4.Planning and Control

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Business ManagementPrepared by: JamalChapter 3

PLANNING AND CONTROL

1) PLANNING & CONTROL CYCLE:It has following steps:

1) Identify Objectives: Like maximize profits, increase market share, produce betterquality product etc

2) Identify Potential Strategies: by position audit or strategic analysis, gatherinformation to identify potential strategies3) Evaluate Strategies: in term of suitability, feasibility and acceptability4) Choose alternative course of action: collect the chosen strategies together andcoordinate them into long tern financial plan5) Implement the long term plan: break long term plan into smaller parts (one yearbudgets)6) Measure actual result and compare with the plan7) Respond to divergence from the plan

2) THE CONTROL PROCESS:

Control is achieved through control cycle. The elements in control cycle are as follow:1) Plans & targets are set for future e.g. budgets, profit targets, standard costs etc2) Plans are put into operation.

3) Actual results are recorded and analyzed4) Feed back are given to management

5) Management used this feed back to compare actual results with the plan ortargets

As a result of comparison management can take following actions:

They can take control action

They can decide to do nothing

They can alter the plan or targetRefer example on page 48

3) FEEDBACK & FEEDFORWARD CONTROL:

a) Feedback is the process of reporting back control information to managementand the control information itself.

b) Feed forward control is control based on comparing original targets or actualresults with a fore cast of future results

c) Single Loop Feedback: is the feedback of relatively small variation b/w actualand plan in order that corrective action can bring performance in line with planned results

d) Double loop Feedback: Ensure that plans budgets, org structure and controlsystem themselves are revised to meet changes in condition

e) Negative Feedback: Feedback will most often be negative targets weremissed and this was not what was required

f) Positive Feedback: Targets were missed, but other targets were hit whichwere better than those we were aiming at

g) Feed forward Control: Past events are used as a means of controlling andadjusting future activity

4) CONTROLLABILITY & RESPONSIBILITY REPORTING:The selection of budgets centre and responsibility centre are key steps in setting up a controlsystem. Responsibility centre include cost centre, profit centre & investment centresBudget Centre: Each section of an org for which a budget is prepared is a budget centreFeatures of Control System:

A hierarchy of budget centre

Clearly identified responsibility for achieving budgets for individual budgetcentre

Responsibilities for revenues, costs and capital employed- Appropriate level ofauthority management hierarchy should be responsible for all these things


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Responsibility accounting: is a system of accounting that segregates the revenue, cost intoareas of personal responsibility in order to monitor and assess the performance of each dept of anorg. Responsibility centre is a unit of an org headed by manager who has direct responsibility forits performance. Examples are cost centre, investment centre, profit centre etc

Controllable & Non controllable cost:

Controllable costs are items of expenditure which can be directly influenced by a given managerwithin a given time of span .A cost which is non controllable in one dept may be controllable byother dept.Some cost are non controllable, such as increase in expenditure items due to inflation

The controllability of Fixed cost: All fixed cost are assumed to be non controllable in shortterm but there are some exceptions like committed fixed cost arising from the possession of plant,building and an admin dept to support the long term needs of the business. Discretionary fixedcosts such as advertising and R&D are incurred as a result of a top mgt.

Managers should not be held accountable for costs over which they have nocontrol.

A reporting system must allocate responsibility appropriately if cost related tomore than one manager.

Control Reporting: Feedback period ought to be planned to avoid excessive reporting orunnecessary delays in control reporting. Most suitable frequency of routine control reportingvaries from operation to operation. Control reports should be clear and understandable to theperson receiving them

5) BUDGETARY PLANNING & CONTROL SYSTEMS:Following are the objectives of a budgetary planning & control system

1) Ensure the achievement of the organizations objectives2) Compel planning3) Communicates ideas and plans

4) Coordinate activities5) Provide a frame work for responsibility accounting6) Establish a system of control7) Motivate employees to improve their performance

6) RISK & UNCERTAINTY:Risk: is sometimes used to describe situation where outcomes are not known, but theirprobabilities can be estimatedUncertainty is present when the outcomes cannot be predicted or assigned probabilities.Types of Risk & Uncertainty:

1) Physical: Like earth quake, fire, flooding etc

2) Economic: govt forecasts might be wrong

3) Business: Lowering in entry barriers, changes in customer/supplier industries,technological changes etc

4) Product Life Cycle: Different risk at different stages of life cycle

5) Political: Nationalization, civil war, political instability

6) Financial: debt financing, higher interest rates etc

Accounting for Risk: A firm might quantify the return from investment say 5%. This can beadjusted for riskReturn: the target return could be raised to compensate for the risk.Payback: project should be payback within certain period of time.Finance: Investments should be financed under strict conditions (only from profit)Planners try to quantify the risk so as to compare the estimated riskiness of different strategies:

Rule of Thumb: to choose the best possible result with a best estimate Basic Probability theory to express the likely hood of a forecast result


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Calculating standard deviation of the expected values of the profit, higherthe deviation more will be risk

7) USING IS/IT AS A STRATEGIC TOOLCompetitive advantage is a profitable and sustainable position. It exist in the mind of thecustomers, who believes the values they will receive from a product is greater than both the price

they will pay and the values offer by the competitor

IT has the potential to change the nature of competition within an industry in three ways :1) Change the industry structure ( Porters five forces modal refer chapter 21)2) Create new businesses and industries3) Used to create competitive advantage

IT as a collaborative venture:The org using technologies like EDI & VANS require close cooperation with other org, the ultimateaim is still to gain a competitive advantage but the ultimate aim is still to gain a competitiveadvantagePossible benefits include the following:Financial benefits:

1) Economies of scale such as increase discounts for collective purchasing in bulkor lower ordering and delivery cost2) Saving in staff cost3) Marketing benefits:4) Better knowledge of the market5) More satisfied customer

Operational benefits1) Faster and more accurate processing due to EDI2) Less need to retain a wide range of expertise or to stock a full range of items

The main drawback is that org are required to share sensitive information

IT/IS as Source of Competitive Advantage:

Cost leadership- means being the lower cost producer in the industry as a whole Differentiation is the exploitation of a product or service which the industry aswhole believe to be unique

Niech Marketing -Focus involve a restriction of activities to only part of themarket ie segmentation

IT could be used for competitive advantages by following ways:

Linking the org to customers or supplier, eg EDI, VAN, website

Creating effective integration of the use of info eg data mining, ERM

Enabling the org to develop, produce, market and distribute new products orservices, eg CAD, CRM

Giving senior management info to help develop and implement strategy, eg

knowledge management

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4.Planning and Control