Adaptive Controls

8/4/2019 Adaptive Controls

1/41

ADAPTIVE CONTROLSCONTINGENCY APPROACH

STRATEGY & CONTROL

SYSTEMSCOMPETITIVE ADVANTAGEREFERENCES: ICMR (2003) CHAPTER 5, 6; G&A CHAPTER 3

Ananya Rajender, Yesha Upadhayay,

SD Ram, Arijiya Ray, Shweta

Set D


2/41

Adaptive Controls

The culture of an organization should be flexible

enough to permit changes


3/41

Features of an Adaptive Organization

More implicit Control Mechanism

Employees internalize it through:

Training programs

Extensive acculturation

Socialization

High level of awareness, skill and integrity within the

work group


4/41

The Formal Side

Structures that can be easily formed and dissolved

Use of ad-hoc teams, projects and world wide

purchasing

Processes should focus on organizations vision,

strategy, information flows, and other formal

procedures

Motivating reward system


5/41

Divisional Autonomy

Organizations today require flexibility, innovation

and creativity

This makes levels of autonomy a crucial decision

Management must design a tool to help it gain

congruence between levels of autonomy and its

extent (i.e. degree of decentralization of decision

making)


6/41

Determinants of Levels of Autonomy

1. Management Style and Processes

2. Responsibility Structure

3. Reward Systems


7/41

Management Style and Processes

The level of centralization required to run a business

The level of involvement of corporate managers in

business

Interaction of corporate managers with other managers

Level of trust and confidence of the manager in the

ability of his subordinates


8/41

Responsibility Structure

1. It consists of Responsibility Centers and relatedperformance measurement systems

2. It includes an accounting system that helps

managers to record the plans and performancesof the center

3. The measurement of performance is done throughcost, profit, revenue, investment and quality goals

4. It can be considered the second line of influencethat the top management has over profit centermanagers


9/41

Methods of Measuring Performance

of a Responsibility Structure

a. The Efficiency Measure: i.e. in terms of inputs

received over specified period of time for a given

level of output

b. The Process Measure: pertains to production

process

c. The Effectiveness Measure: gauges output in terms

of goals and objectives


10/41

ROI as a Measure of Responsibility

Structure

Elements such as cost, quality, revenue and

investment are assigned to a responsibility center

and are hence used to calculate ROI

The contribution of each center to ROI depends on

allocation of resources to center manager

To calculate ROI, it is important to define the

revenue, expense and investment allocated


11/41

Reward Systems

1. It is determined on the basis of the performance

of a particular center

2. The amount and method of allocating bonuses

depends upon the managers autonomy

3. Rewards can be tangible and intangible

4. These are the third line of influence that top

management has over profit center manager


12/41

Inter Profit Center Relations

It is important to integrate the activities of different

responsibility centers

One major concern is determination of prices for

goods and services (transfer pricing) that are

transferred between divisions

One solution to transfer pricing problem is to stop

business transactions between divisions but thisforgoes the benefits of economies of scale


13/41

Setting Transfer Price

Transfer price is defined as the value of transfer of

services between two or more profit centers

It enables management to enjoy benefits of

centralization and decentralization

The process of setting Transfer Price is governed by

two criteria

Goal congruence Fairness


14/41

Goal Congruence: i.e. if the buying and sellingdivisions make decisions regarding price and quantityof transfers, which would have been the same even if

made by central managementFairness: i.e. profit center gives divisional managers therequired autonomy to pursue their objectives

A transfer pricing system is said to be efficient if it

encourages managers to pursue decentralization ofautonomy while not forgoing the benefits ofcentralization

It should allow the divisional managers to achieve thegoals while maintaining a congruence withorganizational goals


15/41

Approaches to Management ControlSystems


16/41

Contingency Approach to Control

Universalistic approach argues that there is an optical schemefor control design which is applicable to all settings and firms.

Classical approach talks about the scientific managementapproach that states the division of labor based onspecialization

and thedelegation of authority

andhierarchy

system and their roles.

Contingency theory is similar to classical theory which is alsobased on scientific management approach.

This theory states that appropriateness of different controlsystems depends on the business setting.

This theory says that the organization IMPORTS energy andresources from the environment and CONVERTS them into goods,services and by-products.

Several factors which have encouraged the formation ofcontingency theory , described as below:


17/41

What is the need for the Contingency Approach?/

Factors for the formation of contingency approach

1) Technology:

Influences the design of control systems

Enables the CHANGE in the organization

Refashion the corporate policies rapidly

Analysis of incentive plans

Development of new incentive plans

Quick implementation of those plans

Collects data for strategic and operational decision

making

Helps finding specific problems in the administration


18/41

2) Organizational Structure:

According to theory , the organization structure should be

such that can cope with high degree of uncertainty .

The ORGANIC organizational structure adapts easily to

unstable conditions in a rapidly changing environment.

The management control systems for organic

organizations is complex because of the expansion and

growth in business.

The contingency approach helps in designing the control

system that meets the demand of complex

organizational structure.


19/41

3) Environment:

Management controls are greatly influenced by the type of

competition faced by firms.

Contingency approach helps to develop a highly sophisticated controlsystem for competition faced by the firm.

It also expands the scope of strategy.

Emphasizes the fit between the external factors and internal

resources of the company.

Analyzes the organizational structure, culture and processes so as to

adopt technical and structural changes.

Fisher`s approaches focus on the unique characteristics of

management control systems as well as the changing environment.


20/41

Fishers says that the contingency theory enabled researchers

to develop general suggestions about control systems

relative to business and organizational settings.

He identified the different five contingent control variables:

1) Technology & interdependence

2) Industry & firm

3) Competitive strategy4) Mission and

5) Observability factors/ Vision


21/41

They can be either external or internal and can affectoutcomes, performances, resource allocation anddistribution.

He also suggested potential research areas in

contingency control which are casual relationships ofmultiple variables and human resource policies andcultural systems.

Some non-financial factors such as cycle time, leadtime, frequency of orders and productionperformance factors are also included.

Financial factors includes budgeting and standardcost systems.


22/41

Strategy and Control Systems

An organization can gain competitive advantage by integrating the

usually separate functions of strategy and control.

Management control systems are the tools which help in the effective

implementation of strategy.

Two levels of strategy: 1) Corporate strategy 2) Business Unit

strategy

For Corporate strategy, there is a suitability criteria and for Business

Unit strategy, there is mission and purpose of each unit.


23/41

What is Corporate Strategy?

Corporate Strategy relates to firm as a whole.

In corporate strategy, control refers to the styles or

behaviors by which the corporate executives influence the

strategic direction as well as the objectives of the firm.

Strategy and controls should be integratedso as to keep

employee`s behavior in congruence with managerial

goals. The organization should be well-alignedand it refers to its

hierarchies and reporting patterns.

Planning and control requirements should be designed

under a corporate strategy.


24/41

Executive managers should have enough knowledge about

various departments and processes and they should make a plan

to implement the strategies into their action.

There are three types of companies according to the corporatestrategy, which are mentioned below.

1) Single business firm: The firm focuses on the single business.

E.g. DELL COMPUTERS

2. Relateddiversification firm: The firm is diversifiedinto

businesses that are related to one another and have common

set of core competences. E.g. LG ELECTRONICS


25/41

3) Unrelated Diversification firm: The firm operates indifferent areas of businesses which are unrelatedtoeach other. E.g. HINDUSTAN UNILIVER LTD.

Single business and Related diversification firm should

have good communication channels so as to allowinterdependence among the different units.

In case of unrelated diversified firm, the requirements ofthe knowledge management and expertise of theemployees are more.

As a firm becomes more diversified, control systemsshould be altered to foster better co-operation amongdiverse units and to encourage their entrepreneurialspirits unlike undiversified firms.


26/41

Designing Different Corporate Strategies

1) Strategic planning:

Conglomerate business requires vertical plans. E. g. Differen

Units prepare the plans which are reviewed by senior

management.

Diversified firms need horizontal plan that involves the

preparation plan on behalf of a group or unit by one

executive with inputs from different units. These plan

helps getting a feedback as its generated in the whole

firm.


27/41

2) Incentives and Compensation:

In single business firms, compensation is according

to the performance of the whole firm.

In business unit firms, compensation is according to

the performance of the unit andnot the whole firm.

Linking performance with the whole firm,

increases team work and interdepen

dencies.


28/41

Segmented business units

Individual strategy Aspects: Mission & Competitive advantages

MISSION A broad organizational goal

Trade-off b/n short term & long term goals

Business unit strategy


29/41

Factors of planning decisions:

Internal & external factors

Competitive variation of ability

Attractiveness of industry

Two planning approaches:

Two by two growth share matrix(BGC)

Three by three industry attractiveness-business strenght

matrix(GEC)


30/41

Single Business Related

Diversified

Unrelated Diversif

Programing Verticsl/Horizontal ---------------> Vertical only

Budgeting --------------->

Relative control of business unit

manager over budget formulation

Low ---------------> High

Importance attached to meeting

the budget

Low ---------------> High

Tranfer pricing

--------------->

Imprtance to transfer pricing High ---------------> Low

Sourcing flexibility Constrained ---------------> Arm`s length mark

pricing

Incentive compensation --------------->

Bonus criteria Finacial & non-financial

critetria

---------------> Primarily financial

criteria

Bonus determination approach Primarily subjective ---------------> Primarily formulabased


31/41

Action of organization

Build

Hold

Harvest Divest

Form and structure of control

Strategic planning process

Budgeting Incentive compensation system


32/41

Strategy level Key strategic issues Generic Strategy

optins

Primary organisation

leve;s involved

Corparate Level Are we in the right mix of

business ?

Single business related

diversification

unrelated

diversification

Corporate office

What set of businessindustries or industries

should we be in ?

Business unit level What should be mission of

business unit?

Build,Hold,Harvest,Dive

st

Corporate office and

general manager


33/41

COMPETITIVE ADVANTAGE

Competitive advantage is defined as the strategic advantage

one business entity has over its rival entities within its

competitive industry. Achieving competitive advantage

strengthens and positions a business better within the business

environment.

In order to accomplish its mission, every business unit should

develop a competitive advantage. In order to identify its

competitive advantage, a business unit should analyze the

competitive structure of the industry in which it plans tooperate.


34/41

Porters Five Forces Model analyzes the competitive

structure on the basis of the following factors:


35/41

Alternative generic strategies may be developed

in terms of:

Low cost-primary focus is to achieve lowcost relative to competitors.

Differentiation- the goal is to differentiate the

product with that of competitors product.

Focus- it helps the unit to achieve core

competency by narrowing its market segment.


36/41

The controller is a person who is responsible for designing and

operating the management control system.

In many organisations, title of this person is ChiefFinancial Officer.

The controller usually performs the following functions:

Designing and operating information and control systems.

Preparing financial statements and financial reports for share holdersand other external parties .

Functions of the Controller


37/41

Preparing and analyzing performance reports ,interpreting these

reports for managers, and analyzing program and budget proposals

from various segments of the company and consolidating them

into an overall annual budget .

Supervising internal audit and accounting control procedures to

ensure the validity of information, establishing adequate

safeguards against theft and fraud ,and performing operational

audits .

Developing personnel in the controller organisation and

participating in the education of management personnel in matters

relating to the controller function.


38/41

The controllership function is a staff function .

The controller is responsible for the design and operation of the systems

which collects and report information , the use of this information is the

responsibility of line management .

The controller is responsible for developing and analyzing control

measurement and for recommending actions to management .

Other possible charges which includes monitoring adherence to the

spending limitations laid down by the chief executive, controlling the

integrity of the accounting system, and safeguarding company assets

from theft and fraud.

RELATION TO LINE ORGANISATION


39/41

Business unit controllers inescapably have divided loyalty.

On the one hand,they owe some allegiance to the corporate controller,

who is presumably responsible for the overall operation of the control

system .

On the other hand they owe allegiance to the managers of their own

units ,for whom they provide staff assistance .

In some companies, the business unit controller reports to the businessunit manager , and has what is called a dotted line relationship with the

corporate controller. Here, the business unit general manager is the

controllers immediate boss, and has ultimate authority in the hiring,

training, transferal, compensation, promotion, and firing of controllers

within that business unit.

THE BUSINESS UNIT CONTROLLER


40/41

The controllers also play an important role in the preparation of

strategic plans and budgets .

In other companies, business unit controllers report directly to the

corporate controller that is, the corporate controller is their boss,

which is indicated by a solid line on the organization chart.

There are problems with each of these relationships, regardless of

the reporting relationships, it is expected that controller will notparticipate in the transmission of misleading information or in the

concealment of unfavorable information.


41/41

ThankYou!!

Adaptive Controls

Documents

Transcript of Adaptive Controls