Understanding Strategies 2

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Management ControlManagement Control

SystemSystem

Chapter 2Chapter 2

By Prof. Shilpa RanderBy Prof. Shilpa Rander



Boundaries of Management Boundaries of Management

ControlControl Management Control is the process by whichManagement Control is the process by which

managers influence other members of themanagers influence other members of theorganization to implement the organizationsorganization to implement the organizationsstrategies.strategies.

1.1. Planning.Planning.

2.2. Coordinating.Coordinating.

3.3. CommunicatingCommunicating

4.4. EvaluatingEvaluating5.5. Deciding what, if any, action should be taken.Deciding what, if any, action should be taken.

6.6. Influencing people to change their behavior.Influencing people to change their behavior.



Management Control is different from two otherManagement Control is different from two othersystemssystems-- Strategy Formulation and Task Control.Strategy Formulation and Task Control.

Management ControlManagement Control fits betweenfits between strategystrategy formulationformulation andand

task control.task control.

Goals, Strategies and Policies.Goals, Strategies and Policies.

Implementation of StrategiesImplementation of Strategies

Efficient and EffectiveEfficient and Effectiveperformance of individual Tasksperformance of individual Tasks

Strategy Formulation

Management Control

Task Control



UnderstandingUnderstanding

StrategiesStrategies



StrategyStrategy

Strategies are plans to achieveStrategies are plans to achieve

organization goals.organization goals.

Strategy describes the general directionStrategy describes the general direction

in which an organization plans to movein which an organization plans to moveto attain its goals.to attain its goals.



Management Control Systems are tools toManagement Control Systems are tools to

implement strategies.implement strategies.

Strategies differ between organizations, andStrategies differ between organizations, andcontrols should be tailored to thecontrols should be tailored to the

requirements of specific strategies.requirements of specific strategies.

Different strategies require :Different strategies require :

1.1.Different task priorities;Different task priorities;2.2.Different key success factors;Different key success factors;

3.3.Different skills, perspectives, and behaviors.Different skills, perspectives, and behaviors.



The concept of StrategyThe concept of Strategy

Deciding on the goals of the organization and theDeciding on the goals of the organization and thestrategies for attaining these goals.strategies for attaining these goals.

Strategy Formulation :Strategy Formulation :

1. A firm develops its strategies by matching its core1. A firm develops its strategies by matching its corecompetencies with industry opportunities.competencies with industry opportunities.

2. Strategy formulation is a process that senior executives2. Strategy formulation is a process that senior executivesuse to evaluate a companys strengths and weaknesses inuse to evaluate a companys strengths and weaknesses inlight of the opportunities and threats present in thelight of the opportunities and threats present in theenvironment and then to decide on strategies that fit theenvironment and then to decide on strategies that fit thecompanys core competencies with environmentalcompanys core competencies with environmentalopportunities.opportunities.



Environmental Analysis:

CompetitorCustomerSupplier

RegulatorySocial/Political

Internal Analysis:

Technology know-howManufacturing know-how

Marketing know-how

Distribution know-how

Logistics know-how

Opportunities & Threats:

Identifying opportunities

Strengths & Weaknesses:

Identify core competencies

Fix internal competenciesWith externalopportunities

Firms Strategies



Strategy Level :Strategy Level :

Strategies for the whole organizationStrategies for the whole organization--Corporate Level StrategyCorporate Level Strategy

Strategies for business units within theStrategies for business units within theorganizationorganization--Business Unit StrategiesBusiness Unit Strategies



Corporate Level StrategyCorporate Level Strategy

1.1. The definition of business in which the firm willThe definition of business in which the firm willparticipate.participate.

2.2. Are we in the right mix of industries? Are we in the right mix of industries?

3.3. What industries and subindustries should we be in?What industries and subindustries should we be in?4.4. The deployment of resources among thoseThe deployment of resources among those

businesses.businesses.

5.5. Decisions involving businesses to add, businesses toDecisions involving businesses to add, businesses to

retain, businesses to emphasize, businesses toretain, businesses to emphasize, businesses todeemphasize, and businesses to divest.deemphasize, and businesses to divest.



In terms of their corporate levelIn terms of their corporate levelstrategy, companies can bestrategy, companies can be

classified into 3 categories:classified into 3 categories:

1.1. Single IndustrySingle Industry-- A single industry firm uses its A single industry firm uses itscore competencies to pursue within that industry.core competencies to pursue within that industry.

E.g. McDonalds.E.g. McDonalds.

2.2. Related DiversificationRelated Diversification-- firms that operate in afirms that operate in anumber of industries and their businesses arenumber of industries and their businesses areconnected to each other. E.g. Procter & Gambleconnected to each other. E.g. Procter & Gamble

3.3. Unrelated DiversificationUnrelated Diversification-- Firms that operate in aFirms that operate in anumber of different industries.number of different industries.



Business Unit Strategy :Business Unit Strategy :

Within the organization small units areWithin the organization small units arecreated.created.

Issues:Issues:1.1. What should be the mission (overallWhat should be the mission (overall

objectives) of the business unit?objectives) of the business unit?2.2. How should the business unit compete toHow should the business unit compete to

realize its mission?realize its mission?3.3. Responsible for the performance of theResponsible for the performance of the

respective unit.respective unit.



Distinction between strategy formulationDistinction between strategy formulation

and Management control:and Management control:1.1. Process of decidingProcess of deciding

on new strategieson new strategies

2.2. It varies with theIt varies with thenature of thenature of thestrategy.strategy.

3.3. It involvesIt involvesrelatively fewrelatively fewpeoplepeople

1.1. Process of Process of implementingimplementingthose strategies.those strategies.

2.2. It involves a seriesIt involves a seriesof steps.of steps.

3.3. It involvesIt involvesmanagers andmanagers andstaff at all levels instaff at all levels inthe org.the org.



Task Control:Task Control:

Task Control is the process of ensuringTask Control is the process of ensuringthat specified tasks are carried out that specified tasks are carried out efficiently and effectively.efficiently and effectively.

1.1. Transaction oriented.Transaction oriented.2.2. Coordinate order entryCoordinate order entry3.3. Schedule ProductionSchedule Production4.4. Manage Cash FlowsManage Cash Flows5.5. Maintain Personnel RecordsMaintain Personnel Records6.6. Reorder an Item.Reorder an Item.



Strategic Management Strategic Management

Process :Process : Formulating strategy & strategic plansFormulating strategy & strategic plans

and managing the org. to achieveand managing the org. to achieve

them.them. Strategic management takes placeStrategic management takes place

within the context of vision of within the context of vision of organization.organization.

It describes how the vision of theIt describes how the vision of theorganization will be realized.organization will be realized.



GoalsGoals

ProfitabilityProfitability

Stability of the org.Stability of the org.

Value to the local community Value to the local community

Service to the societyService to the society



ProfitabilityProfitability

Economic Value Added (EVA) = Profit AfterEconomic Value Added (EVA) = Profit AfterTaxTax Return On Assets (Capital Invested)Return On Assets (Capital Invested)

Profit After TaxProfit After Tax==

EBITEBIT

--Interest Interest --

TaxTax

Return On AssetsReturn On Assets

==Rate Of ReturnRate Of Returnxx

Total AssetsTotal Assets

OrOr

Cost Of CapitalCost Of CapitalX X

CapitalCapital



Return On Capital EmployedReturn On Capital Employed==

EBIT/Capital Employed.EBIT/Capital Employed.

EBITEBIT==

SalesSales--

Variable Cost Variable Cost --

Fixed Cost Fixed Cost



Capital EmployedCapital Employed

Equity Share CapitalEquity Share Capital

++Preference Share CapitalPreference Share Capital++

Debenture CapitalDebenture Capital++

Long Term Loans fromLong Term Loans fromFinancial InstitutionsFinancial Institutions

Total AssetsTotal Assets--

Current LiabilitiesCurrent Liabilities

OrOr

Non Current AssetsNon Current Assets++

Working CapitalWorking Capital



Return On Investment Return On Investment ==

Profit x 100 /Investment Profit x 100 /Investment

Profit MarginProfit Margin==Profit x 100 / SalesProfit x 100 / Sales

Investment Turnover RatioInvestment Turnover Ratio

==Sales / Investment Sales / Investment

Return On Investment=

ProfitMargin x Investment Turnover

Understanding Strategies 2

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