Management Control Systems

First European Edition

Robert N. Anthony, Vijay Govindarajan, Frank G. H. Hartmann, Kalle Kraus and Göran Nilsson

Mc Graw Hill Education

Higher Education

London Boston BurrRidge, IL Dubuque, IA Madison, WI New York San Francisco St. Louis Bangkok Bogota Caracas Kuala Lumpur Lisbon Madrid Mexico City Milan

Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto

rief Table of Contents "

1 2

3 4

Case grid About the authors Preface Acknowledgements Guided tour

PART 1: Management control and management control systems Introduction to management control Designing management control systems

PART 2: The environment and strategy of organizations 70 Organizations and their environment 72 Strategy and management control 142

PART 3: Management control and the organization's internal structure 192 Decentralization, control and incentives 194 Responsibility centres: revenue and expense centres 227

X

XV

xvi xviii

xix

1 3

34

7

8

9 10

11

Responsibility centres: profit and investment centres Transfer pricing, shared service centres and cross-functional management

PART 4: The management control process Planning and budgeting Performance measurement and analysis Compensation, incentives and motivation

254

289

3 2 9 331

384

420

PART 5: Management control challenges 476

12 Management control challenges in service delivery 478

13 Management control of projects 509 14 Management control and inter-

organizational relationships 552

Company Index 606 Subject Index 613

Detailed Table of Contents illillliiiilii^

Case grid x About the authors xv Preface xviii Acknowledgements xviii Guided tour xix

PART 1 : Management control and managemen t control systems 1 Introduction to management control 3 Introduction 4 Management control: role and position 8 Human behaviour in organizations 13 Road map for the reader 20 Case 1.1: Management Control Problems 24 Case 1.2: Wal-Mart Stores, Inc. 26 Case 1.3: PCL: A Breakdown in the

Enforcement of Management Control 29

Designing management control systems 34 Introduction 35 Management control systems 36 Management control system and processes, in and out of control 39 Delineating management control, strategic control and task control 44 Case 2.1: Management Control Problems 50 Case 2.2: Nucor Corporation (A) 53 Case 2.3: PremiumSofi: Managing Creative

People 62

PART 2 : The environment and strategy of organizations 70 Organizations and their environment 72 Introduction 73 Shareholders and stakeholders 74 Goals of the organization 78 Two major trends 82 The environment of the organization 86 Case 3.1: Corporate Governance in Three

Economies: Germany, Japan, and the United States 93

Case 3.2: The Body Shop: Developing a Roadmapfor Corporate Social Responsibility

Case 3.3: Tough Decisions at Marks and Spencer

Case 3.4: Unintended Acceleration: Toyota's Recall Crisis

Case 3.5: ABB's Hydropower Sustainability Dilemma

Strategy and management control Introduction Strategy from different perspectives Strategic frameworks Strategy and management control systems Case 4.1: William Oliver Bootmaker Case 4.2: Encyclopcedia Britannica, Inc. (A) Case 4.3: Encyclopcedia Britannica, Inc. (B) Case 4.4: Encyclopcedia Britannica, Inc. (C) Case 4.5: Cisco Systems (A) Case 4.6: Cisco Systems (B)

PART 3: Management control and the organization's internal structure Decentralization, control and

99

102

114

125

142 143 144 147 155 168 173 175 177 179 188

192

incentives Introduction Decentralization and control Formal control of decentralized management Should control be tight or loose? Controllership Case 5.1: Management Control Problems Case 5.2: Southwest Airlines Corporation Case 5.3: Governance and Control atAXA

Responsibility centres: revenue a n d e x p e n s e centres Introduction Responsibility centres Revenue centres Expense centres Case 6.1: BookWorm

1 9 4 195 196

197 204 205 210 212 214

227 228 228 233 234 240

Detailed Table of Contents

Case 6.2: MoreSki Case 6.3: Barca Products, S.A. Case 6.4: Grand Jean Company Case 6.5: Vershire Company

Responsibility centres: profit and investment centres Introduction Conditions for delegating profit responsibility Advantages of profit centres Difficulties with profit centres Business units as profit centres Other profit centres Measuring profitability Investment centres Measuring assets employed Case 7.1: BreathEZ Case 7.2: MedalRain Case 7.3: TurnAround Case 7.4:Abrams Company Case 7.5: Quality Metal Service Center

Transfer pricing, shared service centres and cross-functional management Introduction Transfer pricing Transfer pricing methods Pricing corporate services Administration of transfer prices Shared service centres Cross-functional management Case 8.1: Computer Sciences Corporation Case 8.2: Transfer Pricing Problems Case 8.3: Birch Paper Company Case 8.4: North Country Auto, Inc. Case 8.5: BoldFlash: Cross-Functional

Challenges in the Mobile Division

PART 4: The management control process Planning and budgeting Introduction Long-range strategic planning Benefits and limitations of long-range strategic planning The parts and linkages of the budget Budgeting process Budget preparation Beyond budgeting Alternatives to budgeting Critique against beyond budgeting

241 242 246 249

254 255

255 256 256 257 258 260 264 267 275 276 277 278 282

289 290 290 291 297 298 300 302 307 309 314 316

322

329 331

332 335

336 338 341 344 348 349 352

10

11

12

Case 9.1: Sometimes Accountants Fail to Budget 356

Case 9.2: The Case of the Colored Post-It™ Notes 361

Case 9.3: New York Times 363 Case 9.4: Svenska Handelsbanken 373

Performance measurement and analysis Introduction Performance measurement systems Variance analysis Additional considerations and limitations of variance analysis Combining financial and non-financial performance measures Case 10.1: Variance Analysis Problems Case 10.2: Making Balanced Scorecard

Work: The Worldclass Lighting Experience

Case 10.3: The Gail Palmer Ashton Graduate School of Business: The Balanced Scorecard Initiative 416

384 385 385 386

392

396 405

408

Compensation, incentives and motivation Introduction Compensation and incentives Theories on incentives and motivation Case 11.1: What Is CEO Talent Worth? Case 11.2: Arck Systems Case 11.3: Lincoln Electric Company (A) Case 11.4: Disorganization atSemco:

Human Resource Practices as a Strategic Advantage

420 421 422 425 440 446 450

464

PART 5: Management control challenges Management control challenges in service delivery Introduction Service organizations Professional and financial service organizations Management control systems The financial services sector Health-care organizations Non-profit and NGOs Case 12.1: Management Control Problems Case 12.2: Piedmont University Case 12.3: Implementation of Performance

Measurements atHopco Hospital

476

478 479 479

482 483 485 487 489 494 496

499

Detailed Table of Contents x

13 Management control of projects Introduction Nature of projects The control environment Project planning Project execution Project evaluation Agile project management Case 13.1: Project Management Analysis

in the Internet Forecasting Industry

Case 13.2: Interior JV: Teething Problems of a Manufacturing Operation in China

Case 13.3: CMM versus Agile: Methodology Wars in Software Development

Case 13.4: AB Thorsten

»09 510 510 512 514 517 520 522

526

528

532 544

1 4 M a n a g e m e n t control a n d inter-organizat ional relationships Introduction Increased importance of inter-organizational relationships Inter-organizational management control Case 14.1: Ramirent Case 14.2: Working Capital Management Case 14.3: LEGO Group: An Outsourcing

Journey Case 14.4: ECCO A/S - Global Value

Chain Management Case 14.5: Strategic Performance

Measurement of Suppliers at WTC

Company Index Subject Index

552 553

554 555 565 566

567

580

596

606 613