Chapter 10

Summing Up

Corporate Level StrategyImplication of Corporate Level Strategy on Organizational StructureImplication of Corporate Strategy for Management ControlBusiness Unit StrategyImplication of Business Unit Strategy for Management ControlTop Management Style and Its Implication on MCS

Corporate Level Strategy

Strategy may be define as “ Where the organization wants to go to fulfill its purpose and achieve its mission, it provides the framework for guiding choices which determine the organization nature and direction and direction and these choices related to the organization’s products or services, market, key capabilities, growth, return on capital, and allocation of resources.”Corporate strategy is defined as the determination of the business in which firm will compete and the allocation of resources among business.Corporate strategy involves the formulation of strategy for the firm as a whole. It is concerned with being in the right businesses. Thus, it can be said that corporate strategy has more to do with where to compete.Firm can be grouped into three broad category based on their corporate level strategy:

1. Single Industry Firms: A firm which operates in one line of business is known as a single industry firm e.g. Gujarat Ambuja Cement (Cement Business), Exxon Mobil (Petroleum Industry).

2. Related Diversified Firms: A firm that operates in a number of industries and there exists a common set of core competence which benefits business units e.g Hindustan Unilever Limited, P & G Limited etc.

3. Unrelated Diversified Firms: A firm that operates in business that are not related to one another. These are also known as conglomerates eg. Grasim Ltd., L & T Ltd., etc.

These 3 Strategies at corporate level are shown below

• Extent of Diversification: Relates to the number of industries in which the company operates.

• Degree of relatedness: refers to the nature of linkage across the multiple business units.

Corporate Level Strategy and its Implication on Organizational Structure

Parameters Single Industry Related Diversified Unrelated Diversified

Organizational Structure

Functional Business Unit Holding Company

Industry Familiarity High Medium LowFunctional Background

Relevant Experince Medium Mainly Finance

Decision Making Authority

More Centralized Medium Decentralized

Size of corporate Staff High Medium LowInternal Promotion High Medium LowUse of lateral Transfer

High Medium Low

Corporate Culture Strong Medium LowIn case of single industry, the company tends to be functionally organized. Top managers are responsible for developing the company’s overall strategy to compete in its chosen industry as well as its functional strategies in such areas as research and development, manufacturing and marketing. However, all single industry firms are not functionally organized. For example, holes, super market etc. are single industry firms but organized as business units. They have both production and marketing functions at different locations.

On the other hand, every unrelated diversified company is organized into relatively autonomous business units. Due to large and diverse set of business top managers in such firm tend to focus on portfolio management. They delegate the work of development of new product, marketing strategy to the business unit managers. Therefore, at

At the single industry end of corporate strategy, top managers are likely to be extremely familiar with the industry in which the firm competes. Many of them tend to have expertise in research and development, manufacturing and marketing. On the other, at the unrelated diversified end, top managers tend to be expert in finance.

If a firm moves form single industry to the unrelated diversified and, the autonomy of the business unit manager tends to increase. The top managers of unrelated diversified firms may

Deg

ree

of

Rela

tedn

ess

Extent of Diversification

Single Industry

Related Diversification

Unrelated Diversification

not have the knowledge and expertise to make strategic and operating decision for a group of desperate business unit. Moreover, there is very little interdependence across business units in conglomerates. However, there may be great deal of interdependence among business units in single industry firm, related diversified firms. Greater interdependence calls for more intervention by top managers.

The size of a conglomerate corporate staff tends to be small as compared to single industry firm of small size. Corporate level managers are less involved in business unit operations. Promoting from within or by laterally transferring executives from one business unit to another is less likely to benefit conglomerate. A conglomerate may not have the single, strong corporate culture like single industry firms.

Corporate Level Strategy and its Implication on Management Control

(A) Strategic Planning: Conglomerates tend to use strategic planning systems due to low level of interdependence. The business units prepare strategic plans and submit them to top management for review and approval. Strategic planning system for related diversified and single industry firms tends to be both vertical and horizontals due to high level interdependence.

(B) Budgeting: In a single Industry firm, the CEO may know the firm’ s operations and the corporate and business unit managers will have more frequent contacts. The CEO of single industry firms are able to control the operation of their subordinates through informal systems, and personal interactions. This help to depend less on budgeting system for control. On the other hand, in case of a conglomerate, it is not possible for CEO to depend on informal system and interpersonal contacts. However mush of the communication and control has to be achieved through the formal budgeting system.

(C) Transfer Pricing: Transfer of goods within business units are common in case of single industry and related diversified firms. The transfer pricing policy in a conglomerate has to give certain flexibility to business unit at arm’s length market prices. In case of single industry and related diversified firms synergies may be important and business units can be given freedom to make sourcing decision.

(D) Incentive Compensation:

(i) Use of formula: Multi industry firm’s compensation to business units managers may be based on certain formulas while in single industry firm it may be more flexible depending on the overall performance of the company.

(ii) Profitability Measures: In multi industry firms, incentive bonus of business units managers is dependent more on the profitability of that company, but in single industry firms it is the reverse.

Parameters Single Industry Related Diversified

Unrelated Diversified

(1) Strategic Planning Vertical & Horizontal

Combined Vertical Only

(2) Budgeting(a) Relative control of

business unit managers over Budget formulation

(b) Budget Importance

Low

Low

Medium

Medium

High

High

(3) Transfer Pricing(a)Importance of TP(b)Sourcing Flexibility

HighConstrained

MediumMixed

LowArms Length Pricing

(4) Incentive Compensation

(a)Bonus Criteria(b)Bonus

Determination Approach

(c) Bonus Basic

Fin. & Non Fin. CriteriaSubjective

Based on Business Unit & Companies performance

CombinedCombined

Combined

Primarily Fin. CriteriaFormula Based

Business Unit Performance

Business Unit Strategy

Business unit strategies deal with how to create and maintain competitive advantage in each of the industries in which a company has chosen to participate. The strategy of business unit depends on two interrelated aspect: 1) its mission (what are its objective) and 2) its competitive advantage (“how should the business unit compete in its industry to accomplish its mission”).

Business unit missionIn a diversified firm one of the important task of senior management is resource deployment. Make decision regarding the use of the cash generated from some business unit. Several planning model have been developed to help corporate level manager of diversified firms to effectively allocate resource. These models suggest that a firm has business unit in several categories, identifies by their mission the appropriate strategies for each category differ. Together the several unit make up a portfolio, the component of which differ as to their risk/ reward characteristic just as the component of investment portfolio differ. Both corporate office and business unit general manager are involved in identified the mission of individual business unit.Of the many planning model two of the most widely used are Boston consulting group two by two growth share matrix and general electric company / mc Kinsey & company three-by three industry attractiveness –business strength matrix while these model differ in the methodology they use to develop the most appropriate mission for the various business unit, they have same set of mission from which to choose: Build, hold, harvest, & divest.

BuildThis mission implies an objective of increased market share, even at the expense of short term earning and cash flow.

Hold This strategic mission is geared to protection of the business unit market share and competitive position. (IBM Computer)

HarvestThis mission has the objective of maximizing short term earning and cash flow , even at the expense of market share.

DivestThis mission indicates a decision to withdraw from the business either through a process of slow liquidation or outright sale.

The mission for existing business units could be either build , hold, or harvest .These mission constitute a constitute a continuum with “pure build” at one end and “pure harvest” at the other end. To implement the strategy effectively there should be congruence between the mission chosen and the type of control used. we develop the control mission “fit” using the following line of reasoning”

The mission of the business unit influences the uncertainty that general managers face and the short term versus long term trade off they make.

Management control system can be systematically varied to help motivate the manager to cope effectively with uncertainty and make appropriate short term versus long –term tradeoffs.

Thus different mission often require systematically different management control system.

Business Unit Strategy and its Implication for Management Control

(A) Strategic planningA strategy describes the general direction in which an organization plans to move to attain its goals while designing a strategic planning process, an organization has to consider several issues. The response of the business unit to these issues tends to depend upon the mission it is pursuing. The implication for strategic planning process for different strategic mission is shown in the chart:

Parameters Build Hold HarvestImportance of Strategic Planning

Relatedly High Medium Relatively Low

Formalization of capital expenditure decision

Less Formal Medium More Formal

Capital Expenditure Evaluation criteria

Emphasis on non-financial Data

Both Financial and Non-financial Data

Financial Data

Discount Rates Relatively Low Moderate Relatively HighCapital investment analysis

Subjective and qualitative

Qualitative and Quantitative

Objective and Quantitative

(B) BudgetingBudgeting involves analyzing the firms financial flows, costs, revenue etc forecasting the outcome of different investment, financing, dividend and other decision. Budgeting is the process of preparation, implementation and operation of budgets. It is the formulation of plan for given future period in numerical terms. The implication for designing budgeting system to support different missions is shown in the chart:

Parameters Build Hold HarvestRole of budget Mere a short term

planning Mere a control tool

Business unit Relatively High Relatively Low

managers influence in preparing budgetRevision of the budget during the year

Relatively easy Relatively Difficult

Frequency of informal reporting and contracts with supervisors

More frequent on policy issues- less frequent on operating issues

Less frequent on policy issues- More frequent on operating issues

Frequency of feedback from supervisor on actual performance against budget

Less Often relatively Low

Control limit used on periodic evaluation against the budget

Relatively high Relatively Low

Importance attached to meeting the budget

Relatively low Relatively High

Output versus behavioral control

Behavioral Control Output Control

Top Management Style and Implication on Management Control

The management control function is an organisation is influenced by the style of senior management. The style of the chief executive officer affects the management control process in the entire organization. For example Narayan Murthy of Infosys, Mukesh Ambani Of Reliance, Ratan Tata of Tatas etc.

Similarly, the style of the business unit manager affects the unit’s management control process in their functional areas. If feasible, designers should consider management style in designing and operating control system.(If chief executive offers actively participate in system design, as should be the case, the system will reflect their preferences.)

(A)Differences in Management Styles“Managers manage differently”. Some rely heavily on reports and certain formal documents; others prefer conversations and informal contacts. Some think in concrete terms; others think abstractly. Some are analytical; others use trial and error. Some are risk takers; others are risk averse. Some are process oriented; others are result oriented. Some are people oriented; others are task oriented. Some are friendly; others are aloof. Some are long-term oriented; others are short-term oriented. Some dominate decision making (“Theory x”), others encourage organisation participation in decision making (“Theory Y”). Some emphasize monetary rewards; others emphasize a broader set of rewards.

(B) Different Management Styles are as follows:

1. Autocratic: An autocratic manager makes all the decisions & keeps the information as a decision maker within the senior management. Objectives & tasks are well set & workers are expected to do exactly as required. The communication of objectives is mainly downwards from the leader to the worker.

2. Democratic: Here the manager allows the employees to take part in the decision making & everything is approved by majority. The advantage is that it is useful when

complex decisions are to be made requiring the help of specialists but the disadvantage is that it take a long time & the collective decision may not be the best.

3. Laissez-faire: in this leadership style the staff managers are transformed into owner of their own areas of business & it brings in highly professional & creative group of employees. The advantage is that the focuse is on the staff & they have the freedom to work within fixed parameters but the disadvantage is that the top management is cut off from all decision making.

(C) Factors which influence top management style:

(1)Percentage of ownership in the company: If the company has more of equity participation rather than debt then it will tend to have a more paternalistic approach since there is no pressure from outsiders. Also since the company is managed in a family business way they tend to be very supportive and concerned about the Junior Management & the workers e.g. Birla Group

(2)Debt owned companies: Since most of the funds in such companies are from the outside there is a lot of pressure for top management to show profit hence they will adopt an autocratic style where top management issues orders to the lower levels. E.g. Reliance Group

(3)Self-esteem of the CEO: If the CEO has high degree of self-esteem and self-respect then he will be confident of his business and will adopt the democratic style of leadership E.g. Infosys, Microsoft.

(4)Cooperatives: In companies which require lot of experts & where there is considerable involvement of the Bottom line staff to the profits of the company, their CEO may adopt a Laissez Faire Approach. E.g. Amul, Toyota.

(D) Implications for Management Control

The various dimensions of management style significantly influence the operation of the control systems. Even if the same reports with the same set of data go with the same frequency to the CEO, two CEOs with different styles would use these reports very differently to manage the business units. The dramatic shifts in the control process within General Electric when Jack Welch succeeded Reginald Jones as the CEO.

Style affects the management control process-how the CEO prefers to use the information, conducts performance review meetings, and so on-which in turn affects how the control system actually operates, even if the formal structure does not change under a new CEO. In fact, when CEOs change, subordinates typically infer what the new CEO really wants based on how he/she interacts during the management control process. (e.g., whether performance reports or speeches and directives take precedence).

Personal versus Impersonal Controls: Presence of personal versus impersonal control in organisations is an aspect of managerial style. Managers differ on how much importance they attach to formal budgets and reports as well as informal conversations and other personal contacts. Some managers are “numbers oriented”; they want a large flow of quantitative information, and they spend much time analyzing this information and deriving tentative conclusions from it. Other managers are “people oriented”; they look at a few numbers, but they usually arrive at their conclusions by talking with people, judging the relevance and importance of what they learn partly on their appraisal of the other person. They visit various locations and spend time talking with both supervisors and staff to get a sense of how well things are going.

Managers’ attitudes towards formal reports affect the amount of detail they want, the frequency of these reports, and even their preference for graphs rather than tables of numbers, and whether they want numerical reports supplemented with written comments. Designers of management control system need to identify these preferences and accommodate them.

Tight versus Loose Controls: A manager’s style affects the degree of tight versus loose control in any situation. The manager of a routine production responsibility center can be controlled relatively tightly or loosely, and the actual control reflects the style of the manager’s superior. Thus, the degree of tightness or looseness often is not revealed by the content of the forms or aspects of the formal control documents, rules, or procedures. It is a factor of how these formal devices are used.

The degree of looseness tends to increase at successively higher levels in the organisation hierarchy: higher level managers typically tend to pay less attention to details and more to overall results (the bottom line, rather than the details of how the results are obtained). However, this generalization might not apply if a given CEO has a different style.

Example. The classical illustration of this point is IIT under Harold Geneen. One could argue that IIT, being a conglomerate, should be managed based on monitoring the business unit bottom line and not through a details evaluation of every aspect of the business unit operations. This is so since, in a conglomerate, the CEO typically has “capacity limitations” in understanding the nuts and bolts of various business units operations. In such context, it was Harold Geneen’s personal style that explains the detailed evaluations hr made of the business units’ managers.

When Rand Araskog succeeded Harold Geneen at IIT, he altered the detailed and tight control system since, among other things; Araskog’s personal style was not oriented toward exercising tight controls.The style of the CEO has a profound impact on management control. If a new senior management with a different style takes over, the system tends to change correspondingly. It might happen that the manager’s style is not a good fit with the organization’s management control requirements. If the manager recognizes the incongruity and adapts his/her style accordingly, the problem disappears. If, however, the manager is unwilling or unable to change, the organisation will experience performance problems. The solution in this case might be to change the manager.