Set D

ADAPTIVE CONTROLS CONTINGENCY APPROACH STRATEGY & CONTROL SYSTEMS COMPETITIVE ADVANTAGE
REFERENCES: ICMR (2003) CHAPTER 5, 6; G&A CHAPTER 3

Ananya Rajender, Yesha Upadhayay, SD Ram, Arijiya Ray, Shweta

Adaptive Controls

The culture of an organization should be flexible enough to permit changes

Features of an Adaptive Organization

More implicit Control Mechanism Employees internalize it through:
Training

programs Extensive acculturation Socialization

High level of awareness, skill and integrity within the work group

The Formal Side

Structures that can be easily formed and dissolved Use of ad-hoc teams, projects and world wide purchasing Processes should focus on organizations vision, strategy, information flows, and other formal procedures Motivating reward system

Divisional Autonomy
Organizations today require flexibility, innovation and creativity This makes levels of autonomy a crucial decision Management must design a tool to help it gain congruence between levels of autonomy and its extent (i.e. degree of decentralization of decision making)

Determinants of Levels of Autonomy

1. 2. 3.

Management Style and Processes Responsibility Structure Reward Systems

Management Style and Processes

The

level of centralization required to run a business The level of involvement of corporate managers in business Interaction of corporate managers with other managers Level of trust and confidence of the manager in the ability of his subordinates

Responsibility Structure
1.

2.

3.

4.

It consists of Responsibility Centers and related performance measurement systems It includes an accounting system that helps managers to record the plans and performances of the center The measurement of performance is done through cost, profit, revenue, investment and quality goals It can be considered the second line of influence that the top management has over profit center managers

Methods of Measuring Performance of a Responsibility Structure

a.

b.

c.

The Efficiency Measure: i.e. in terms of inputs received over specified period of time for a given level of output The Process Measure: pertains to production process The Effectiveness Measure: gauges output in terms of goals and objectives

ROI as a Measure of Responsibility Structure

Elements such as cost, quality, revenue and investment are assigned to a responsibility center and are hence used to calculate ROI The contribution of each center to ROI depends on allocation of resources to center manager To calculate ROI, it is important to define the revenue, expense and investment allocated

Reward Systems
1.

2.

3. 4.

It is determined on the basis of the performance of a particular center The amount and method of allocating bonuses depends upon the managers autonomy Rewards can be tangible and intangible These are the third line of influence that top management has over profit center manager

Inter Profit Center Relations

It is important to integrate the activities of different responsibility centers One major concern is determination of prices for goods and services (transfer pricing) that are transferred between divisions One solution to transfer pricing problem is to stop business transactions between divisions but this forgoes the benefits of economies of scale

Setting Transfer Price

Transfer price is defined as the value of transfer of services between two or more profit centers It enables management to enjoy benefits of centralization and decentralization The process of setting Transfer Price is governed by two criteria
Goal

congruence Fairness

Goal Congruence: i.e. if the buying and selling divisions make decisions regarding price and quantity of transfers, which would have been the same even if made by central management Fairness: i.e. profit center gives divisional managers the required autonomy to pursue their objectives A transfer pricing system is said to be efficient if it encourages managers to pursue decentralization of autonomy while not forgoing the benefits of centralization It should allow the divisional managers to achieve the goals while maintaining a congruence with organizational goals

Approaches to Management Control Systems

Contingency Approach to Control

Universalistic approach argues that there is an optical scheme for control design which is applicable to all settings and firms. Classical approach talks about the scientific management approach that states the division of labor based on specialization and the delegation of authority and hierarchy system and their roles. Contingency theory is similar to classical theory which is also based on scientific management approach. This theory states that appropriateness of different control systems depends on the business setting. This theory says that the organization IMPORTS energy and resources from the environment and CONVERTS them into goods, services and by-products. Several factors which have encouraged the formation of contingency theory , described as below:

What is the need for the Contingency Approach?/ Factors for the formation of contingency approach
1)

Technology: Influences the design of control systems Enables the CHANGE in the organization Refashion the corporate policies rapidly Analysis of incentive plans Development of new incentive plans Quick implementation of those plans Collects data for strategic and operational decision making Helps finding specific problems in the administration

2) Organizational Structure: According to theory , the organization structure should be such that can cope with high degree of uncertainty . The ORGANIC organizational structure adapts easily to unstable conditions in a rapidly changing environment. The management control systems for organic organizations is complex because of the expansion and growth in business. The contingency approach helps in designing the control system that meets the demand of complex organizational structure.

3) Environment: Management controls are greatly influenced by the type of competition faced by firms. Contingency approach helps to develop a highly sophisticated control system for competition faced by the firm. It also expands the scope of strategy. Emphasizes the fit between the external factors and internal resources of the company. Analyzes the organizational structure, culture and processes so as to adopt technical and structural changes. Fisher`s approaches focus on the unique characteristics of management control systems as well as the changing environment.

1) 2) 3) 4) 5)

Fishers says that the contingency theory enabled researchers to develop general suggestions about control systems relative to business and organizational settings. He identified the different five contingent control variables: Technology & interdependence Industry & firm Competitive strategy Mission and Observability factors/ Vision

They can be either external or internal and can affect outcomes, performances, resource allocation and distribution. He also suggested potential research areas in contingency control which are casual relationships of multiple variables and human resource policies and cultural systems. Some non-financial factors such as cycle time, lead time, frequency of orders and production performance factors are also included. Financial factors includes budgeting and standard cost systems.

Strategy and Control Systems

An organization can gain competitive advantage by integrating the usually separate functions of strategy and control. Management control systems are the tools which help in the effective implementation of strategy. Two levels of strategy: 1) Corporate strategy 2) Business Unit strategy For Corporate strategy, there is a suitability criteria and for Business Unit strategy, there is mission and purpose of each unit.

What is Corporate Strategy?

Corporate Strategy relates to firm as a whole. In corporate strategy, control refers to the styles or behaviors by which the corporate executives influence the strategic direction as well as the objectives of the firm. Strategy and controls should be integrated so as to keep employee`s behavior in congruence with managerial goals. The organization should be well-aligned and it refers to its hierarchies and reporting patterns. Planning and control requirements should be designed under a corporate strategy.

Executive managers should have enough knowledge about various departments and processes and they should make a plan to implement the strategies into their action. There are three types of companies according to the corporate strategy, which are mentioned below. 1) Single business firm: The firm focuses on the single business. E.g. DELL COMPUTERS 2. Related diversification firm: The firm is diversified into businesses that are related to one another and have common set of core competences. E.g. LG ELECTRONICS

3)

Unrelated Diversification firm: The firm operates in different areas of businesses which are unrelated to each other. E.g. HINDUSTAN UNILIVER LTD. Single business and Related diversification firm should have good communication channels so as to allow interdependence among the different units. In case of unrelated diversified firm, the requirements of the knowledge management and expertise of the employees are more. As a firm becomes more diversified, control systems should be altered to foster better co-operation among diverse units and to encourage their entrepreneurial spirits unlike undiversified firms.

Designing Different Corporate Strategies

1)

Strategic planning: Conglomerate business requires vertical plans. E. g. Different Units prepare the plans which are reviewed by senior management. Diversified firms need horizontal plan that involves the preparation plan on behalf of a group or unit by one executive with inputs from different units. These plan helps getting a feedback as its generated in the whole firm.

2) Incentives and Compensation: In single business firms, compensation is according to the performance of the whole firm. In business unit firms, compensation is according to the performance of the unit and not the whole firm. Linking performance with the whole firm, increases team work and interdependencies.

Business unit strategy

Segmented business units Individual strategy Aspects: Mission & Competitive advantages

MISSION A broad organizational goal Trade-off b/n short term & long term goals

Factors of planning decisions: Internal & external factors Competitive variation of ability Attractiveness of industry Two planning approaches: Two by two growth share matrix(BGC) Three by three industry attractiveness-business strenght matrix(GEC)

Single Business Programing Budgeting Relative control of business unit manager over budget formulation Importance attached to meeting the budget Tranfer pricing Imprtance to transfer pricing Sourcing flexibility Incentive compensation Bonus criteria Bonus determination approach High Constrained Low Low Verticsl/Horizontal

Related Diversified ---------------> ---------------> ---------------> ---------------> ---------------> ---------------> ---------------> --------------->

Unrelated Diversifie Vertical only

High High

Low Arm`s length market pricing

Finacial & non-financial ---------------> critetria Primarily subjective --------------->

Primarily financial criteria Primarily formula based

Action of organization Build Hold Harvest Divest Form and structure of control Strategic planning process Budgeting Incentive compensation system

Strategy level Corparate Level

Key strategic issues Are we in the right mix of business ?

Generic Strategy optins Single business related diversification unrelated diversification

Primary organisation leve;s involved Corporate office

What set of business industries or industries should we be in ? Business unit level What should be mission of Build,Hold,Harvest,Dive business unit? st Corporate office and general manager

COMPETITIVE ADVANTAGE
Competitive advantage is defined as the strategic advantage one business entity has over its rival entities within its competitive industry. Achieving competitive advantage strengthens and positions a business better within the business environment. In order to accomplish its mission, every business unit should develop a competitive advantage. In order to identify its competitive advantage, a business unit should analyze the competitive structure of the industry in which it plans to operate.

Porters Five Forces Model analyzes the competitive structure on the basis of the following factors:

Alternative generic strategies may be developed in terms of: Low cost- primary focus is to achieve low cost relative to competitors. Differentiation- the goal is to differentiate the product with that of competitors product. Focus- it helps the unit to achieve core competency by narrowing its market segment.

Functions of the Controller

The controller is a person who is responsible for designing and operating the management control system. In many organisations, title of this person is Chief Financial Officer. The controller usually performs the following functions:
Designing and operating information and control systems. Preparing financial statements and financial reports for share holders and other external parties .

Preparing and analyzing performance reports ,interpreting these reports for managers, and analyzing program and budget proposals from various segments of the company and consolidating them into an overall annual budget . Supervising internal audit and accounting control procedures to ensure the validity of information, establishing adequate safeguards against theft and fraud ,and performing operational audits . Developing personnel in the controller organisation and participating in the education of management personnel in matters relating to the controller function.

RELATION TO LINE ORGANISATION

The controllership function is a staff function . The controller is responsible for the design and operation of the systems which collects and report information , the use of this information is the responsibility of line management . The controller is responsible for developing and analyzing control measurement and for recommending actions to management . Other possible charges which includes monitoring adherence to the spending limitations laid down by the chief executive, controlling the integrity of the accounting system, and safeguarding company assets from theft and fraud.

THE BUSINESS UNIT CONTROLLER

Business unit controllers inescapably have divided loyalty. On the one hand,they owe some allegiance to the corporate controller, who is presumably responsible for the overall operation of the control system . On the other hand they owe allegiance to the managers of their own units ,for whom they provide staff assistance . In some companies, the business unit controller reports to the business unit manager , and has what is called a dotted line relationship with the corporate controller. Here, the business unit general manager is the controllers immediate boss, and has ultimate authority in the hiring, training, transferal, compensation, promotion, and firing of controllers within that business unit.

The controllers also play an important role in the preparation of strategic plans and budgets . In other companies, business unit controllers report directly to the corporate controller that is, the corporate controller is their boss, which is indicated by a solid line on the organization chart. There are problems with each of these relationships, regardless of the reporting relationships, it is expected that controller will not participate in the transmission of misleading information or in the concealment of unfavorable information.

ThankYou!!