Management Control System

Chapter 8Strategic Planning

By,

Sanjay Borad

MBA-Finance, CWA & B’Com

Boundaries of Management Control

Strategy Formulation

Management Control

Task Control

Goals, strategies and policies

Implementation of Strategy

Efficient and Effective performance of individual tasks

It is least systematic

It is most systematic

This Process we would be talking about in

this chapter

Nature of Strategic Planning

• Strategic planning is the first activity in the sequential process of management control process.

• Definition:– Strategic Planning is the process of deciding on the

programs that organization will undertake and on the approximate amount of resources that will be allocated to each program over the next several years.

• We will discuss– Relation to strategy formulation

– Evolution of strategic planning

– Benefits and Limitations of strategic planning

– Program structure & Organizational relationships

Relation to Strategy Formulation

• Distinction between Strategic Formulation and Strategic Planning– Strategy formulation is the process of deciding on

new strategies, whereas strategic planning is the process of deciding how to implement the strategies.

– Strategy formulation arrives at the goals of the organization and creates the main strategy whereas strategy planning develops programs to achieve the goals efficiently and effectively.

– Strategy formulation is unsystematic whereas strategic planning is systematic.

Relation to Strategy Formulation

• Segregate Strategy Formulation

– Generally, overlapping happens between strategy formulation and strategic planning.

– It is desirable to keep strategy formulation segregated due to foster

• Creativity

• Innovative thinking etc.

– On the other hand, strategy formulation needs to be dynamic because they should be changed in response to perceived opportunities and threats.

Evolution of Strategic Planning

• Strategic planning process was unsystematic and failed due to some reasons:

– Data detailed rather than appropriate

– Remained a form filling activity etc.

Benefits of Strategic Planning

A formal strategic planning process can give to the organization:

• Framework for developing the annual budget

– See next slide

• Management development tool

– Excellent management education and training tool.

• Mechanism to force managers to think long term

• Means of aligning managers with the long-term strategies of the company

– Discussions clarify corporate strategies in the minds and align managers with it.

Strategic Planning – Framework for Budget

Strategic Option A

Strategic Option B

Strategic Option C

Strategic Option D

Strategic Option C

Strategic Option B

Strategic Option A

Strategic Option D

Budgeting

Strategic Planning

Strategic A

Strategic C

Budgeting

• Considers too many strategic issues in the budgetary stage leading to – Information overload– Inadequate consideration of some alternatives or neglect some choices

• Strategic planning on the other hand, facilitate optimal resource allocation decisions in support of key strategic options

• Strategic planning narrows the range of options to assist planners in better resource allocation decisions

Limitations of Strategic Planning

• Planning can end up becoming a form filling, bureaucratic exercise, devoid of strategic thinking.

• An organization may create a large strategic planning department and delegate the preparation of the strategic plan that staff department.

• Strategic planning is time consuming and expensive.

Formal strategic planning fits most where --

• Convinced Top Management

• Large Organization• In small organizations, informal understanding of future

direction is sufficient.

• Future Uncertainty

– Stable organization with certain future does not require strategic planning.

– Should be able to make reliable estimates of future.

Organizational Relationships

• Strategic planning process clears communication between the top management and the business unit managers and have mutually agreed upon objectives and plans

• Top management style dominates every strategy.

– CEO

Analyzing Proposed New Programs

• Proposals for new programs are either – Reactive – reaction to perceived threat of competitors etc.

– Proactive – initiative to capitalize on opportunities.

• A highly structured, formal system may create the wrong atmosphere for this purpose. The system should be flexible enough and receptive enough so that good new ideas do not get killed off before they come to the attention of the proper decision maker.

• Go step by step – Means don’t invest money before testing or making

reasonable surety of success.

Capital Investment Analysis

• Techniques used for analyzing capital investment proposals generally use

– Net present value

– Internal rate of return

• All projects cannot be analyzed using these techniques

– Reasons• Highly obvious about viability.

• Highly uncertain

• Objective other than profitability like improve employee morale

• Legal requirements

Capital Investment Analysis conti…..

• The management control systems should provide an orderly way of deciding on proposals that cannot be analyzed by quantitative techniques. Systems that attempt to rank non quantifiable projects in order of profitability won’t work; many projects do not fit into a mechanical ranking scheme.

Capital Investment Analysis conti…..

• Some considerations that are useful in implementing capital expenditure evaluation systems.– Rules

• Maximum payback period – 2 years (example)• Specify minimum required rate of return • Different rates for different level of risks

– Avoiding manipulation • Manipulations means making jugglery with numbers to show viability of

project• It is very difficult to detect manipulations • Reputation of a project maker can help in judging. One can believe on

reputation.

– Models • Risk analysis• Sensitivity analysis• Simulation• Scenario planning• Game theory • Option pricing models

Organization for analysis

• A team may evaluate extremely large and important proposals.

• Decision to proceed may require a succession of development and testing hurdles be crossed before full implementation.

• Expert systems uses computer software in the analysis of proposed programs

Analyzing Ongoing Programs

• In addition to developing new programs, many companies have systematic ways of analyzing ongoing programs. Techniques utilized are:

– Value chain analysis

– Activity based costing

Value Chain Analysis

Value Chain Analysis

• From the strategic planning perspective, the value chain concept highlights three potentially useful areas:

– Linkages with suppliers.

– Linkages with customers.

– Process linkages within the value chain of the firm.

Value Chain Analysis

• Linkages with Suppliers

– Read the example

[Supplier’s suppliers Suppliers Firm]

• Linkages with customers

– Read the Example

[Firm Customers Customer’s Customers]

• Process Linkages with the value chain of the firm.

– Read the example

Value Chain Analysis

• A firm should also work towards improving the efficiency of every activity within the chain through a better understanding of the drivers that regulate costs and value for each activity. – Efficiency of inward portion [before production]

• Reducing no. of vendors• Computer system in place• Limiting deliveries to just in time• Holding vendors responsible quality

– Production portion• Increase automation• Rearrange machines into cells

– Outward portion• Electronic order placing• Appropriate placing of warehouse• Changing channel of distributions• Improving warehouse operations etc.

• These efficiency oriented initiatives usually involve trade-offs.

– Ex – direct orders from customer computers may speed delivery and reduce paper work but it leads to an increase in order-filling costs because of the small quantities ordered.

• Thus, it is important that all related parts of the value chain be analyzed together; otherwise; improvements in one link may be offset by additional costs in another.

Activity Based Costing

• Activity Based Costing (ABC) is an accounting technique thatallows an organization to determine the actual cost associatedwith each product and service produced by the organization.

• It is developed to provide more-accurate ways of assigning thecosts of indirect and support resources to activities, businessprocesses, products, services, and customers.

• ABC systems recognize that many organizational resources arerequired not for physical production of units of product but toprovide a broad array of support activities that enable avariety of products and services to be produced for a diversegroup of customers.

• While traditional costing arbitrarily allocates overhead costs,ABC traces overhead costs by looking at the activities thateach product and service calls upon. With ABC the productsconsume the activities. It is the activities that cost money.

What's what in ABC?

• Activity - the work that is done. • Resource – it is what the activity uses to do the work e.g. people, equipment, and

services. Resources cost money. (The cost of the activity depends on the quantity of resources used to accomplish the

activity.)

• The cost driver for an activity is the factor that influences the amount of the resources that will be consumed by this activity. – Example: the activity is delivering goods. The costs of this activity include the truck

drivers' wages, fuel, depreciation of the truck, insurance, etc. The quantities of the resources that will be consumed by this activity are influenced by the number of deliveries made per year. Hence the cost driver could be the number of deliveries. A cost driver is designed to allocate the delivery activity cost pool to the cost objects.

• The activity driver measures how much of the activity is used by the cost object. – Example: Product A is delivered once a month, whereas product B is delivered once a

week. Products A and B require a different number of deliveries, hence the cost of the delivery activity should be assigned to each product on the basis of the number of deliveries each uses.

• The cost object is whatever it is you wish to cost. It could be a product, service, process, job or customer.

Salaries 313,000

Depreciation 155,000

Electricity 132,000

Supplies 25,000

Travel 100,000

Total 725,000

Accounting RecordsActivities Salaries DepreciationElectricity Supplies Travel Total

Business Development 20,000 25000 5000 5000 55,000

Maintianing Present Business 80,000 60000 50000 5000 10000 205,000

Purhcasing Material 125,000 50000 20000 20000 60000 275,000

Set up Machines 25,000 10000 2000 37,000

Running Machines 50,000 10000 50000 110,000

Resolve Quality Problems 13,000 5000 25000 43,000

Total 313,000 155000 132000 25000 100000 725,000

ABC Records

Mapping

Strategic Planning Process

The process of strategic planning involves following steps:

• Reviewing and updating the strategic plan from last year

• Deciding on assumptions and guidelines– Changes in economic and market conditions are

reexamined to incorporate necessary changes with latest information.

• First iteration of the new strategic plan

• Analysis

• Second iteration of the new strategic plan

• Review and approval

Thank You