CONTROLS FOR DIFFERENTIATED STRATEGIES

Corporate Strategy
Logic for linking controls to strategy is based on following line of thinking: different organisations generally operate in different strategic contexts different strategies require different task priorities, key success factors, skills, perspectives and behaviour for effective execution control systems influence behaviour of people thus, a continuing concern in design of control systems should be whether the behaviour induced by system is consistent with strategy

Corporate Strategy
Implications for Organisation Structure: at single industry end, company tends to be functionally organised at unrelated diversified end, many senior managers tend to be experts in finance as firm moves from single industry to diversified end, autonomy of unit manager increases for two reasons: senior managers of unrelated diversified firms may not have knowledge & expertise to make strategic & operating decisions for business units

Corporate Strategy
there is very little interdependence across units in a conglomerate size of a conglomerates corporate staff as that to same-sized single industry firm, tends to be low also, a conglomerate may not have single, cohesive, strong corporate culture Implications for Management Control: different corporate strategies imply following differences for designing of control systems: due to more diversification, corporate managers may not be experienced in activities of units

Corporate Strategy
single industry and related diversified firms possess corporatewide core competencies on which strategies of most of business units are based Strategic Planning: due to lower level of interdependencies, conglomerates tend to use vertical planning system for related diversified and single industry firms, planning systems tend to be horizontal & vertical Horizontal dimension might come into process in different ways like: a group executive might be responsible to plan

Corporate Strategy
strategic plans of individual units could have an interdependence section, where general manager identifies focal linkages with other units and how they will be exploited corporate office could require joint strategic plans for interdependent business units strategic plans of individual units could be circulated to managers of similar units to critique and review Above methods are not mutually exclusive, some of them could be proposed fruitfully at same time

Corporate Strategy
Budgeting: Chief Executives of single industry firms may be able to control operations of subordinates through informal and personally oriented mechanisms like frequent personal interactions In a conglomerate, it is nearly impossible for Chief Executive to rely on informal interpersonal interactions as a control tool For a conglomerate, business unit managers have more influence in developing budgets and greater emphasis is on meeting budgeted targets

Corporate Strategy
Transfer Pricing: For a conglomerate, policy is to give sourcing flexibility to business units and use arms length market prices For a single industry or related diversified firm, synergies may be important rather than freedom to make sourcing decisions Incentive Compensation: Use of formulas by conglomerates to determine bonuses, while subjective factors are used in case of single industry and related diversified firms

Corporate Strategy
Profitability measures are used to determine incentives for unrelated diversified firms in terms of profit of particular business units manager Single industry and related diversified firms base bonus of business unit manager on both units performance and performance of larger organisational unit such as product group Bonus of general managers should be based on overall corporate performance so that greater inter-unit cooperation is encouraged, thereby enhancing exploitation of interdependencies

Business Unit Strategy

It depends on two interrelated aspects: Mission Competitive advantage Mission: mission for existing business units could be either build, hold or harvest to implement strategy effectively, there should be congruence between mission chosen and type of controls used

Business Unit Strategy

control-mission fit is developed with the following line of reasoning: mission of business unit influences uncertainties faced by general managers and short term v/s long-term trade-offs management control systems can be varied systematically to help motivate the manager to cope effectively with uncertainty

Business Unit Strategy

Mission and uncertainty: build strategies are undertaken in growth stage of product lifecycle, whereas harvest strategies are undertaken in decline stage of lifecycle build strategy has a business unit in greater conflict with its competitors than a harvest one on both input and output side, build managers tend to experience greater dependencies on external individuals and organisations

Business Unit Strategy

since build units are often in new and evolving industries, their managers are likely to have less experience in their industries Mission and time span: share building strategy includes: Price cutting Major R & D expenditures Major market development expenditures harvest strategy concentrates on maximising short-term profits

Business Unit Strategy

Strategic Planning: strategic planning process is more critical and important for build as compared to harvest units in screening capital investment and allocating resources, system may be more quantitative and financial for harvest units for build units, non-financial data may be more important, as low discount rates can be set to forward more investment ideas to corporate office

Business Unit Strategy

Budgeting: budgets are relied on less in build units than in harvest units Following additional differences are found in budget process between build & harvest units: 1. Budget revisions are likely to be more frequent for build units than harvest units 2. Build unit managers may have greater input and influence in budget formulation

Business Unit Strategy

Incentive compensation system: 1. what should size of incentive bonus payments be relative to general managers base salary ? 2. what measures of performance i.e. profit, EVA sales volume, market share etc. should be used to decide general managers bonus what should be weights ? 3. how much reliance should be on subjective judgements in deciding bonus amounts ? 4. how frequently should incentive be awarded ?

Business Unit Strategy

Incentive compensation system (continued): with respect to first question, many firms use the principle that riskier the strategy, greater the proportion of general managers compensation in bonus compared to salary for second question, when rewards are tied to certain performance criteria, behavior is influenced by desire to optimise performance based on those criteria

Business Unit Strategy

for third question, managers bonus might be a strict formula-based plan or superiors subjective judgement or combination of both approaches for third question, build managers are evaluated more subjectively than harvest ones for the final question, payments of bonuses less frequently encourages managers to take a long term perspective and hence build managers receive bonus less frequently than harvest ones

Business Unit Strategy

Competitive Advantage: choosing a differentiation approach, than a low cost approach, increases uncertainty in a business units task environment for 3 reasons: 1. Product innovation is more critical for differentiation business units 2. Differentiation business units tend to have a broader set of products to create uniqueness 3. Products of differentiated units succeed if customers perceive its advantages over competitors

Top Management Style

Management control function is influenced by the style of senior management Differences in management styles: style is influenced by managers background and personality some rely heavily on reports, some prefer conversations and informal contacts some are analytical, some use trial & error some are process-oriented, some are resultoriented

Top Management Style

Implications for management control: style affects management control process- how CEO prefers to use information, conduct performance review meetings etc. personal versus impersonal contacts: Some managers are number-oriented Some managers are people-oriented Managers attitudes towards formal reports affect amount of detail they want, frequency of these reports etc.

Top Management Style

tight versus loose controls: Manager of a routine production centre can be controlled relatively tightly or loosely and actual control reflects style of managers superior Degree of looseness tends to increase at higher levels successively in the organisation hierarchy; however it may not happen if CEO has a different style Degree of tightness or looseness is a factor of how such formal devices are used