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Chapter 2

Understanding Strategies
Management control systems are
tools for implementing strategies.
Strategies
differ
between
organizations, and controls must be
tailored to the requirements of
specific
strategies.
Different
strategies require different task
priorities; different key success
factors;
and
different
skills,
perspectives, and behaviors.

Thus, a continuing concern in the


design of control systems should be
whether the behavior induced by the
system is the one called for by the
strategy.

Strategies are plans to achieve


organizational goals. Therefore, in
this chapter we first describe some
typical goals in organizations. Then
we describe strategies at two levels
in an organization: the corporate
level and the business levels.
Strategies provide the broad context
within which one can evaluate the
optimality of the elements of
management systems.

2.1 Goals
Goals of a corporation refer to the end results
that it wants to attain and which is set the chief
executive officer and other top executives or
sometimes by the owners.
The major forms of goals include the followings:
Profitability
Maximizing shareholder value
Risk
Multiple stakeholder approach

2.2 The Concept of Strategy


Strategy describes the general
direction in which an organization
plans to move to attain its goals.
Every well-managed organization has
one or more strategies, although
they may not be stated explicitly.

A firms strategies are formed or crafted by


matching its vision, mission, objectives, external
opportunities and threats and internal strengths
and weaknesses.
The main spirit of strategy is to gain
competitiveness by satisfying customers and
beating the competitive forces.
Strategies can be found at four levels of an
organization: corporate strategy, business levels
strategies, functional level strategies, and
operating level strategies.

Corporate-Level Strategy
Corporate strategy is concerned
more with the question of where to
compete than with how to compete
in a particular industry; the latter is a
business unit. At the corporate level,
the issues are (1) the definition of
businesses in which the firm will
participate and (2) the deployment of
resources among those businesses.

In terms of their corporate-level strategy, companies can be classified into one of three categories:

A single industry firm operates in one


line of business.
A related diversified firm operates in
several industries, and the business units
benefits from a common set of core
competencies.
An unrelated business firm operates in
businesses that are not related to one
another; the connection between the
business unit is purely financial.

Core Competence and Corporate


Diversification
Research results suggest that related
diversified firms, on an average,
perform the best, single industry
firms perform next best, and
unrelated diversified firms do not
perform well over the long term.

Implications of Control
Systems
Corporate strategy is a continuum
with single industry at the end of the
spectrum
and
unrelated
diversification at the other end
(related diversification is in the
middle of the spectrum). Many
companies do not fit neatly into one
of the three classes.
The
planning
and
control
requirements of companies pursuing
different
corporate
level

The key issues for the control


systems designers, therefore, is:
How should the structure and form of
control differ across a single industry
firm, a related diversified firm and an
unrelated diversified firm.

2.3 Business Unit Strategies


Business unit strategies deals with
how to create and maintain
competitive advantage in each of
the industries in which a company
chosen to participate. The strategy
of a business unit depends on two
interrelated aspects:
(a)Mission
(b)Competitive advantage

Business Unit Mission


In a diversified firm one of the
important
tasks
of
senior
management
is
resource
deployment, that is, make decisions
regarding the use of the cash
generated from some business units
to finance growth in other business
units.

BCG Model

Starhold
Question markbuild
Cash cowharvest
Dogdivest

Business Unit Competitive Advantage


Every business unit should develop a
competitive advantage in order to
accomplish its mission. Three
interrelated questions have to be
considered in developing the
business units competitive
advantage.

First, what is the structure of the


industry in which the business unit
operates
How should the business unit exploit
the industrys structure
Third, what will be the basis of the
business units competitive
advantage.

Michael Porter has described two


models useful in strategic analysis
and formulating strategies:
Five-Force Model of Competition
Value Chain Model

Porters Five-Force Model

Industry competitors
Bargaining power of customers
Bargaining power of suppliers
Threat of substitute products
Threat of new entry.

Generic Strategies

Low cost provider strategy


Broad differentiation strategy
Best-Cost provider strategy
Market Niche based on low cost
Market Niche based on differentiation

Value Chain Analysis


The value chain consists of the
various activities associated with the
procurement of inputs to the enduser point services. The major
activities associated with the value
chain include the following:

Primary activities

Procurements and logistics


Operations
Outbound logistics and distribution
Sales and marketing
Customer services

Support activities

Human resources
Finances
Engineering and R & D
General administration

The key questions are:


Can we reduce costs in this activity,
holding the value or revenue
constant?
Can we increase value or revenue in
this activity, holding costs constant?
Can we reduce assets in this activity,
holding costs and revenue constant?
Most importantly, can we do (i), (ii)
and (iii) simultaneously?

Strategic Performance Control


Strategic learning involves anticipating changes, monitoring the
business environment continuously, and taking proactive steps.
Management control contributes to strategic learning and enables the
organization
to
survive
in
the
marketplace.
The vision of the organization is its envisioned future and reflects its
core ideology. The mission statement flows from the vision statement
and explains the reason for the organization's existence. The vision and
mission statement together provide growth directions for the
organization
and
control
the
allocation
of
resources.
The strategies that an organization adopts depend on the resources and
strengths available with it and the strategic gaps existing in the
marketplace. These strategies can control organizational performance.
The degree of control depends on the manner in which the organization
distinguishes itself from its competitors and the competitors' ability to
respond to its strategies.

The ability of the organization to craft strategies which effectively leverage on


its resources or strengths and align them with the environment in which it
operates depends on how well it addresses its critical success factors (CSFs).
According to Rockart, CSFs are "the limited number of areas in which results,
if they are satisfactory, will ensure successful competitive performance for the
organization. They are the few key areas where things must go right for the
business to flourish." They are "areas of activity that should receive constant
and careful attention from management."
Each industry and, in turn, each organization, has a different set of CSFs. The
alignment between the mission and strategic goals which determine the CSFs
is ensured by strategic controls. Performance measures are required to track
and monitor the activities which lead to the achievement of the CSFs.
Performance measures are of three types: performance indicators (lead or lag
indicators), key performance indicators, and key result indicators.

Performance indicators clearly identify the specific areas which


need control intervention to improve organizational performance.
Good performance indicators are Specific, Measurable, Attainable,
Realistic, and have a Time perspective. Key performance indicators
are identified from the performance indicators. Key performance
indicators deal with aspects which, when improved upon, lead to
radical performance improvements. If a key performance indicator
is improved upon, it will have a positive ripple effect on most of the
other performance indicators. Key result indicators indicate whether
the approach toward achieving performance is appropriate but do
not indicate the means or method to achieve better performance or
outcomes. Key result indicators are useful for governance and are
usually reported to the top management and the board on a
monthly
or
quarterly
basis.

The continuous monitoring/reporting of various


performance measures has been greatly facilitated by
advancements in information technology and systems
(IT&S). Some of the business contexts in which IT&S is
of strategic significance are: nature of operations
(printing press, dairy processing); information intensity
(hotels, airlines, banks, financial services companies);
extent of geographical and operations spread
(diversified conglomerates); and nature of industry
(electronic chip design, software products, automobile
manufacturing,
pharmaceuticals).

'The Balanced Scorecard (BSC)' was proposed by Robert Kaplan and


David Norton in 1992. It is a concept which combines financial and
non-financial measures, short-term and long-term goals, the
organization's market performance and internal improvements, past
outputs and ongoing requirements. The BSC framework considers the
customer perspective (To achieve our vision, how should we appear
to our customers?); internal business process perspective (To satisfy
our customers and shareholders, what business processes must we
excel at?); and the innovation/learning and growth perspective (To
achieve our vision, how will we sustain our ability to change and
improve?); in addition to the financial perspective (To succeed
financially, how should we appear to our shareholders?). In the
implementation of the BSC, these perspectives are seen and
evaluated in an interconnected manner and not as standalone
perspectives. The BSC is useful as a tool for strategic performance
control and strategic learning.

3.4 Functions of the


Controller
Designing and operating information
and control systems
Preparing financial statements and
financial reports
Preparing and analyzing performance
reports, interpreting these reports to
managers.

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
organization
and
participating in the education of
management personnel in matters
relating to the controller function.