Control For Differentiated Strategies: Facts, Approaches, Arguments

Different strategies influence management control processes, internal and external factors like size, environment, technology, interdependence and strategies forge together to what researchers call as the contingency theory. These strategies and their influences in management control systems are tendencies, not hard and fast rules. Linking controls to strategies is based on various thinking:

• Different organizations operate in different strategic context,
• Different strategies require different tasks, success factors, perspective and behaviour,
•  Controls are systems that influence the people behind the activities being measured,
• Behaviour induced by the system is consistent with the strategy.
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Corporate strategy is about being in the right mix of businesses. It addresses are the definition of businesses where they compete and the deployment of resources to these businesses.

Three categories classify companies in their corporate strategies:

• Single industry, a firm operating one line of business,
• Related Diversified operates in several industries with common core competencies,
• Unrelated Diversified operates various businesses without connection except financial.

Different corporate strategies imply different control structures based on organizational structures.

Single industries would be functionally organized, related diversified will be structured as business units while unrelated diversified would be structured as a holding company.

Corporate management’s familiarity with range from high to low from single industry to unrelated diversified. Functional background of corporate management starts from relevant operating experience from single industry to mainly finance for unrelated diversified. Decision making authority as a single industry is more centralized to a more decentralized authority on unrelated diversified.

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Corporate staff size, Reliance on internal promotions and Use of lateral transfers are high on single industries to low on unrelated diversified.

Corporate culture ranges from strong on single industries to weak on unrelated diversified companies. Implications on management control also flow in relation to single industry to unrelated diversified. Strategic planning-wise single industries perform vertical-cum-horizontal planning while unrelated diversified are generally vertical only. Control of budget manager on budget formulation and importance to meeting the budget is low on single industries to high on unrelated diversified companies.

Importance of transfer pricing on the other hand is high among single industry businesses and low among unrelated diversified. Sourcing flexibility for single industries are constrained while unrelated diversified gets arm’s length market pricing. Bonus criteria on single industries are both financial and non-financial while on unrelatedly diversified companies its primarily financial. Bonus determination is also highly subjective for single industries while more formula based for unrelated diversified.

The bonus basis is based on both business unit and corporate performance on single industries and gravitates toward business unit performance-based for unrelated diversified companies. Business Unit Strategies Business strategy is about how to compete. With two interrelated aspects: its mission (four types: build, hold, harvest and divest) and competitive advantage (two ways: cost leadership and differentiation). The missions also constitute a continuum, pure build on one end to pure harvest on the other.

Congruence between mission chosen and types of control used leads to effective implementation. Different missions also require different management control systems. Mission and Uncertainty are also correlated, build units face greater uncertainty versus harvest due to several reasons:

1. Build are usually done at the growth stage while of the product life cycle while harvest happens at the maturity stage.
2. Build units are targeted to increase market share wherein it is highly cutthroat in terms of competition versus harvest.
3. Build is also more dependent on external input and outputs, the more external dependencies the higher risk since these are outside ones control
4. build are often in new and evolving industries where managers have less experiences.

Build to Harvest strategies also is a choice of Time-span, short-term versus long-term trade-offs. Build managers are tuned at future profits while harvest managers are more concentrated on maximizing short term gains. In terms of control systems differing across missions: The Importance of strategic planning is relatively high on build and relatively low on harvest.

Capital Expenditure Decisions are less formal on build while more formal on harvest. Capital Expenditure Evaluation criteria for build units are more emphasized on non-financial data while Harvests have more emphasis on financial. Discount rates are low on build while high on harvest’s but conversely for project approval limits at the business unit level its high for build and low for harvest. Capital investment analysis is more subjective and qualitative on build and it moves up becoming more objective and quantitative for harvest businesses.

Implications of different strategic missions on budget are as follows: the role of budget on build is more of a short-term planning tool while for harvest it is a control tool. Business manager;s influence on budget preparation and control limit used on evaluation against budget are high on build and low on harvest. Budget revisions are easy for build while more difficult for harvest. Informal reporting is more frequent on policy issues and less on operating issues for build and while it is the opposite when you go towards harvest.

Feedback on performance versus budget is less often on build but more often for harvest. Importance to meeting the budget is also low for build but high for harvest. Behaviour control is also more emphasized in build while output control is more prevalent on harvest businesses. Strategic missions implications on incentive compensation are as follows: percent compensation as bonus is high on build and low for harvest. Bonus criteria for build is on non-financial while its more financial on harvest. Bonus is determined more subjectively for build and more formula based for harvest.

The frequency for bonus payments for build is less compared to harvest where it is more frequent. Competitive Advantage can be achieved thru differentiation or low cost approaches. Differentiation is considered to be more uncertain than low cost for the following reasons:

• Product Innovation is very critical in differentiation, it increases uncertainty due to its emphasis in producing new and unproven products.
• Low cost have narrow lines and minimizes inventory versus broader line of differentiation to create uniqueness – the more the products, the more complex the higher the uncertainty.
•  low cost produce simple products that are priced lower than competing products, while differentiated products are complex with more myopic approach to consumers perception that are more difficult to predict thus making it more uncertain.

Top Management Style Management control is heavily influenced by the management and managers manage differently. Each manager’s management style is influenced by his background like age, education, experience and his personality such as risk appetite and tolerance for ambiguity. Management style significantly influences the operation of control systems.

The executive’s preference for use of information and performance review meetings, personal and impersonal controls is also a variable of managerial style. The importance of formal budgets and reports versus informal conversations are highly dependent on the type of leadership. Some are more quantitative while others are more qualitative. The attitude of managers towards reports affect the amount of detail that they want, frequency, graphs versus tables or words, thus its best that designers of management control systems also identify these preferences and accommodate them.

A manager’s style also influences the degree of tightness or looseness of controls. This degree is also correlated to style of the manager’s superior. The degree of looseness also increases at higher levels of hierarchy but might not also be generalized dependent on the style of the CEO. The style of the CEO has a great impact on management control, and as each senior manager changes so does the system change accordingly.