MANAGEMENT CONTROL SYSTEM

SL GM 601
Designing the Control
Process and
Managerial Controls
ICFAI BUSINESS SCHOOL
Class of 2011

Class of 2011 – SL GM 601 1

15/07/2010
 Three levels of strategy
Corporate /
Business

Level

Business
Business 1 Business 2 Business 3 Level

Functional
Human
Product/ R Financial/ Marketing Relations Level
&D Accounting Strategies Strategies
Strategies Strategies

Class of 2009
12/13/10 2
Business Strategy 1
 Two Levels of Strategy
Strategy Level Key Strategic Generic Primary
Issues Strategic Organisational
Options Level Strategies
Involved
Corporate Level Are we in the right mix Single Industry Corporate
of industries Office
Related
What industries of Diversification
subindustries should we
be in Unrelated
Diversification
Business Unit What should be mission Build; Hold; Harvest; Corporate Office and
Level of the Business Unit Divest BU General Manager
How should the business
unit compete to realise Low Cost BU GM
its mission Differentiation

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 Concept of Core
Competence
• Must relate to an activity or process
that fundamentally underpins the value
in the product or service features – as
seen through the eyes of the customer
• Leads to levels of performance from an
activity or process that are significantly
better than competitors
• Robustness
– Rarity – who owns it?; is it easily
transferrable?;
– Complexity
– Causal ambiguity
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 Core Competencce and
Corporate
Diversification
• Single Industry
• Related Diversification
• Unrelated Diversification

Who will perform best?

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 Competition in different
types of organisations

• Single Industry Firms

• Unrelated Diversified Firms
• Related Diversified Firms

Corporate Level or Unit

Level?
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 BCG

• Based on use of industry growth and

relative market share as proxies for
– the competitive position of a firm’s
business unit in its industry
– the resulting net cash flow required to
operate the business unit
• Underlying assumption
– Experience curve is operating 
• firm with largest relative share = lowest
cost producer
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 BCG
High Stars Question marks

Remainder divested
Market Growth Rate

A select few (net

users of resources)
Cash use

(net suppliers of resources)

Low Cash cows Dogs

High Relative Market Share ( Cash Generation)Low

Class of 2008 Business Strategy

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1
 GE-McKINSEY-SHELL Size
Market Growth
Industry Attractiveness Pricing
Market Diversity
Competitive Structure
Business Unit Position High Medium Low Industry Profitability
Technical Role
Size
High
Social
Growth
Environmental
Share
Legal
Medium
Position
Human
Profitability
Margins
Tech Pos Divest
Low

Stren/Weak Selectively
Image Invest
Pollution 1.Identify Industry attractiveness factors
People 2.Assign weight to each factor Invest
3.Obtain weighted composite score
4.Classify the score into ratings H/M/L
5.Classify business units into different categories
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1
 Business Competitive
Advantage
– Porter’s Five Forces analysis
• Powerful industry forces  Less profitable
• Key strategic issues change depending on the
relative strength of five forces
• Based on the nature of each force formulate
effective strategies
– Value Chain Analysis
• The options ??

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 BCG -- Disadvantages

– Markets defined properly to account for important

shared experience and other interdependencies with
other markets. This is often a subtle problem and
requires a great deal of analysis
– The structure of the industry and within industry are
such that relative market share is a good proxy for
competitive position and relative costs. This is often
not true
– Market growth is a good proxy for required cash
investment. Yet profits (and cash flow) depend on a
lot of other things.

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 Goal Congruence

• Perceived Interests of the people in

alignment with the Best Interests of the
organisation
• Does “perfect congruence” exist?
• At least control system should not
encourage individuals to act against the
interests of the organisation

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 Goal Congruence (2)

Two questions to be answered

• What actions does it motivate
people to take in their own self-
interest?
• Are these actions in the best
interest of the organisation

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Class of 2011 – SL GM
601
 Formal Vs Informal

• Formal Control Systems

– Strategic Plans
– Budgets
– Reports
• Informal Processes
– Work ethic
– Management style
– Organisational culture
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 Informal Forces Affecting Goal
Congruence

• External
• Internal

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 Informal Forces
Affecting Goal
Congruence (2)
• External
– Work ethic
• Employee loyalty
• Employee Diligence
• Employee Aspirations
• Employee Pride in doing a good job
These could be Local, National , Industry
Specific
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 Informal Forces
Affecting Goal
Congruence (3)
• Internal
– Culture
• Common Beliefs
• Shared Values
• Norms of behaviour
• Implicitly accepted and explicitly
manifested assumptions
– Management Style
– The Informal Organisation
– Perception and Communication
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 Formal Control System

• Rules
• Formal Control Process

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 Formal Control System
(2)
• Rules
• All types of formal instructions and controls
• Remains in force till they are modified
• Some rules are guidelines – though stated as
rules, it is expected that, on occasions, these
rules may be overlooked
• Positive actions to be taken
• Prohibitions
• Physical Controls
• Manuals
• System Safeguards
• Task Control Systems Class of 2011 – SL GM
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 Formal Control Process
Goals & Rules Other
Informatio
Strategies
n

Rewar

Yes
d

Responsibility Was
Strategic Budgeting
Centre Reports Performance
Planning
Performance Sastisfactory

Revis Measurem
Correctiv

No
e Revis ent
e e
Action
Feedback
Communication

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 Types of Organisations

• Functional Organisation
• Business Unit Structure
• Matrix Structure

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 Functional Organisation

• Each functional Manager is specialised in a

function and he/she brings in that knowledge
to that function
• Advantage
• Efficiency
• Disadvantage
• No unambiguous way of measuring the
effectiveness of each functional unit
• Minor conflicts at lower level tend to go right up
to the top
• Diversified or multi-product companies
• Tend to form ‘silos’ for each function
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 Business Units

• BU may also be viewed as a Division

• Responsible for all function
• Profits can be directly allocated
• Business Unit managers have broad authority, but
still report to HQ
• Advantages
• Training for generalists ( head of a business unit is a CEO)
• BU is closer to the market  sounder decisions than HQ
• Disadvantages
• Duplication of work between BU and HQ
• No functional level disputes; But disputes between BUs

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 Implications of System
Design

• Ease of Control  Business Units

• Efficiency  Functional Units

Which system is to be followed?

It should fit the organisation

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 Controller

• In many organisations it is the CFO

• Functions of the controller
• Design and operate information and control systems
• Prepare financial statements and financial reports (including tax
returns) for shareholders and other external parties
• Prepare and analyse the performance reports, intepreting these
reports for managers and analysing program and budget proposals
for various segments of the company and consolidating them into
an overall annual budget
• Supervising internal audit and accounting control procedures to
ensure the validityof information, establishing adequate safeguards
against theft and fraud, and performing operational audits
• Developing personnel to controller organisation and participating in
the education of management personnel in matters relating to
controller functions

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 Relation to Line
Organisation

Corporat Corporate
e Contoller
Controll
er Business Unit
Business Unit Manager
Manager

Business Unit Business Unit

Controller Controller
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 Logic For Linking Controls
to Strategy
• Different Organisations will have different strategic contexts
• Different strategies require different task priorities, key success
factors, skills, perspectives, and behaviours for effective
execution
• Control systems are measurement systems and influence the
behaviour of the people whose activities are being measured
• Thus, a continuing concern in the design of control systems
should be whether the behaviour induced by the system is
consistent with the strategy

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 Types of Organisation and
Uncertainty?
• Is there any difference in uncertainty of
business between an organisation following
a «Build» strategy and another following a
« Harvest » strategy?
• Build strategies undertaken during growth and Harvest strategy
undertaken during periods of mature or decline stage
• Build aims to increase market share. Harvest aims to hold the
market share
• Dependency on inputs and outputs  higher for build managers

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 Different Corporate
Strategies: Organisational
Structure
Single Implication
Related Unrelated
Industry Diversification Diversification
Organisational Functional Business Units Holding Company
Structure
Industry familiarity of High  Low
Corporate
Management
Functional Background Relevant operating experience  Mainly
of Corporate Finance
Management (mfg, mktg, r&d)

Decision Making More centralised  More

Authority Decentralised
Corporate Staff Size High  Low
Reliance on internal High  Low
promotions
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Use of lateral transfers High  Low
 Different Corporate
Strategies: Management
Control
Single Implication
Related Unrelated
Industry Diversification Diversification
Strategic Planning Vertical cum  Vertical only
horizontal
Budgeting: Relative control of
BU manager of budget Low  High
formulation
Importance attached to Low  High
meeting the budget
Importance of transfer pricing High  Low

Sourcing flexibility Constrained  Arm’s Length

transfer pricing
Incentive Compensation : Financial and  Primarily
Bonus criterion non financial
Financial
Criteria
Criteria
Bonus01/06/2010
determination approachPrimarily
Class ofSubjective  Primarily formula based
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 Different Strategic
Missions : Implication for
Strategic Planning Process
Build Hold Harvest
Importance of Strategic Relatively high  Relatively Low
Planning
Formalisation of Capital Less formal DCF  More formal DCF
Expenditure Decisions analysis, longer pay analysis shorter pay
back back
Capital Expenditure More emphasis on  More emphasis on
Evaluation Criteria non-financial data financial data (cost
(mkt shr, efficient efficiency, straight
use of R&D cash on cash
expenditure, etc) incremental returns )

Discount Rates Relatively low  Relatively high

Capital Investment Analysis More subjective and  More objective and
qualitative quantitative
Project Appraisal limits at the Relatively high  Relatively Low
business unit level

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 Different Strategic
Missions : Implication for
Budgeting
Build Hold Harvest
Role of Budget More of a short  More a control tool
term planning tool “A document of
restraint”
BU Manager’s role in preparing Relatively high  Relatively Low
the budget
Revisions to budget during the Relatively easy  Relatively difficult
year
Frequency of informal reporting More frequent on  Less frequent on policy
and contacts with seniors policy issues and issues and more
less frequent on frequent on operating
operating issues issues
Frequency of feedback from Less Often  More often
superiors on actual performance
vs budget
“Control Limit” used on periodic Relatively high  Relatively high (i.e.,
evaluation against the budget (i.e., more flexible) more flexible)

Importance attached to meeting Relatively low  Relatively High

the budget
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 Different Strategic
Missions: Implication for
Incentive Compensation

Build Hold Harvest

Percent compensation as bonus Relatively high  Relatively Low

Bonus Criteria More emphasis on  More emphasis on

non-financial financial criteria
criteria
Bonus Determination Approach More subjective  More formula based

Frequency of Bonus Payment Less frequent  More frequent

Frequency of feedback from Less Often  More often
superiors on actual performance
vs budget

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 Management Style

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