Business Management

Prepared by: TALHA

Chapter 3

PLANNING AND CONTROL

1) PLANNING & CONTROL CYCLE:
It has following steps:
1) Identify Objectives: Like maximize profits, increase market share, produce better quality
product etc
2) Identify Potential Strategies: by position audit or strategic analysis, gather information to
identify potential strategies
3) Evaluate Strategies: in term of suitability, feasibility and acceptability
4) Choose alternative course of action: collect the chosen strategies together and coordinate them
into long tern financial plan
5) Implement the long term plan: break long term plan into smaller parts (one year budgets)
6) Measure actual result and compare with the plan
7) Respond to divergence from the plan
2) THE CONTROL PROCESS:
Control is achieved through control cycle. The elements in control cycle are as follow:
1) Plans & targets are set for future e.g. budgets, profit targets, standard costs etc
2) Plans are put into operation.
3) Actual results are recorded and analyzed
4) Feed back are given to management
5) Management used this feed back to compare actual results with the plan or targets
As a result of comparison management can take following actions:
They can take control action
They can decide to do nothing
They can alter the plan or target
Refer example on page 48
3) FEEDBACK & FEEDFORWARD CONTROL:
a)
Feedback is the process of reporting back control information to management and the
control information itself.
b)
Feed forward control is control based on comparing original targets or actual results with a
fore cast of future results
c)
Single Loop Feedback: is the feedback of relatively small variation b/w actual and plan in
order that corrective action can bring performance in line with planned results
d)
Double loop Feedback: Ensure that plans budgets, org structure and control system
themselves are revised to meet changes in condition
e)
Negative Feedback: Feedback will most often be negative targets were missed and this was
not what was required
f)
Positive Feedback: Targets were missed, but other targets were hit which were better than
those we were aiming at
g)
Feed forward Control: Past events are used as a means of controlling and adjusting future
activity
4) CONTROLLABILITY & RESPONSIBILITY REPORTING:
The selection of budgets centre and responsibility centre are key steps in setting up a control system.
Responsibility centre include cost centre, profit centre & investment centres
Budget Centre: Each section of an org for which a budget is prepared is a budget centre
Features of Control System:
A hierarchy of budget centre
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Business Management
Prepared by: TALHA
Chapter 3
Clearly identified responsibility for achieving budgets for individual budget centre
Responsibilities for revenues, costs and capital employed- Appropriate level of authority
management hierarchy should be responsible for all these things
Responsibility accounting: is a system of accounting that segregates the revenue, cost into areas of personal
responsibility in order to monitor and assess the performance of each dept of an org. Responsibility centre is a
unit of an org headed by manager who has direct responsibility for its performance. Examples are cost centre,
investment centre, profit centre etc
Controllable & Non controllable cost:
Controllable costs are items of expenditure which can be directly influenced by a given manager within a given
time of span .A cost which is non controllable in one dept may be controllable by other dept.
Some cost are non controllable, such as increase in expenditure items due to inflation
The controllability of Fixed cost: All fixed cost are assumed to be non controllable in short term but there are
some exceptions like committed fixed cost arising from the possession of plant, building and an admin dept to
support the long term needs of the business. Discretionary fixed costs such as advertising and R&D are incurred
as a result of a top mgt.

Managers should not be held accountable for costs over which they have no control.
A reporting system must allocate responsibility appropriately if cost related to more than one
manager.

Control Reporting: Feedback period ought to be planned to avoid excessive reporting or unnecessary delays in
control reporting. Most suitable frequency of routine control reporting varies from operation to operation.
Control reports should be clear and understandable to the person receiving them
5) BUDGETARY PLANNING & CONTROL SYSTEMS:
Following are the objectives of a budgetary planning & control system
1) Ensure the achievement of the organizations objectives
2) Compel planning
3) Communicates ideas and plans
4) Coordinate activities
5) Provide a frame work for responsibility accounting
6) Establish a system of control
7) Motivate employees to improve their performance
6) RISK & UNCERTAINTY:
Risk: is sometimes used to describe situation where outcomes are not known, but their probabilities can be
estimated
Uncertainty is present when the outcomes cannot be predicted or assigned probabilities.
Types of Risk & Uncertainty:
1) Physical: Like earth quake, fire, flooding etc
2) Economic: govt forecasts might be wrong
3) Business: Lowering in entry barriers, changes in customer/supplier industries, technological
changes etc
4) Product Life Cycle: Different risk at different stages of life cycle
5) Political: Nationalization, civil war, political instability
6) Financial: debt financing, higher interest rates etc
Accounting for Risk: A firm might quantify the return from investment say 5%. This can be adjusted for risk
Return: the target return could be raised to compensate for the risk.
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Business Management
Prepared by: TALHA
Chapter 3
Payback: project should be payback within certain period of time.
Finance: Investments should be financed under strict conditions (only from profit)
Planners try to quantify the risk so as to compare the estimated riskiness of different strategies:
Rule of Thumb: to choose the best possible result with a best estimate
Basic Probability theory to express the likely hood of a forecast result
Calculating standard deviation of the expected values of the profit, higher the deviation more
will be risk
7) USING IS/IT AS A STRATEGIC TOOL
Competitive advantage is a profitable and sustainable position. It exist in the mind of the customers, who
believes the values they will receive from a product is greater than both the price they will pay and the values
offer by the competitor
IT has the potential to change the nature of competition within an industry in three ways :
1) Change the industry structure ( Porters five forces modal refer chapter 21)
2) Create new businesses and industries
3) Used to create competitive advantage
IT as a collaborative venture:
The org using technologies like EDI & VANS require close cooperation with other org, the ultimate aim is still to
gain a competitive advantage but the ultimate aim is still to gain a competitive advantage
Possible benefits include the following:
Financial benefits:
1) Economies of scale such as increase discounts for collective purchasing in bulk or lower
ordering and delivery cost
2) Saving in staff cost
3) Marketing benefits:
4) Better knowledge of the market
5) More satisfied customer
Operational benefits
1) Faster and more accurate processing due to EDI
2) Less need to retain a wide range of expertise or to stock a full range of items
The main drawback is that org are required to share sensitive information
IT/IS as Source of Competitive Advantage:
Cost leadership- means being the lower cost producer in the industry as a whole
Differentiation is the exploitation of a product or service which the industry as whole believe to
be unique
Niech Marketing -Focus involve a restriction of activities to only part of the market ie
segmentation
IT could be used for competitive advantages by following ways:
Linking the org to customers or supplier, eg EDI, VAN, website
Creating effective integration of the use of info eg data mining, ERM
Enabling the org to develop, produce, market and distribute new products or services, eg CAD,
CRM
Giving senior management info to help develop and implement strategy, eg knowledge
management

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Business Management
Prepared by: TALHA
Chapter 3

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