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CHAPTER 13

CONTROLS FOR DIFFERENTIATED STRATEGIES

Zuni Barokah, M.Com., Ph.D. Magister Manajemen

Fakultas Ekonomika dan Bisnis UGM 2014

Contingency Theory: Management control process and structure depend upon

various factors

General observations: Suggestions are from tendencies

Designers need to consider other external and internal factors

Corporate Strategy

Logic of thinking:

Different organizations Different strategic contexts

Different strategies different task priorities, key success factors, skills, perspectives, and behaviors.

Control systems measurement systems that influence

Concern: is the behavior induced by the system is consistent with the strategy?

Implications of Organization Structure: Different strategies Different structures

SINGLE INDUSTRY

RELATED DIVERSIFIED

UNRELATED DIVERSIFIED

Organizational structure Functional Business units Holding company

Industry familiarity of corporate management

High Low

Functional background of corporate management

Relevant operating experience

Mainly finance

Decision-making authority More centralized

More decentralized

Size of staff High Low

Reliance on internal promotions High Low

Use of lateral transfers High Low

Corporate culture Strong Weak

Implications for Management Control

Org. structures define reporting relationships

control system ensure they are functioning effectively

The more diversified the firm: Corporate-level managers are less informed and experienced

of the business units activities

Single industry and related diversified firms: Corporatewide core competencies; low interdependence

Different Strategies: Management Control

Caused by their level of interdependencies

3 ways for incorporating horizontal dimension: By group executives

Through interdependence section of individual business unit strategic plan by business unit general managers

Through joint strategy plans for interdependence business units

SINGLE INDUSTRY

RELATED DIVERSIFIED

UNRELATED DIVERSIFIED

Strategic Planning Vertical-cum-horizontal

Vertical only

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Different Strategies: Management Control

SINGLE INDUSTRY

RELATED DIVERSIFIED

UNRELATED DIVERSIFIED

Budgeting: control of business unit manager

Low High

Importance of meeting the budget

Low High

Different Strategies: Management Control

SINGLE INDUSTRY

RELATED DIVERSIFIED

UNRELATED DIVERSIFIED

Transfer Pricing: Importance

High Low

Transfer Pricing: Sourcing Flexibility

Constrained Arms-length market pricing

Sourcing flexibility: synergies mat be important to single industry and related diversified

Different Strategies: Management Control

SINGLE INDUSTRY

RELATED DIVERSIFIED

UNRELATED DIVERSIFIED

Incentive: Bonus criteria

Financial and nonfinancial

Primarily financial

Incentive: Bonus determination approach

Primarily subjective

Primarily formula based

Incentive: Bonus basis

Both business unit and corp. performance

Primarily on business unit performance

Formula based plans that are strictly tied to financial performance criteria could be contraproductive.

Business Unit Strategy: Intrafirm Difference in Control Systems

Strategies of business units depend on: Its mission

Its competitive advantage

Mission

Mission option: Build

Hold

Harvest

Divest

Congruence between the mission and types of controls = effective strategy implementation

Mission influences uncertainties control systems help managers cope with uncertainties different missions require different controls

Mission and Uncertainty

Uncertainty in Build > Uncertainty in Harvest

Reasons: Many factors change more rapidly and more unpredictably in

growth process than in mature/decline stage

Competitors actions are likely to be unpredictable

Build manager tends to experience greater dependencies on external individuals and organizations than harvest manajer.

Build business units are often a new and evolving industries thus build managers are likely to have less experience.

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Mission and Time Span

Build managers depress short term profits

Harvest managers concentrates on maximizing short term profits

Strategic Planning Missions and its Implications for Strategic Planning

Build Hold Harvest

Importance of strategic planning

Relatively high Relatively low

Formalization of capital expenditure decisions

Less formal; DFV analysis, longer payback

More formal; DFC analysis. Shorter payback

Capital expenditure evaluation criteria

More emphasis on non financial data

More emphasis on financial data

Discount rates Realtively low Relatively high

Capital investment analysis More subjective and qualitative

More objective and quiantitatuve

Project approval limits at the business unit level

Relatively high Relatively low

Missions and Its Implications for Budgeting

Build Hold Harvest Role of the budget More or a

short-term planning tool

More or a long-term planning tool

Business unit managers influence in preparing budget

Relatively high Relatively low

Revisions to the budget during the year

Relatively easy Relatively difficult

Frequency of informal reporting and contacts with superiors

More frequent on policy issues; less on operating issues

Less frequent on policy issues; more on operating issues

Missions and Its Implications for Budgeting

Build Hold Harvest Frequency of feedback from superiors on actual performance VS budget

Less often More often

control limit used on periodic evaluation against the budget

Relatively high Relatively low

Importance attached to meeting the budget

Relatively low Relatively high

Output VS behavior control Behavior control

Output control

Missions and Its Implications for Incentive Compensation

Build Hold Harvest Percent compensation as bonus

Relatively high

Relatively low

Bonus criteria More emphasis on nonfinancial criteria

More emphasis on financial criteria

Bonus determination approach

More subjective

More formula based

Frequency of bonus payment

Less frequent More frequent

Competitive Advantage

Differentiated player VS low cost player

Differentiated approach increases uncertainty, because: Product innovation is critical, mostly new product, and

business unit then betting on unproven products

Typically tend to have a broader set of products, thus creates high environmental complexity

It is difficult to predict the demand for differentiated products

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Top Management Style

The function of management control is influenced by the style of senior management.

Differences in management styles: influenced by managers background and personality

Top Management Style: Implications for Management Control

Personal VS Impersonal Controls

Tight VS Loose Controls