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, M.Com., 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

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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

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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

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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