Understanding Strategy MCS 2

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Chapter 2Understanding Strategies

Management control systems aretools for implementing strategies.Strategies dier betweenorganizations, and controls must betailored to the requirements ofspecic strategies. Dierent

strategies require dierent taskpriorities dierent key successfactors and dierent skills,

perspecti!es, and beha!iors.


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"hus, a continuing concern in thedesign of control systems should bewhether the beha!ior induced by thesystem is the one called for by thestrategy.


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Strategies are plans to achie!eorganizational goals. "herefore, inthis chapter we rst describe some

typical goals in organizations. "henwe describe strategies at two le!elsin an organization# the corporatele!el and the business le!els.Strategies pro!ide the broad conte$twithin which one can e!aluate theoptimality of the elements of

management systems.


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%.& 'oals

'oals of a corporation refer to the end resultsthat it wants to attain and which is set the chiefe$ecuti!e o(cer and other top e$ecuti!es orsometimes by the owners.

"he ma)or forms of goals include the followings# *rotability

Ma$imizing shareholder !alue

+isk

Multiple stakeholder approach


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%.% "he oncept of Strategy

Strategy describes the generaldirection in which an organizationplans to mo!e to attain its goals.

-!ery wellmanaged organization hasone or more strategies, althoughthey may not be stated e$plicitly.


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/ rm0s strategies are formed or crafted bymatching its !ision, mission, ob)ecti!es, e$ternalopportunities and threats and internal strengthsand weaknesses.

"he main spirit of strategy is to gaincompetiti!eness by satisfying customers andbeating the competiti!e forces.

Strategies can be found at four le!els of anorganization# corporate strategy, business le!elsstrategies, functional le!el strategies, andoperating le!el strategies.


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orporate1e!el Strategy

orporate strategy is concernedmore with the question of where tocompete than with how to compete

in a particular industry the latter is abusiness unit. /t the corporate le!el,the issues are 2&3 the denition of

businesses in which the rm willparticipate and 2%3 the deployment ofresources among those businesses.


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4n terms of their corporatele!el strategy, companies can be classied into one of three categories#

/ single industry frm operates in oneline of business.

/ related diversifed frm operates inse!eral industries, and the business unitsbenets from a common set of corecompetencies.

/n unrelated business rm operates inbusinesses that are not related to oneanother the connection between thebusiness unit is purely nancial.


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ore ompetence and orporateDi!ersication

+esearch results suggest that relateddi!ersied rms, on an a!erage,perform the best, single industry

rms perform ne$t best, andunrelated di!ersied rms do notperform well o!er the long term.


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4mplications of ontrolSystems orporate strategy is a continuum

with single industry at the end of thespectrum and unrelated

di!ersication at the other end2related di!ersication is in themiddle of the spectrum3. Manycompanies do not t neatly into oneof the three classes.

"he planning and controlrequirements of companies pursuing

dierent corporate le!el


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"he key issues for the controlsystems designers, therefore, is#

5ow should the structure and form ofcontrol dier across a single industryrm, a related di!ersied rm and anunrelated di!ersied rm.


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%.6 7usiness 8nit Strategies

7usiness unit strategies deals withhow to create and maintaincompetiti!e ad!antage in each of

the industries in which a companychosen to participate. "he strategyof a business unit depends on two

interrelated aspects#2a3Mission

2b3ompetiti!e ad!antage


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7usiness 8nit Mission

4n a di!ersied rm one of theimportant tasks of seniormanagement is resource

deployment, that is, make decisionsregarding the use of the cashgenerated from some business units

to nance growth in other businessunits.


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7' Model

Star9hold

:uestion mark9build

ash cow9har!est Dog9di!est


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7usiness 8nit ompetiti!e /d!antage

-!ery business unit should de!elop acompetiti!e ad!antage in order toaccomplish its mission. "hree

interrelated questions ha!e to beconsidered in de!eloping thebusiness unit0s competiti!e

ad!antage.


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;irst, what is the structure of theindustry in which the business unitoperates

5ow should the business unit e$ploitthe industry0s structure

"hird, what will be the basis of the

business unit0s competiti!ead!antage.


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Michael *orter has described twomodels useful in strategic analysisand formulating strategies#

;i!e;orce Model of ompetition


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*orter0s ;i!e;orce Model

4ndustry competitors

7argaining power of customers

7argaining power of suppliers "hreat of substitute products

"hreat of new entry.


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'eneric Strategies

1ow cost pro!ider strategy

7road dierentiation strategy

7estost pro!ider strategy Market =iche based on low cost

Market =iche based on dierentiation


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*rimary acti!ities

*rocurements and logistics

>perations

>utbound logistics and distribution Sales and marketing

ustomer ser!ices


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Support acti!ities

5uman resources

;inances

-ngineering and + ? D 'eneral administration


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"he key questions are#

an we reduce costs in this acti!ity,holding the !alue or re!enueconstant@

an we increase !alue or re!enue inthis acti!ity, holding costs constant@

an we reduce assets in this acti!ity,

holding costs and re!enue constant@ Most importantly, can we do 2i3, 2ii3

and 2iii3 simultaneously@


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Strategic Perormance Control

Strategic learning in!ol!es anticipating changes, monitoring thebusiness en!ironment continuously, and taking proacti!e steps.Management control contributes to strategic learning and enables theorganization to sur!i!e in the marketplace.

"he !ision of the organization is its en!isioned future and reAects itscore ideology. "he mission statement Aows from the !ision statementand e$plains the reason for the organizationBs e$istence. "he !ision andmission statement together pro!ide growth directions for theorganization and control the allocation of resources.

"he strategies that an organization adopts depend on the resources and

strengths a!ailable with it and the strategic gaps e$isting in themarketplace. "hese strategies can control organizational performance."he degree of control depends on the manner in which the organizationdistinguishes itself from its competitors and the competitorsB ability torespond to its strategies.


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"he ability of the organization to craft strategies which eecti!ely le!erage onits resources or strengths and align them with the en!ironment in which itoperates depends on how well it addresses its critical success factors 2S;s3./ccording to +ockart, S;s are Cthe limited number of areas in which results,if they are satisfactory, will ensure successful competiti!e performance for theorganization. "hey are the few key areas where things must go right for the

business to Aourish.C "hey are Careas of acti!ity that should recei!e constantand careful attention from management.C

-ach industry and, in turn, each organization, has a dierent set of S;s. "healignment between the mission and strategic goals which determine the S;sis ensured by strategic controls. *erformance measures are required to trackand monitor the acti!ities which lead to the achie!ement of the S;s.

*erformance measures are of three types# performance indicators 2lead or lagindicators3, key performance indicators, and key result indicators.


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*erformance indicators clearly identify the specic areas whichneed control inter!ention to impro!e organizational performance.'ood performance indicators are Specic, Measurable, /ttainable,+ealistic, and ha!e a "ime perspecti!e. ey performance indicatorsare identied from the performance indicators. ey performance

indicators deal with aspects which, when impro!ed upon, lead toradical performance impro!ements. 4f a key performance indicatoris impro!ed upon, it will ha!e a positi!e ripple eect on most of theother performance indicators. ey result indicators indicate whetherthe approach toward achie!ing performance is appropriate but donot indicate the means or method to achie!e better performance or

outcomes. ey result indicators are useful for go!ernance and areusually reported to the top management and the board on amonthly or quarterly basis.


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"he continuous monitoringEreporting of !ariousperformance measures has been greatly facilitated byad!ancements in information technology and systems24"?S3. Some of the business conte$ts in which 4"?S is

of strategic signicance are# nature of operations2printing press, dairy processing3 information intensity2hotels, airlines, banks, nancial ser!ices companies3e$tent of geographical and operations spread2di!ersied conglomerates3 and nature of industry

2electronic chip design, software products, automobilemanufacturing, pharmaceuticals3.


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B"he 7alanced Scorecard 27S3B was proposed by +obert aplan andDa!id =orton in &FF%. 4t is a concept which combines nancial andnonnancial measures, shortterm and longterm goals, theorganizationBs market performance and internal impro!ements, pastoutputs and ongoing requirements. "he 7S framework considers thecustomer perspecti!e 2"o achie!e our !ision, how should we appearto our customers@3 internal business process perspecti!e 2"o satisfyour customers and shareholders, what business processes must wee$cel at@3 and the inno!ationElearning and growth perspecti!e 2"oachie!e our !ision, how will we sustain our ability to change andimpro!e@3 in addition to the nancial perspecti!e 2"o succeed

nancially, how should we appear to our shareholders@3. 4n theimplementation of the 7S, these perspecti!es are seen ande!aluated in an interconnected manner and not as standaloneperspecti!es. "he 7S is useful as a tool for strategic performancecontrol and strategic learning.


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6.G ;unctions of theontroller Designing and operating information

and control systems

*reparing nancial statements andnancial reports

*reparing and analyzing performancereports, interpreting these reports to

managers.


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Super!ising internal audit andaccounting control procedures toensure the !alidity of information,

establishing adequate safeguardsagainst theft and fraud, andperforming operational audits

De!eloping personnel in thecontroller organization andparticipating in the education ofmanagement personnel in matters

relating to the controller function

Understanding Strategy MCS 2

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