COMPARISON / EXAMPLES OF STRATEGY F0RMULATION, MCS, AND TASK CONTROL

strategy formulation

1 definition

2 degree of system least systematic

3 time frames long-run

4 nature of activity

5 people involved

6 who is affected?

examples strategy formulation1 enter a new business

2 change debt/equity ratio

3 devise inventory policy

Strategy formulation is the process of deciding on the long term goals of the organization and the adoption of a broad course of action and the allocation of resources for attaining these goals.

involves assessing threats, opportunities, and new ideas, which can happen at any time; hence cannot be pre-determined. Judgement, and numbers used are rough estimates

few -the sponsor of the idea, headquarters staff and senior management

organization as a whole in a broad sense

4

similarities

Concept of Corporate Strategy:The need for formulating strategies arises in response to a perceived threat (e.g., market inroadsby competitors, a shift in consumer tastes, or a neew government regulation) or an opportunity (e.g.,technological innovations, new perceptions of customer behaivour, or the new applications of existing products). A new CEO, especially one brought from outside perceives threats and opportunities differently from how his or her predecessor did.Thus, there may be often changes in strategies whena new CEO takes over.Thus, strategies state in a general way the direction in which senior management wants the organizationto move. These are the big and importane plans which take the company ahead in future.

Perspective of MCS:The perspective of MCS is that with its help, the senior management can influence other members,down the line, so that corporate strategies are best implemented.

Management Control Process takes place in a formal planning and control system within which informal interactions take place.

1. Strategic planning2. Budget preparation3. Execution, and4. EvaluationEach activity leads to the next, in a regular cycle. Collectively, they constitute a closed loop.

a manager and his or her subordinates. Informal communications occur mainly by means of memoranda, meetings, conversations.

The Formal System:1. Strategic planningStrategic planning is the processs of deciding on the major programs that the organization willundertake to implement its strategies and the approximate amount of resources that will be

decide magnitide and direction of research

require planning and control

The formal system includes the following:

The informal system involves interactions between one manager and another or between

several years (typically three or five). In a profit-oriented company, each principal product or product line is called a program. In a non-profit organization, the principal services that the organization provides are its programs.Strategic planning is the first step in the management control cycle.2. Budget preparation (also see note on Types of Budget below)An operating budget is the organization's plan for a specified period , usually a year. The budget represents a fine-tuning of the strategic plan, incorporating the most current information. In the budget, revenues and expenses are re-arranged from programs to responsibility centers;thus the budget shows the expenses that each manager is expected to incur. The process of preparing the budget is essentially one of negotiation between the managers of each responsibility center and their siperiors. The end-product of these negotiations is an agreed-uponstatement of the anticipated expenses for the coming year (if the responsibility center is anexpense center), or the planned profit or expected return on investment (if the responsibility center is a profit center or an investment center).3. ExecutionDuring the year, managers execute the program or a part of the program for which they are responsible, and also report on what has happened in the course of fulfilling that responsibility.Ideally, reports are structured so that they provide information about both programs and responsibility centers. Responsibility centers mat show budgeted and actual information, financialand non-financial performancemeasures, internal and external information. These reports keep managers at higher levels informed about the status of the various programs in their charge and also help to ensure that the work of the various responsibility centers is coordinated.4. EvaluationThe managers' reports also are used as a basis for control. The process of evaluation is a comparisonof actual expenses and those that should have beeen incurredunder the circumstances. If the circumstances assumed in the budget are unchanged, the comparison is between the budgeted andthe actual amounts. If circumstances have changed, these changes are taken into account. Ultimately,the analysis leads to praise or constuctive criticism of the responsibilty center managers.

The focus of Performance evaluation is extended to incorporation of nonfinancial measures and

Sometimes, the management control systems (especially the nonfinancial variety) can lead to

management control of ongoing projects.

Types of Budget:The end product of the budgetary process is a master budget. The master budget summarisesthe objectives of all the sub-unitsof an organization -marketing, production, finance and

devoted to each. The output of the process results in a document called strategic plan (or insome companies, the long-range plan). Strategic plans cover a period that extends over

to consider the design of a Balanced Score Card.

developing new strategies ; such controls are referred to as interactive controls.

There are also several variations from this process : differentiated controls for differentiated strategies, service organizations, and multinational organizations.

The process for management control of projects is somewhat different from the

distribution. It quantifies the expectations regarding future income, financial position,

1organization. Operating budgets are plans relating to the operations of the firm. The operations, that is functions relating to an organizationd for the ensuing year are laid down.Apart from this, it includes budgets which specifically lay down plans for different individuals.

inventory budget, direct materials budget, direct labour budget, production overhead budget, plant utilization budget, and manpower budget.(Through the operations budget, MCS relates to operations control.)

2

statement of changes in working capital and its sources and applications, projected profit and loss account, projected balance sheet and capital budget.

Contrast between Budget and Forecast.A budget differs in several respects from a forecast. A budget is a management plan, with the implicit assumption that positive steps wil be taken by the budgetee - the manager who prepares

what will most likely happen, carrying no implication that the forecaster will attempt to so shapeevents that the forecast will be realized. As contrasted with the budget, a forecast has the following characteristics:1. a forecast may or may not be in monetary terms2. it can be for any period3. the forecaster does not accept responsibility for meeting the forecasted results4. forecasts are not usually approved by higher authority5. forecast is updated as soonn as new information indicatse that there is a change in conditions.6. Variances from forecast are not analyzed formally or periodicallyAn example of a forecast is one that is made by the treasurer's office to help in cash planning.Such a forecast includes estimates of revenues, expenses, and other items that affect cash flows.The treasurer, however, has no responsibility for making the actual sales, expenses, or other items conform to the forecast. The cash forecast is not cleared with top management; it maychange weekly or even daily, without approval from higher authority; and usually the variancesbetween the actual and forecast are not systematically analyzed. From management's point of view, a financial forecast is exclusively a planning tool, whereas a budget is both a planning and control tool.Methods of Financial Forecasting:Qualitative:

1 Market Research based (seeking a poll from a large number of likely customers to find whether they would buy/not buy the product)

2 Delphi Method: (seeking opinions from field experts and then compiling into a forecast)Quantitative:

cash flows and supporting plans. The master budget comprises of two parts- operating budgets and financial budgets.Operating Budgets: Operating decisions are includedin the operating budgets of an

The operating budgets which are generally prepared are sales budget, production budget,

Financial Budgets: Financial budgets are those which incorporate financial decisions of an organization. The financial budgets are cash budget, working capital budget, projected

the budget - to make actial events correspond to the plan; a forecast is merely a prediction of

1 Indicator approach: relating forecast to an indicator such as GDP(Gross Domestic Product) or Inflation, or unemployment, etc.)

2 Econometric Modelling: This is on lines of the Indicator method but with details of numbers worked out mathematically in great details. This method is used more by Governments rather than corporates.

3 Time Series Method: This method takes past data and tries to relate to the future financialforecasting. This is most common in business forecasting.

various expenses, assets and liabilities for a future period as a percent of sales, and then, using these percentages, construct proforma balance sheets.

Under this method, one of the most common methods used is "Percent of Sales Method"Traditional financial forecastingtakes the sales forecast and forecasts its impact on the firm's

COMPARISON / EXAMPLES OF STRATEGY F0RMULATION, MCS, AND TASK CONTROL

management control systems (MCS) task control

systematic precise, sometimes scientific

between-long run and short-run short run

individual task performers

specific tasks

management control systems (MCS) task control expand a plant schedule production

issue new debt manage cash flows

decide inventory levels reorder an item

MCS deals with the implementation of strategy which is formulated and is the process by which managers influence other members of the organization to implement these strategies effectively and efficiently

task control is the process of ensuring that specified tasks are carried out effectively and efficiently.

involves a series of steps that occur in a predictable sequence (master budget to sub-budgets, and as per the formal mcs control process), according to a time-table, and with reliable estimates. Thereafter the results are evaluated with respect to the budgets and necessary corrective actions taken, wherever necessary

transaction-oriented, i.e., according to rules which are established in MCS process.

large number- involves managers and their staff at all levels in the organization

organization along with consideration for all the business units

control research organization run individual research project

require planning and control require planning and control

The need for formulating strategies arises in response to a perceived threat (e.g., market inroadsby competitors, a shift in consumer tastes, or a neew government regulation) or an opportunity (e.g.,technological innovations, new perceptions of customer behaivour, or the new applications of existing products). A new CEO, especially one brought from outside perceives threats and opportunities differently from how his or her predecessor did.Thus, there may be often changes in strategies when

Thus, strategies state in a general way the direction in which senior management wants the organizationto move. These are the big and importane plans which take the company ahead in future.

The perspective of MCS is that with its help, the senior management can influence other members,down the line, so that corporate strategies are best implemented.

Management Control Process takes place in a formal planning and control system within which

Each activity leads to the next, in a regular cycle. Collectively, they constitute a closed loop.

a manager and his or her subordinates. Informal communications occur mainly by means of

Strategic planning is the processs of deciding on the major programs that the organization willundertake to implement its strategies and the approximate amount of resources that will be

involves interactions between one manager and another or between

several years (typically three or five). In a profit-oriented company, each principal product or product line is called a program. In a non-profit organization, the principal services that the

Strategic planning is the first step in the management control cycle.2. Budget preparation (also see note on Types of Budget below)An operating budget is the organization's plan for a specified period , usually a year. The budget represents a fine-tuning of the strategic plan, incorporating the most current information. In the budget, revenues and expenses are re-arranged from programs to responsibility centers;thus the budget shows the expenses that each manager is expected to incur. The process of preparing the budget is essentially one of negotiation between the managers of each responsibility center and their siperiors. The end-product of these negotiations is an agreed-uponstatement of the anticipated expenses for the coming year (if the responsibility center is anexpense center), or the planned profit or expected return on investment (if the responsibility center is a profit center or an investment center).

During the year, managers execute the program or a part of the program for which they are responsible, and also report on what has happened in the course of fulfilling that responsibility.Ideally, reports are structured so that they provide information about both programs and responsibility centers. Responsibility centers mat show budgeted and actual information, financialand non-financial performancemeasures, internal and external information. These reports keep managers at higher levels informed about the status of the various programs in their charge and also help to ensure that the work of the various responsibility centers is coordinated.

The managers' reports also are used as a basis for control. The process of evaluation is a comparisonof actual expenses and those that should have beeen incurredunder the circumstances. If the circumstances assumed in the budget are unchanged, the comparison is between the budgeted andthe actual amounts. If circumstances have changed, these changes are taken into account. Ultimately,the analysis leads to praise or constuctive criticism of the responsibilty center managers.

The focus of Performance evaluation is extended to incorporation of nonfinancial measures and

Sometimes, the management control systems (especially the nonfinancial variety) can lead to

The end product of the budgetary process is a master budget. The master budget summarisesthe objectives of all the sub-unitsof an organization -marketing, production, finance and

devoted to each. The output of the process results in a document called strategic plan (or inthe long-range plan). Strategic plans cover a period that extends over

Balanced Score Card.

developing new strategies ; such controls are referred to as interactive controls.

There are also several variations from this process : differentiated controls for differentiated , and multinational organizations.

management control of projects is somewhat different from the

distribution. It quantifies the expectations regarding future income, financial position,

organization. Operating budgets are plans relating to the operations of the firm. The operations, that is functions relating to an organizationd for the ensuing year are laid down.Apart from this, it includes budgets which specifically lay down plans for different individuals.

inventory budget, direct materials budget, direct labour budget, production overhead budget, plant utilization budget, and manpower budget.(Through the operations budget, MCS relates to operations control.)

statement of changes in working capital and its sources and applications, projected profit and loss account, projected balance sheet and capital budget.

A budget differs in several respects from a forecast. A budget is a management plan, with the implicit assumption that positive steps wil be taken by the budgetee - the manager who prepares

what will most likely happen, carrying no implication that the forecaster will attempt to so shapeevents that the forecast will be realized. As contrasted with the budget, a forecast has the

1. a forecast may or may not be in monetary terms

3. the forecaster does not accept responsibility for meeting the forecasted results4. forecasts are not usually approved by higher authority5. forecast is updated as soonn as new information indicatse that there is a change in conditions.6. Variances from forecast are not analyzed formally or periodicallyAn example of a forecast is one that is made by the treasurer's office to help in cash planning.Such a forecast includes estimates of revenues, expenses, and other items that affect cash flows.The treasurer, however, has no responsibility for making the actual sales, expenses, or other items conform to the forecast. The cash forecast is not cleared with top management; it maychange weekly or even daily, without approval from higher authority; and usually the variancesbetween the actual and forecast are not systematically analyzed. From management's point of view, a financial forecast is exclusively a planning tool, whereas a

Market Research based (seeking a poll from a large number of likely customers to find whether

Delphi Method: (seeking opinions from field experts and then compiling into a forecast)

cash flows and supporting plans. The master budget comprises of two parts- operating

Operating decisions are includedin the operating budgets of an

The operating budgets which are generally prepared are sales budget, production budget,

Financial budgets are those which incorporate financial decisions of an organization. The financial budgets are cash budget, working capital budget, projected

the budget - to make actial events correspond to the plan; a forecast is merely a prediction of

Indicator approach: relating forecast to an indicator such as GDP(Gross Domestic Product) or

Econometric Modelling: This is on lines of the Indicator method but with details of numbers worked out mathematically in great details. This method is used more by Governments rather

Time Series Method: This method takes past data and tries to relate to the future financialforecasting. This is most common in business forecasting.

various expenses, assets and liabilities for a future period as a percent of sales, and then, using these percentages, construct proforma balance sheets.

Under this method, one of the most common methods used is "Percent of Sales Method"takes the sales forecast and forecasts its impact on the firm's