessresearch

Tolerance for Failure Guarantee of previous jobs in case ofventure failure


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Rewards for Success Golden Step Award Venture

Carlton Award Technical Innovation

R & D Spending6-7% sales on R & D 3-Tiered Research

Business Unit Laboratories

Sector Laboratories

Corporate Laboratories

Technology Forum Periodical meets of scientists, in-house trade show, extensive email directories, award

Customer Contact Meet between Scientists andCustomers


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Documents

Controls for Differentiated Strategies