6/10/2014
CONTROLS FOR
DIFFERENTIATED STRATEGIES
Contingency Theory:
Management control process and structure depend upon
various factors
CHAPTER 13
General observations:
Suggestions are from tendencies
Designers need to consider other external and internal factors
Zuni Barokah, [Link]., Ph.D.
Magister Manajemen
Fakultas Ekonomika dan Bisnis UGM
2014
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 for Management Control
Implications of Organization Structure:
Different strategies Different structures
SINGLE
INDUSTRY
RELATED
UNRELATED
DIVERSIFIED DIVERSIFIED
Organizational structure
Functional
Business units
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
Different Strategies: 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
Holding company
SINGLE
INDUSTRY
Strategic Planning
Vertical-cumhorizontal
RELATED
UNRELATED
DIVERSIFIED DIVERSIFIED
Vertical only
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
6/10/2014
Different Strategies: Management Control
Different Strategies: Management Control
RELATED
SINGLE
UNRELATED
INDUSTRY DIVERSIFIED DIVERSIFIED
SINGLE
INDUSTRY
RELATED
DIVERSIF
IED
UNRELATED
DIVERSIFIED
Budgeting: control of
business unit manager
Low
High
Transfer Pricing:
Importance
High
Low
Importance of meeting the
budget
Low
High
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
DIVERSIF
IED
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
Business Unit Strategy:
Intrafirm Difference in Control Systems
Strategies of business units depend on:
Its mission
Its competitive advantage
Formula based plans that are strictly tied to financial
performance criteria could be contraproductive.
Mission
Mission option:
Build
Hold
Harvest
Divest
Congruence between the mission and types of controls =
effective strategy implementation
Mission influences uncertainties control systems help
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.
managers cope with uncertainties different missions
require different controls
6/10/2014
Strategic Planning
Mission and Time Span
Missions and its Implications for Strategic Planning
Build managers depress short term profits
Harvest managers concentrates on maximizing
short term profits
Missions and Its Implications for Budgeting
Build
Hold
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
Harvest
Build
Hold
Harvest
Role of the budget
More or a
short-term
planning tool
More or a longterm planning
tool
Frequency of feedback from
superiors on actual
performance VS budget
Less often
More often
Business unit managers
influence in preparing
budget
Relatively high
Relatively low
control limit used on
periodic evaluation against
the budget
Relatively high
Relatively low
Revisions to the budget
during the year
Relatively easy
Relatively
difficult
Importance attached to
meeting the budget
Relatively low
Relatively high
Output VS behavior control
Behavior
control
Output control
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 Incentive
Compensation
Build
Hold
Harvest
Percent compensation as Relatively
bonus
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
6/10/2014
Top Management Style
The function of management control is influenced by
Top Management Style:
Implications for Management Control
Personal VS Impersonal Controls
the style of senior management.
Tight VS Loose Controls
Differences in management styles: influenced by
managers background and personality
