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Chapter 13

Controls for
Differentiated
Strategies

Formal Control Process


Goals
Goals
and
andstrategies
strategies
(Chp
(Chp22&&13)
13)

Rules
Rules
(Chp
(Chp3)3)

Other
Other
information
information
Reward (feedback)

Strategic
Strategic
Planning
Planning
(Chp
(Chp8)8)
Revise

Budgeting
Budgeting
(Chp
(Chp9)9)

Revise

Responsibility
Responsibility
center
center
Performance
Performance
(Chp
(Chp10
10&&11)
11)
Corrective
action

Report
Report
actual
actualvsvsplan
plan

Was
Was
performance
performance
satisfactory?
satisfactory?
(Chp
(Chp11
11&&12)
12)

Measurement
Feedback
Communication

Yes
No

Introduction

1.
2.
3.
4.

Different strategies influence the


management control process.
Corporate strategy
Business level
The form & structure of control
system.
Management Style

Corporate Strategy

Different strategy
different task
priorities, key success factors, skill,
perspectives & behaviors.
Strategy

Control Systems

Measurement

Implication for
Organization Structure
Single Industry
Organizational Structure

Functional

Related Diversified
Business units

Unrelated Diversified
Holding company

Industry familiarity of corporate High


management

Low

Functional background of
corporate management

Relevant operating
experience

Mainly finance

Decision-making authority

More centralized

More decentralized

Size of corporate staff

High

Low

Reliance on internal
promotions

High

Low

Use of lateral transfer

High

Low

Corporate Culture

Strong

Weak

Implications for
Management Control
Single Industry
Strategic planning

Vertical-cumhorizontal

Related Diversified

Unrelated Diversified
Vertical only

Budgeting:
Low
Relative control of business
unit manager over budget
formulation

High

Importance attached to
meeting the budget

Low

High

Transfer pricing:
Importance of transfer
pricing

High

Low

Sourcing flexibility

Constrained

Arms-length market
pricing

Continued
Single Industry

Related Diversified

Unrelated Diversified

Incentive compensation:
Bonus criteria

Financial &
nonfinancial criteria

Primarily financial
criteria

Bonus determination
approach

Primarily subjective

Primarily formulabased

Bonus basis

Based both on
business unit &
corporate
performance

Based primarily on
business unit
performance

Business Unit Strategy

Strategy of business unit depends on


two interrelated aspects:
1.
2.

Its mission: build, hold, harvest


Its competitive advantage:
low cost & differentiation

Mission
Pure Build

Pure Harvest

Builds unit tend to face greater


environmental uncertainty than harvest.
The choice of build & harvest strategies
has implication for short-term vs longterm profit trade-offs.

Implications for
Strategic Planning Process
Build

Hold

Harvest

Importance of strategic
planning

Relatively high

Relatively low

Formalization of capital
expenditure decisions

Less formal

More formal

Capital expenditure evaluation


criteria

More emphasis on
nonfinancial data

More emphasis on
financial data

Discount rate

Relatively low

Relatively high

Capital investment analysis

More subjective &


qualitative

More objective &


quantitative

Project approval limits at the


business-unit level

Relatively high

Relatively low

Different Strategic Missions:


Implications for Budgeting
Build

Hold

Harvest

Role of the budget

More a short-term
planning tool

More a control tool

Business unit managers


influence in preparing the
budget

Relatively high

Relatively low

Revisions to the budget during Relatively easy


the year

Relatively difficult

Frequency of informal
reporting & contacts with
superiors

More frequent on
policy issues; less
frequent on operating
issues

Less frequent on
policy issues; more
frequent on operating
issues

Frequency of feedback from


superiors on actual
performance versus the
budget

Less often

More often

Continued
Build

Hold

Harvest

Control limit used on periodic


Relatively high
evaluation against the budget

Relatively low

Importance attached to meeting


the budget

Relatively low

Relatively high

Output versus behavior control

Behavior control

Output control

Different Strategic Missions:


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
Choosing differentiation approach, rather than a
low-cost approach, increases uncertainty in a
business units task environment.

Differentiation

Low-cost

Product innovation

Product offering stable

Broad set of products

Narrow product lines

Produce competing
products

Produce no-frill
commodity products

Top Management Style


Influenced by managers background
& personality.
Style affect management control
process
how the control system
actually operates.

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