COMPARISON / EXAMPLES OF STRATEGY F0RMULATION, MCS, AND TASK CONTROL strategy formulation Strategy formulation is the process of deciding

on the long term goals of the organization and the adoption of a broad course of action and the allocation of resources for attaining these goals. least systematic

definition

degree of system

time frames

long-run

nature of activity

involves assessing threats, opportunities, and new ideas, which can happen at any time; hence cannot be pre-determined. Judgement, and numbers used are rough estimates

people involved

few -the sponsor of the idea, headquarters staff and senior management organization as a whole in a broad sense

who is affected?

examples

strategy formulation 1 enter a new business 2 change debt/equity ratio 3 devise inventory policy 4 decide magnitide and direction of research

similarities

require planning and control

Concept of Corporate Strategy: The need for formulating strategies arises in response to a perceived threat (e.g., market inroads by competitors, a shift in consumer tastes, or a neew government regulation) or an opportunity (e.g., technological innovations, new perceptions of customer behaivour, or the new applications of existing products). A new CEO, especially one brought from outside perceives threats and opportunities differently from how his or her predecessor did.Thus, there may be often changes in strategies when a new CEO takes over. Thus, strategies state in a general way the direction in which senior management wants the organization to move. These are the big and importane plans which take the company ahead in future. Perspective of MCS: The perspective of MCS is that with its help, the senior management can influence other members, down the line, so that corporate strategies are best implemented.

Management Control Process takes place in a formal planning and control system within which informal interactions take place. The formal system includes the following: 1. Strategic planning 2. Budget preparation 3. Execution, and 4. Evaluation Each activity leads to the next, in a regular cycle. Collectively, they constitute a closed loop. The informal system involves interactions between one manager and another or between a manager and his or her subordinates. Informal communications occur mainly by means of memoranda, meetings, conversations.

The Formal System: 1. Strategic planning Strategic planning is the processs of deciding on the major programs that the organization will undertake to implement its strategies and the approximate amount of resources that will be devoted to each. The output of the process results in a document called strategic plan (or in some companies, the long-range plan ). Strategic plans cover a period that extends over several years (typically three or five). In a profit-oriented company, each principal product or product line is called a program. In a non-profit organization, the principal services that the organization provides are its programs.

Strategic planning is the first step in the management control cycle. 2. Budget preparation (also see note on Types of Budget below) An operating budget is the organization's plan for a specified period , usually a year. The budget represents a fine-tuning of the strategic plan, incorporating the most current information. In the budget, revenues and expenses are re-arranged from programs to responsibility centers; thus the budget shows the expenses that each manager is expected to incur. The process of preparing the budget is essentially one of negotiation between the managers of each responsibility center and their siperiors. The end-product of these negotiations is an agreed-upon statement of the anticipated expenses for the coming year (if the responsibility center is an expense center), or the planned profit or expected return on investment (if the responsibility center is a profit center or an investment center). 3. Execution During the year, managers execute the program or a part of the program for which they are responsible, and also report on what has happened in the course of fulfilling that responsibility. Ideally, reports are structured so that they provide information about both programs and responsibility centers. Responsibility centers mat show budgeted and actual information, financial and non-financial performancemeasures, internal and external information. These reports keep managers at higher levels informed about the status of the various programs in their charge and also help to ensure that the work of the various responsibility centers is coordinated. 4. Evaluation The managers' reports also are used as a basis for control. The process of evaluation is a comparison of actual expenses and those that should have beeen incurredunder the circumstances. If the circumstances assumed in the budget are unchanged, the comparison is between the budgeted and the actual amounts. If circumstances have changed, these changes are taken into account. Ultimately, the analysis leads to praise or constuctive criticism of the responsibilty center managers. The focus of Performance evaluation is extended to incorporation of nonfinancial measures and to consider the design of a Balanced Score Card . Sometimes, the management control systems (especially the nonfinancial variety) can lead to developing new strategies ; such controls are referred to as interactive controls . There are also several variations from this process : differentiated controls for differentiated strategies , service organizations , and multinational organizations . The process for management control of projects is somewhat different from the management control of ongoing projects.

Types of Budget: The end product of the budgetary process is a master budget. The master budget summarises the objectives of all the sub-unitsof an organization -marketing, production, finance and distribution. It quantifies the expectations regarding future income, financial position, cash flows and supporting plans. The master budget comprises of two parts- operating budgets and financial budgets . 1 Operating Budgets: Operating decisions are includedin the operating budgets of an organization. Operating budgets are plans relating to the operations of the firm. The operations, that is functions relating to an organizationd for the ensuing year are laid down. Apart from this, it includes budgets which specifically lay down plans for different individuals.

The operating budgets which are generally prepared are sales budget, production budget, inventory budget, direct materials budget, direct labour budget, production overhead budget, plant utilization budget, and manpower budget. (Through the operations budget, MCS relates to operations control.) 2 Financial Budgets: Financial budgets are those which incorporate financial decisions of an organization. The financial budgets are cash budget, working capital budget, projected statement of changes in working capital and its sources and applications, projected profit and loss account, projected balance sheet and capital budget.

1 2 1 2

Contrast between Budget and Forecast. A budget differs in several respects from a forecast. A budget is a management plan, with the implicit assumption that positive steps wil be taken by the budgetee - the manager who prepares the budget - to make actial events correspond to the plan; a forecast is merely a prediction of what will most likely happen, carrying no implication that the forecaster will attempt to so shape events that the forecast will be realized. As contrasted with the budget, a forecast has the following characteristics: 1. a forecast may or may not be in monetary terms 2. it can be for any period 3. the forecaster does not accept responsibility for meeting the forecasted results 4. forecasts are not usually approved by higher authority 5. forecast is updated as soonn as new information indicatse that there is a change in conditions. 6. Variances from forecast are not analyzed formally or periodically An example of a forecast is one that is made by the treasurer's office to help in cash planning. Such a forecast includes estimates of revenues, expenses, and other items that affect cash flows. The treasurer, however, has no responsibility for making the actual sales, expenses, or other items conform to the forecast. The cash forecast is not cleared with top management; it may change weekly or even daily, without approval from higher authority; and usually the variances between the actual and forecast are not systematically analyzed. From management's point of view, a financial forecast is exclusively a planning tool, whereas a budget is both a planning and control tool. Methods of Financial Forecasting: Qualitative: Market Research based (seeking a poll from a large number of likely customers to find whether they would buy/not buy the product) Delphi Method: (seeking opinions from field experts and then compiling into a forecast) Quantitative: Indicator approach: relating forecast to an indicator such as GDP(Gross Domestic Product) or Inflation, or unemployment, etc.) Econometric Modelling: This is on lines of the Indicator method but with details of numbers worked out mathematically in great details. This method is used more by Governments rather than corporates. Time Series Method: This method takes past data and tries to relate to the future financial forecasting. This is most common in business forecasting. Under this method, one of the most common methods used is "Percent of Sales Method" Traditional financial forecasting takes the sales forecast and forecasts its impact on the firm's

various expenses, assets and liabilities for a future period as a percent of sales, and then, using these percentages, construct proforma balance sheets.

OF STRATEGY F0RMULATION, MCS, AND TASK CONTROL management control systems (MCS) MCS deals with the implementation of strategy which is formulated and is the process by which managers influence other members of the organization to implement these strategies effectively and efficiently task control

task control is the process of ensuring that specified tasks are carried out effectively and efficiently.

systematic

precise, sometimes scientific

between-long run and short-run

short run

involves a series of steps that occur in a predictable sequence (master budget to sub-budgets, and as per the formal mcs control process), according to a timetransaction-oriented, i.e., table, and with reliable estimates. according to rules which are Thereafter the results are evaluated with established in MCS process. respect to the budgets and necessary corrective actions taken, wherever necessary

large number- involves managers and individual task performers their staff at all levels in the organization

organization along with consideration for specific tasks all the business units

management control systems (MCS) expand a plant issue new debt decide inventory levels control research organization

task control schedule production manage cash flows reorder an item run individual research project

require planning and control

require planning and control

tegies arises in response to a perceived threat (e.g., market inroads sumer tastes, or a neew government regulation) or an opportunity (e.g., w perceptions of customer behaivour, or the new applications of O, especially one brought from outside perceives threats and opportunities r predecessor did.Thus, there may be often changes in strategies when

eral way the direction in which senior management wants the organization d importane plans which take the company ahead in future.

t with its help, the senior management can influence other members, ate strategies are best implemented.

takes place in a formal planning and control system within which

, in a regular cycle. Collectively, they constitute a closed loop. interactions between one manager and another or between ordinates. Informal communications occur mainly by means of

esss of deciding on the major programs that the organization will rategies and the approximate amount of resources that will be of the process results in a document called strategic plan (or in nge plan ). Strategic plans cover a period that extends over or five). In a profit-oriented company, each principal product or m. In a non-profit organization, the principal services that the

step in the management control cycle. ee note on Types of Budget below) ganization's plan for a specified period , usually a year. The budget e strategic plan, incorporating the most current information. In enses are re-arranged from programs to responsibility centers; penses that each manager is expected to incur. The process of tially one of negotiation between the managers of each r siperiors. The end-product of these negotiations is an agreed-upon expenses for the coming year (if the responsibility center is an ed profit or expected return on investment (if the responsibility investment center).

ecute the program or a part of the program for which they are n what has happened in the course of fulfilling that responsibility. so that they provide information about both programs and sibility centers mat show budgeted and actual information, financial emeasures, internal and external information. These reports keep ormed about the status of the various programs in their charge and ork of the various responsibility centers is coordinated.

e used as a basis for control. The process of evaluation is a comparison that should have beeen incurredunder the circumstances. If the e budget are unchanged, the comparison is between the budgeted and stances have changed, these changes are taken into account. Ultimately, constuctive criticism of the responsibilty center managers.

luation is extended to incorporation of nonfinancial measures and lanced Score Card . control systems (especially the nonfinancial variety) can lead to uch controls are referred to as interactive controls .

ons from this process : differentiated controls for differentiated ons , and multinational organizations .

control of projects is somewhat different from the

tary process is a master budget. The master budget summarises nitsof an organization -marketing, production, finance and expectations regarding future income, financial position, ns. The master budget comprises of two parts- operating

g decisions are includedin the operating budgets of an ets are plans relating to the operations of the firm. The elating to an organizationd for the ensuing year are laid down. dgets which specifically lay down plans for different individuals.

are generally prepared are sales budget, production budget, erials budget, direct labour budget, production overhead budget,

get, MCS relates to operations control.) udgets are those which incorporate financial decisions of an dgets are cash budget, working capital budget, projected king capital and its sources and applications, projected profit alance sheet and capital budget.

pects from a forecast. A budget is a management plan, with the ive steps wil be taken by the budgetee - the manager who prepares ents correspond to the plan; a forecast is merely a prediction of carrying no implication that the forecaster will attempt to so shape e realized. As contrasted with the budget, a forecast has the

be in monetary terms

ept responsibility for meeting the forecasted results proved by higher authority n as new information indicatse that there is a change in conditions. e not analyzed formally or periodically ne that is made by the treasurer's office to help in cash planning. mates of revenues, expenses, and other items that affect cash flows. o responsibility for making the actual sales, expenses, or other . The cash forecast is not cleared with top management; it may without approval from higher authority; and usually the variances ast are not systematically analyzed. view, a financial forecast is exclusively a planning tool, whereas a

ng a poll from a large number of likely customers to find whether

ions from field experts and then compiling into a forecast)

orecast to an indicator such as GDP(Gross Domestic Product) or

s on lines of the Indicator method but with details of numbers great details. This method is used more by Governments rather

hod takes past data and tries to relate to the future financial mon in business forecasting. e most common methods used is "Percent of Sales Method" ng takes the sales forecast and forecasts its impact on the firm's

iabilities for a future period as a percent of sales, and then, struct proforma balance sheets.