Management Control Systems

Authors: Anthony and Govindarajan

12th Edition
Ch. 1. The nature of management control systems
Ch. 2. Understanding strategies
Ch. 3. Behavior in organizations
Ch. 4. Responsibility centers : revenue and expense
centers
Ch. 5. Profit centers
Ch. 6. Transfer pricing
Ch. 7. Measuring and controlling assets employed
Ch. 8. Strategic planning
Ch. 9. Budget preparation
Ch. 10. Analyzing financial performance reports
Ch. 11. Performance measurement
Ch. 12. Management compensation
Ch. 13. Controls for differentiated strategies
Ch. 14. Service organizations
Ch. 15. Multinational organizations
Ch. 16. Management control of projects.
 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 firm’s 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
diversification strategies are quite different.
• 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
• Star—hold
• Question mark—build
• Cash cow—harvest
• Dog—divest
 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
unit’s competitive advantage.
• First, what is the structure of the industry in
which the business unit operates
• How should the business unit exploit the
industry’s structure
• Third, what will be the basis of the business
unit’s competitive advantage.
Michael Porter has described two models useful
in strategic analysis and formulating
strategies:
• Five-Force Model of Competition
• Value Chain Model
 Porter’s 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 end-user 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.
• Strategy and Control
Critical Success Factors and Controls
Performance Measurement
Information Technology and Systems for Strategic Control
Nature of Operations and Information Intensity
Extent of Geographical and Operations Spread
• Nature of Industry
The Balanced Scorecard
Customer Perspective
Financial Perspective
Internal Business Process Perspective
Innovation/Learning and Growth Perspective
Implementing the BSC