Management Control Systems. Chapter 16: The Influence of Situational Factors on MCSs

Transcription

1 Management Control Systems Chapter 16: The Influence of Situational Factors on MCSs Merchant and Van der Stede: Management Control Systems Pearson Education Limited 2003

2 Contingency / situational factors There are no universally best control systems that apply to every situation in all organizations... Contingency factors - Organizational factors; - Technological factors; - Strategic factors; etc. MCS variables - Type + tightness of controls used; - Design of the budgeting system; - Performance measures emphasized; - Objectivity of performance evaluations; - Design of reward systems; etc. Outcome variables - Degree of control; - Dysfunctional side-effects; - Control costs. Merchant and Van der Stede: Management Control Systems Pearson Education Limited

3 Strategy typologies... Corporate diversification strategy» Refers to what businesses the firm should invest in and how these businesses should be coordinated.» Defines where to compete;» Single business related / unrelated diversified. Business unit competitive mission» Defines the mission for each of the businesses;» Build hold harvest divest. Business unit competitive position» Determines how to compete in each of the businesses;» Low cost differentiation Merchant and Van der Stede: Management Control Systems Pearson Education Limited

4 Corporate diversification strategy... Degree of Relatedness High Single Business Firms Related Diversifiers One line of business. Operational synergies based on a common set of core competencies. Unrelated Diversifiers Connection between businesses is purely financial (holdings). Number of Businesses High Merchant and Van der Stede: Management Control Systems Pearson Education Limited

5 Incentives Budgets Implications on MCS design... Single / Related Business Unrelated Diversified Control of SBU-manager over budget formulation Low (?) high Importance attached to meeting the budget Low (?) high Bonus criteria financial and non-financial criteria primarily financial criteria Bonus determination primarily subjective or discretionary (?) primarily formula-based Bonus basis SBU + corporate performance primarily SBU-performance Merchant and Van der Stede: Management Control Systems Pearson Education Limited

6 Business unit competitive mission... Has to do with the resource allocation decisions from the corporate office... HQ» cf., internal capital markets;» Cash generated in one business can be used to finance growth in another business. S B U Depends also on the industry attractiveness, market opportunities and SBU-competitive ability... Merchant and Van der Stede: Management Control Systems Pearson Education Limited

7 Market growth rate Portfolio models... H Cash source L H? H Hold $$$ Harvest Build Dog Divest Cash use L L H Relative market share L Merchant and Van der Stede: Management Control Systems Pearson Education Limited

8 The four missions... Build Hold Harvest Divest Invest in MS even at the expense of ST-earnings / CFs Maximize ST-earnings / CFs even at the expense of MS Protect MS and competitive position Outright sale - Slow liquidation Merchant and Van der Stede: Management Control Systems Pearson Education Limited

9 Implications on MCS design (1) BUDGETS Control of SBU-manager over budget formulation Budget revisions during the year Importance attached to meeting the budget Build. Harvest relatively high relatively easy relatively low relatively difficult Budget reporting rather interactive rather diagnostic Tolerance towards budget deviations relatively high relatively low relatively low relatively high Subjective Interpersonal Strategic Objective Administrative Financial Merchant and Van der Stede: Management Control Systems Pearson Education Limited

10 Implications on MCS design (2) Build. Harvest INCENTIVES Bonus criteria Bonus determination CAPITAL BUDGETING Evaluation of capital investments more emphasis on non-financial criteria primarily subjective or discretionary (?) more emphasis on non-financial criteria more subjective and qualitative primarily financial criteria primarily formula-based more emphasis on financial criteria more objective and quantitative Merchant and Van der Stede: Management Control Systems Pearson Education Limited

11 Business unit competitive strategy... Industry s competitive structure Threat of new entry; Threat of substitutes; Power of suppliers; Firm s competitive advantage Power of buyers; Direct rivalry. Cost leadership... Achieve low cost relative to competitors Differentiation Create something which is perceived unique by the customer Merchant and Van der Stede: Management Control Systems Pearson Education Limited

12 Low cost differentiation Cost leadership economies of scale tight cost control standard products cost minimization standardized tasks and production processes Differentiation brand loyalty superior customer service product features product design technology different business unit strategies require different MCS... Merchant and Van der Stede: Management Control Systems Pearson Education Limited

13 Implications on MCS design (1) BUDGETS Control of SBU-manager over budget formulation Low Cost Differentiation relatively low relatively high Budget revisions during the year Tolerance towards budget deviations Importance attached to meeting the budget relatively difficult relatively low relatively high relatively easy relatively high relatively low Merchant and Van der Stede: Management Control Systems Pearson Education Limited

14 Implications on MCS design (2) Low Cost Differentiation INCENTIVES Bonus criteria Bonus determination primarily financial criteria primarily formula-based more emphasis on non-financial criteria more subjective or discretionary (?) Merchant and Van der Stede: Management Control Systems Pearson Education Limited

15 Differences across countries... Behavioral similarities Self-interest is probably a universal behavioral trait. Factors that affect MCSs across countries National culture» People s tastes, norms, values, social attitudes, religions, personal priorities, and responses to interpersonal stimuli. Local Institutions» Government agencies, banking systems, labor unions, financial markets, accounting rules, regulations, etc.. Local business environments» Stage of economic development, political risk, inflation, labor availability, labor quality, labor mobility, etc. Merchant and Van der Stede: Management Control Systems Pearson Education Limited

16 Cultural differences... National culture has a direct effect on MCS because control problems are behavioral problems. Individualism» Incentives based on individual vs. group performance;» Degree of engaging in myopic, self-centered behavior. Power distance» Degree of centralization of decision-making;» Degree of participation in setting performance targets. Uncertainty avoidance» Degree of subjectivity in performance evaluations;» Degree of formality of planning / budgeting processes. Masculinity» Degree of performance-based rewards. Merchant and Van der Stede: Management Control Systems Pearson Education Limited

17 Local institutions... Labor unions» Use of performance-based rewards (>< seniority-based). Financial markets and stock market valuations» Frequency of profit measurement;» Use of short-term incentives;» Likelihood of myopic behavior. Threat of hostile takeovers» Use of reward schemes to get common stock in managers and employees hands. Accounting regulations Merchant and Van der Stede: Management Control Systems Pearson Education Limited

18 Local business environments... Risk and uncertainty-related factors Business risk» Military conflicts, bombings, corporate espionage, etc. Political risk» Negative: forced production, prohibition of layoffs, price controls;» Positive: tariff barriers, subsidies, research support, etc. Stage of economic development» Age and size of corporations, degree of computerization, degree of development of accounting, information, and control systems. Inflation Financial risk (e.g., use of flexible budgeting). Labor Availability, Quality, and Mobility Use of action controls, personnel controls, and long-term incentives. Merchant and Van der Stede: Management Control Systems Pearson Education Limited

19 Foreign currency translation... Local managers bear foreign currency translation risk if their performance in measured in home-country currency. Can subsidiary managers control this risk?» Authority to make cross-border investment, product sourcing, or marketing decisions;» Authority to write purchase or sales contracts in one currency or another;» Authority to make foreign exchange transactions (hedging, swaps, or arbitrage). If not,» Evaluate manager in local currency;» Treat foreign exchange losses and gains below the line;» Calculate foreign exchange variance and treat is as uncontrollable;» Flex the budget to end-of-year currency rates. Merchant and Van der Stede: Management Control Systems Pearson Education Limited