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Vision, mission, goals, objectives

and strategy typology
Key learning objectives
After reading tis capter yo! so!ld be able to"
# describe te concepts of $vision%, $vision statement%, $mission% and $mission
# e'plain te concept tat forms competitive strategy&
describe te similarities and differences bet(een $goals%, $strategic goals% and
describe strategic decisions&
# o!tline te types )or levels* of competitive strategy&
# o!tline +imons% strategy, ,iles and +no(%s strategy typology, Porter%s
competitive strategy and ,int-berg%s five Ps for strategy&
# describe te concepts tat form Porter%s str!ct!ral analysis of ind!stry&
# demonstrate an !nderstanding of te relaticn bet(een strategy and
environmental !ncertainty.
A2C 3niversity, a m!lti4camp!s, learning4centred, researc !niversity, (ill be
ac5no(ledged as an o!tstanding !niversity, (ic combines te best !niversity%
traditions and val!es (it te innovation necessary for s!ccess.
6dealiv positioned for te 27st cent!ry in teta,tcst gro(ing region in A!stralia,
te !niversity. (ill b!ild on its rep!tation for responding creatively to local,
national and global cange by embracing diversity and n!rt!ring
8ig!re 2.7 Vision statement of A2C 3niversity.
0!r vision
$To b!ild a long4term profitable f!t!re for Alpa 8ood Pac5aging%s employees and
sta5eolders by striving to be te 9Higest Val!e +!pplier9 of pac5aging sol!tions
to domestic and international mar5ets.%
8ig!re 2.2 Vision statement of Alpa Pac5aging.
:at is a mission statement;
An organisation%s mission statement portrays its long4term concrete ends to be
acieved. 6t reflects what te organisation is no( and te perceived needs of its
c!stomers or constit!ents. Every corporation and teir major b!siness !nits
ave eiter an e'plicit or implicit b!siness mission. Tis b!siness mission
enables today%s management to select strategies to accomplis organisational
objectives. Te mission statement provides a sort, (ritten description of te
organisation%s overall p!rpose. 0ne company defines its mission as $to develop
leading4edge b!sinesses across a myriad of total systems fronts, from ind!strial
a!tomation to aerospace to medical systems.% 8ig!re 2.< o!tlines te mission
statement of a m!ltinational cereal company, (ic is te (orld%s leading
prod!cer of ready4to4eat cereal and a leading prod!cer of grain4based
convenience foods, incl!ding pastries, fro-en (affles and cereal bars. 8ig!re 2.=
presents te mission statement of a local government (ater corporation in
A!stralia and 8ig!re
presents te mission statement of an A!stralian
:eelen and H!nger )7??@* ave classified an organisation%s mission
statement as $broad% or
$narro(%. A broad mission statement refers to te
organisation%s general statement"
$to serve te best interests of sareolders,
c!stomers and employees%, (ile a narro( mission statement describes te
organisation%s primary b!siness.
0!r mission
A2C is a global company committed to b!ilding long4term gro(t in vol!me and
profit, and to enancing its (orld(ide leadersip position by providing n!tritio!s
food prod!cts of4s!perior val!e.
8ig!re 2.7 cat vi a !i!irinational cereal company.
0!r mission
Alpa :ater e'ists to operate a s!ccessf!l commercial b!siness (ic s!pplies safe
(ater and removes se(age and storm (ater at an acceptable cost and in an
environmentally sensitive manner for te benefit of present and f!t!re Alpanians.
8ig!re 2.= ,ission statement of a local government (ater corporation.
0!r mission
6n te p!rs!it of e'cellence in teacing, researc and comm!nity service, A2C
3niversity is committed to"
bringing disciplines togeter
eA!ity and social j!stice
# lifelong learning
for te enricment of B!eensland, A!stralia and te international comm!nity.
8ig!re 2.>
,ission statement of A2C 3niversity.
0rganisational strategy
+trategy as been defined ),int-berg, 7?C@* as" $a pattern or stream of decisions
abo!t an organisation%s possible f!t!re domains%. +trategy is te process by
(ic organisational managers, !sing a time ori-on of tree to five years,
eval!ate e'ternal environmental opport!nities and also internal strengts and
reso!rces to decide on goals, as (ell as a set of action plans to accomplis tese
goals. Candler )7?D2, p.
7<* defines strategy as $te determination of basic
long4term goals and objectives of te enterprise and te adoption of co!rses of
action and te allocation of reso!rces necessary for carrying o!t tese goals.%
T!s strategy can be seen as an integrated set of actions aimed at sec!ring
a s!stainable competitive advantage. +trategy foc!ses te firm%s attention on
tose aspects of its prod!cts and services tat it m!st rely on to drive te firm
to(ards acievement of its goals. 6t can be seen ten tat, overall, strategy is te
process of b!ilding defences against competitive forces or te finding of
positions in te ind!stry (ere te forces are (ea5est. Terefore any sensible
! "!# F s!!id be designed to b!ild on te relative
advantages of te b!siness. 8ig!re 2.D ill!strates te competitive strategy of a Ge(
Healand plastic food pac5aging company.
0!r strategic priorities
# To provide e'cellence in c!stomer service and ongoing A!ality improti cment.
# To foc!s on te development of long4term partnersips (it company
c!stomers and s!ppliers.
# To strive to be proactive to(ards cons!mer needs, environmental and
comm!nity iss!es.
8ig!re 2.D Competitive strategy of Alpa Plastic 8ood Pac5aging Company.
/oalsIstrategic goals
/oals are specific concrete targets. Te term $goal% is often !sed to describe an
open4ended statement of (at one (ants to accomplis (it no A!antification
of (at is to be acieved and no time criteria for completion. A firm%s goal)s* is
a specific o!tcome tat it see5s to attain or maintain. /oals are cosen to
implement te firm%s strategy or to align te firm more closely (it its vision
and mission. 0ne e'ample of an organisational goal is to $increase profitability%.
An organisational goal does not specifically A!antify or state o( m!c to ma5e
te ne't year.
A firm (or5s bac5 from mission to goals. 6n commercial firms, (ere
financial objectives dominate, goals are in terms of ret!rn on investment )R06* or
ret!rn on eA!ity )R0E*, earnings per sare )EP+*, and so on.
:en an organisation%s goals are set for a longer term, say for a period of
bet(een tree and five years, tey are ten termed &t"at'(%$ ()a*&# 0ne e'ample
of strategic goals is tEiat of a m!ltinational cereal company"
P')-*'. retain top4A!ality people& provide training,
development and gro(t opport!nities& promote from (itin (enever
possible& recognise acievement and re(ard performance.

P")/ t a01 (")t2th# gro( and e'pand core b!siness& strengten global
leadersip& e'cel in te introd!ction of prod!cts tat meet cons!mer needs.
C)0&34'" &at%&/a$t%)0 a01 53a*%t6. strive for e'cellence, as
defined by
internal and e'ternal c!stomers& p!rs!e partnersips (it company
c!stomers, s!ppliers and company employees to acieve common goals.
I0t'("%t6 a01 'th%$&. engage in fair and onest b!siness practices&
so( respect for eac oter, company c!stomers, s!ppliers, sareolders
and comm!nities (itin (ic te company operates.
S)$%a* "'&-)0&%7%*%t6. prod!ce A!ality prod!cts and mar5et tem in a
responsible manner& enco!rage company people to participate in
comm!nity programmes and invest company reso!rces, !man and
financial, in organisations tat benefit te comm!nity4
A leading A!stralian commercial ban5 states its strategic goals as follo(s"
A set of b!siness goals !nderpins te acievement of te gro!p%s vision. Eac
operating division in t!rn as a series of strategies tat are consistent (it, and
directed at, te collective acievement of tose b!siness goals, (ic are"
attract more c!stomers and reven!e per c!stomer&
best val!e service tro!g innovation and on4line leadersip&
# best team&
# develop offsore opport!nities&
# global best4practice costs.
0bjectives are te f!t!re res!lts so!gt or te aims and e'pectations as to te
f!t!re state desired. 0bjectives are te end res!lts of an organisation%s pl anned
activity. 0bjectives are te desired targets (itin te scope of te vision to
realise te mission )Viljoen and Kann, 2JJJ*. 0bjectives state (at is to be
accomplised by (en, and so!ld be A!antified if possible ):eelen and
7??@*. An organisational goal is bro5en do(n into objectives
meas!rable accomplisments to be implemented (itin a specific period of
time. An objective for increased profitability migt be an increase of D per cent
(itin si' monts to one year.
At te corporate level objectives can be split into vision and mission
statements and a statement of goals, eac reflecting different levels of
abstraction and precision.
+trategic decisions
,int-berg, B!inn and Voyer )7??>, p. C* describe strategic decisions, as follo(s"
+trategic decisions are tose tat determine te overall direction of an enterprise
and its !ltimate viability in ligt of te predictable, te !npredictable, and te
!n5no(able canges tat may occ!r in its most important s!rro!nding
6n form!lating an organisation%s strategy, tree main types of strategic decisions are
:at b!siness (ill te organisation operate in;
Ho( so!ld te organisation compete in tat b!siness;
<. :at systems so!ld te organisation ave in place to s!pport its
competitive strategies;
Effective strategic decisions (itin an organisation"
# deal (it te organisation%s bo!ndaries&
# relate to te matcing of te organisation%s activities (it te opport!nities
in its s!bstantive environment&
reA!ire te matcing of an organisation%s activities (it its reso!rces&
# ave major reso!rce implications for organisations&
# are infl!enced by te val!es and e'pectations of tose (o determine te
organisation%s strategy&
# affect te organisation%s long4term direction.
Te primary stages of strategic decisions are as follo(s"
form!lating strategies of te b!siness&
comm!nicating tose t ro!go!t te organisation&
<. developing and Carr4v4inB o!t tactics to implement te strategy&
a. developing and 6mplementing management control systems to monitor te
s!ccess of te implemenrarcn steps, and ence te s!ccess in meeting te
strategic objectives"
Cost information plays a significant role at eac of tese stages. 6t is in tis area
tat strategic inanaoement acco!nting systems are important.
:at is a strategic b!siness !nit;
Tis boo5 defines a strategic b!siness !nit as follo(s"
A strategic b!siness !nit )+23* %& a0 )"(a0%&at%)0a* )-'"at%0( )" &3730%t
that ha& a 1%&t%0$t &'t )/-")13$t& )" &'"2%$'& &)*1 t) a
$3&t)4'"*(")3- )/ $3&t)4'"&, /a$%0( a w'**!1':0'1 &'t )/
$)4-'t%t)"&, a01 a 4%&&%)0 1%&t%0$t /")4 th)&' )/ th' )th'"
)-'"at%0( 30%t& %0 th' :"4#
According to 1ync and Cross )7??7*, +23s are separate b!sinesses in large,
!s!ally diversified companies, ave distinct b!siness concepts and missions,
ave teir o(n competitors 4 mainly e'ternal 4 and ma5e independent
management decisions )see also ,iles and +no(,
7?C@*. Gote tat +23s may
or may not be part of a larger corporation.
Types )or levels* of strategy
Typical b!siness firms !se tree types of strategy" corporate, competitive )or
b!siness* and f!nctional )or operational*"
C)"-)"at' &t"at'(6 describes o( a company determines (at b!siness it
(ants to be in. Corporate strategy deals (it tree 5ey iss!es" directional
strategy )gro(t, stability, or retrencment*& portfolio strategy )ind!stries
or mar5et for prod!cts*& and parenting strategy )systems of allocation of
reso!rces and coordinating activities among prod!ct lines of b!siness !nits.
An e'ample of a corporate strategy (o!ld be (eter a big m!ltinational
corporation, Coles ,yer, periodically considers (eter it so!ld contin!e
to operate in te disco!nt store mar5et )Kmart and Target* and te
departmental store ),yer and /race 2roters* and grocery b!siness )Coles
+!permar5et and 2i41o +!permar5et*.
C)4-'t%t%2' ()" 73&%0'&& 30%t; &t"at'(6 occ!rs at te b!siness !nit, division
prod!ct level, and it refers to o( an organisation competes (itin eac
type of activity and tries to acieve competitive advantage relative to its
competitors. Coles ,yer%s s!permar5ets maL% compete on te basis of lo(
price, (ile te ,yer departmental stores may foc!s on providing s!perior
A!ality prod!cts and c!stomer service.
<30$t%)0a* ()" )-'"at%)0a*; &t"at'(6 is concerned (it te firm%s
relating to its vario!s f!nction4M or operational activities s!c as
recr!itment, mar5eting, distrib!tion and advertising. Coles ,yer
+!permar5ets (o!ld periodically revie( its mar5eting and distrib!tion
f!nctions or sales strategy relative to its competitors s!c as :ool(ort.
Vario!s types of strategy typology
Te follo(ing sections foc!s !pon generic strategies identified by scolars.
Tese strategic alternatives are termed ('0'"%$ beca!se any type of b!siness !nit
can adopt tem, (eter it is a traditional man!fact!ring company, a
igtecnology firm or a service organisation.
S%4)0&' &t"at'(6 t6-)*)(6
imons )7??J* brea5s do(n te concept of a firm%s strategy into te follo(ing
fo!r distinct areas"
St"at'(6 a& -")$'&&# Tis strategy describes te managerial activity inerent
in saping e'pectations and goals and facilitating te (or5 of te
organisation in acieving tese goals.
St"at'(6 a& $)4-'t%t%2' -)&%t%)0# Tis refers to o( te firm competes in its
mar5ets, tat is te prod!ct and mar5et caracteristics cosen by te firm to
differentiate itself from its competitors and gain an advantage.
9# B3&%0'&& *'2'* &t"at'(6# Tis refers to o( a company competes in a
b!siness and positions itself among its competitors.
C)"-)"at' *'2'* &t"at'(6# Tis is concerned (it determining (at b!siness
or b!sinesses te organisation cooses to compete in and te most effective
(ay of allocating scarce reso!rces among b!siness !nits.
6n eac of te areas dc& r" e aE E e tere are $strategic !ncertainties%. +imons
)7??J, p. 7<D* arg!es tat.
Alto!g firms for et"a "" te same ind!stry face te same set of potential
!ncertainties canges No eminent reg!lation, intensify of competition.
advance of ne( tecnologies, nat!re of c!stomers and s!ppliers, prod!ct
lifecvcles and diversify in prod!ct lined, te strategy of te firm strongly infl!ences
(i!t !!ccrtairntics are cri!ca".
,anagers m!st ran5 information from most critical to least critical& tis allo(s
management to attend to strategic !ncertainties tat tey feel tey m!st
monitor to ens!re tat te goals of te firm are acieved )+imons, 7?@C, 7??J*.
M%*'& a01 S0)w'&#(+,?; &t"at'(6 t6-)*)(6
,iles and +no( )7?C@* s!ggest tat organisations conscio!sly develop an image to
demonstrate o( (y te organisation%s str!ct!re and processes reflect
decisions abo!t te mar5et and o( tese decisions $pave te (ay for f!t!re
development. Tis image development can be seen to be te organisation%s
attempt to adapt to its environment by follo(ing a cycle tat involves
decisionma5ing regarding te follo(ing tree potential problems"
E0'-"'0'3"%a* -")7*'4& involve deciding te strategic management of
its prod!ct mar5ets.
E0(%0''"%0(, -")7*'4& relate to creating a system for prod!cing
and distrib!ting te firm%s prod!cts.
A14%0%&t"at%2' -")7*'4& involve te $str!ct!re4processes and innovation%
areas of te firm.
,iles and +no( also believe tat organisations $enact in teir o(n environment% and
tat no t(o organisational strategies are te same, i.e. eac organisation as its o(n
set of prod!cts or services and ence decisions (ill be s!pported by an
organisation%s o(n tecnology, str!ct!re and processes. Kespite tis
individ!ality, ,iles and +no( ave identified patterns of beavio!r (itin
single ind!stries and ave developed fo!r arcetypes of firms, (ic follo(
partic!lar beavio!r types. Tese are disc!ssed in t!rn.

D'/'01'"!t6-' &t"at'(6# 0rganisations tat adopt a defender4type strategy

ave constricted prod!ct4mar5et areas and managers are generally
specialised in te prod!ct or service type tat te organisation prod!ces.
Kefenders ave a narro( prod!ct range, searc little for ne( prod!cts,
aggressively compete on price, A!ality and services, concentrate on prod!ct
improvement, and rarely ma5e major adj!stments to teir tecnology,
str!ct!re or metods of operations. Teir primary& attention is on te
efficiency of teir operations, empasising stability and earning te best
profit possible, given teir internal environment.
P")&-'$t)" t6-' &t"at'(6# Prospector4type organisations searc
for ne( mar5et opport!nities and reg!larly e'periment (it possible ne(
trends and innovations. Tey are $creators of cange% and as s!c generally
foc!s attention on prod!ct innovation and mar5et opport!nities,
empasising creativity over efficiency and maintaining fle'ibility.
A0a*6&'" )" 4%@'1 &t"at'(6# Analyser or mi'ed strategy firms are tose tat
operate in t(o types of prod!ct4mar5et domains. Te first is one tat is
relatively stable and te oter dynamic. Tis ten seems to incorporate
bot te $defender% and $prospector% type of organisation, in so m!c as te first
area concentrates on being efficient and te second area concentrates on
(atcing teir competitors closely so as to determine te possibility of
introd!cing ne( prod!cts or services as rapidly as possible.
R'a$t)" &t"at'(6# Reactor4type organisations appear to be inefficient in so
m!c as tey $ran5 belo(% te defender in teir attit!de regarding gro(t
and te intensity of te mar5et. ,iles and +no( s!ggest tat te reactor is
a resid!al strategy, arising (en one of te oter tree strategies is
improperly p!rs!ed& tey appear to be a(are of environmental !ncertainty,
b!t are !nable to respond effectively. Tis type of organisation, beca!se it
as no direct strategic direction, tends to ma5e no adj!stment !ntil
absol!tely necessary by being forced to do so by environmental press!res.
P)"t'"'& (+,?A; $)4-'t%t%2' &t"at'(6
,icael Porter )7?@J* believes tat tere are many strategic types, (ic vary
te specifics of te control systems employed. He proposes, o(ever, t(o
generic% b!siness !nit strategies for o!tperforming oter organisations in a
partic!lar ind!stry" *)w'" $)&t a01 1%B'"'0t%at%)0#
L)w'" $)&t ()" )2'"a** $)&t *'a1'"&h%-; &t"at'(6 is te organisation%s
ability to
prod!ce and mar5et a comparable prod!ct at a lo(er price tan its
competitors. 6t foc!ses on lo( cost, ig mar5et sare, standardised
prod!cts, economies of scale and tigt cost control. 8irms !sing lo(er cost
strategy prod!ce no4frills prod!cts ind!stry (ide. 0ne e'ample is tat of
8ran5lin +!perstores. Tey address a mass mar5et comprised of price4
sensitive c!stomers.
D%B'"'0t%at%)0 &t"at'(6 is te organisation%s ability to prod!ce and
!niA!e and s!perior A!a!iy prv!!cts. it 1vC16+(
brings brand A!ality, empasis on mar5eting and researc and as s!perior
after4sales &'rv%$'# E'amples incl!de 2,:, ,ercedes 2en- and Alfa
Romeo A!ality car prod!cers. Teir prices range from average to ig.
Porter f!rter proposes anoter strategic foc!s some organisations may ave.
Tis is /)$3& &t"at'(6, (ic concentrates on a defined b!yer gro!p, prod!ct
line or geograpic mar5et and A!ic5 response )or nice strategy*.
P)"t'"'& &t"3$t3"a* a0a*6&%& )/ %013&t"6'
,icael Porter identifies five basic competitive forces tat determine te
intensity of competition in an ind!stry" entry, treat of s!bstit!tion, bargaining
po(er of b!yers, bargaining. po(er of s!ppliers, and rivalry among c!rrent
competitors. Tese are o!tlined belo("
Th"'at )/ '0t"6# Ge( entrants to an ind!stry bring ne( )or similar*
prod!cts and services, t!s increasing mar5et competition. Ho(ever, s!c
a treat depends on si' major so!rces of barriers to entry" )7* economies of
scale& )2* prod!ct differentiation& )<* capital reA!irements& )=* access to
distrib!tion cannels& )>* cost disadvantages independent of scale& and )D*
government policy.
P"'&&3"' /")4 &37&t%t3t' -")13$t&#
All firms in an ind!st
ry face tis sort of
press!re. +!bstit!tes limit te potential of an ind!stry by placing a ceiling
on te prices firms can carge. 8or e'ample, prod!cts made from nat!ral
f i bres )e.g. j!te goods* face serio!s press!re from syntetic s!bstit!tes.
According to Porter, s!bstit!tes not,only limit profits in normal times, b!t
tey also red!ce te bonan-a an ind!stry can reap in boom times.
Ba"(a%0%0( -)w'" )/ 736'"&# 2!yers compete (it te ind!stry by
do(n prices, demanding iger A!ality or more services and playing
competitors off against eac oter 4 all at te e'pense of ind!stry
profitability )Porter, 7?@J*. According to Porter, a b!yer gro!p is po(erf!l
if )a* large vol!mes of p!rcases are made& )b* prod!cts represent a
significant fraction of te ind!stry%s costs& )c* prod!cts are standard or
!ndifferentiated& )d* it faces fe( s(itcing costs& )e* it earns lo( profits& )f*
b!yers pose a credible treat of bac5(ard integration& and )g* te ind!stry%s
prod!ct is !nimportant to te $A!alinC% of te b!yers% prod!cts or services.
Ba"(a%0%0(-)w'" )/ &3--*%'"&# A s!pplier gro!p can e'ert bargaining po(er
if )a* it is
O. ted DEE CDy a 7C: companies and is more concentrated tan te
ind!stry it sells to& )b* it is not obliged to contend (it oter s!bstit!te
prod!cts for sale to te ind!stry, )c* te ind!stry is not an important
c!stomer of te s!pplier gro!p& )d* te s!pplier gro!p%s prod!cts are
differentiated or it as b!ilt !p s(itcing costs& and )e* te s!pplier gro!p
poses a credible treat of for(ard integration.

R%2a*"6 a4)0( '@%&t%0( $)4-'t%t)"&# Rivalry among e'isting
occ!rs (en competitors are n!mero!s in an ind!stry. Tese firms
compete for everyting 4 price, advertising, prod!ct introd!ction,
distrib!tion cannels and after4sales services. Tis pattern of action affects
organisational performance.
/iven te above forces, in order to be competitive and to s!rvive in te mar5et
it is essential tat firms in an ind!stry pay a great deal of attention to str!ct!ral
analysis and strategic coices. +tr!ct!ral analysis elps red!ce te need for
debates on (ere to dra( ind!stry bo!ndaries )Porter, 7?@J*. Also, by doing
so, firms can ma5e a coice of (ere to dra( te line bet(een establised
competitors and s!bstit!te prod!cts, bet(een e'isting firms and potential
entrants and bet(een e'isting firms and s!ppliers and b!yers )Porter, 7?@J*.
M%0tE7'"('& :2' P& /)" &t"at'(6
,int-berg describes organisational strategy by !sing five Ps. According to im,
strategy is"
a -*a0 (en it provides a conscio!sly intended co!rse of action as a
g!ideline to deal (it a sit!ation&
a -*)6 (en it is an intended specific manoe!vre to o!t(it competitors&
a -att'"0 in. a stream of actions for an intended strategy to be realised&
a -)&%t%)0, tat is a means of positioning firms (itin teir b!siness
a -'"&-'$t%2' ! #.#F..7 F perceiving tings tat e'ist only in te
minds of interested parties.
Gote tat tis description cr strareev ta5es it beyond te corporate and b!siness
levels of strategy into te
P!nctionl operational levels. Porter%s five forces of
competitive strategy do not drop do%. n to tis operationalIf!nctional level".
Garnrall4!. 5=inrC5 ra%c ,6Do rinri" nc rife, r re teme of ic 7?CR naner rar
intended strategies are realised strategies and tat strategy form!lation and
implementation (ere separate and seA!ential processes. As dynamic global
b!siness environment factors ave led to firms recognising te need for
employee empo(erment )internal b!siness process and learning and gro(t
perspectives* in te strategy decision process, te broadness of ,A+%s
meas!resIinformation m!st be s!itable for te ne(, less sopisticated )from an
acco!nting perspective* !sers of tat information )for details, see ,int-berg et
B3&%0'&& 4%&&%)0 t6-)*)(6
2!siness mission typology relates to te nat!re of te strategic goals p!rs!ed. 6t
constit!tes a contin!!m (it p!re 73%*1 at one end and p!re ha"2'&t at te
oter end. ,ar5et sare is a paramo!nt objective (ere te strategic goal is to
b!ild, even if at te cost of sort4term financial res!lts. At te oter end of te
contin!!m a arvest mission aims at ma'imising sort4term earnings and cas
f lo(, '2'0 if loss of mar5et sare res!lts )/ovindarajan and /!pta, 7?>>*.
0rganisations !sing a b!ild mission are more li5ely to e'perience greater
dependencies (it e'ternal individ!als. A b!ild mission signifies additional
capital investment )greater dependence on capital mar5ets*, an e'pansion of
capacity )greater dependence on te tecnological investment*, an increase in
mar5et sare )greater dependence on c!stomers and competitors* and an
increase in prod!ction vol!me )greater dependence on ra( material s!ppliers
and labo!r mar5et*. 6n te long r!n, competitive mar5et forces prevent te firm
from passing cost increases on to c!stomers, and s!stainable competitive
advantage arises only by aving iger prod!ctivity tan competitors or by
offering specialised prod!cts and services tat competitors cannot matc. T!s
costs migt be less significant in b!ild tan in arvest sit!ations& b!ild !nits
terefore are more li5ely to place greater empasis on 5eeping prod!ction !p to
b!dgeted levels and identifying bottlenec5s tan are arvest !nits. Conversely,
arvest firms operate in a stable and narro( prod!ct mar5et )HoA!e, 2JJJb*.
+trategy and environmental !ncertainty
6n tis boo5, environmental !ncertainty refers to te firm%s inability to predict
acc!rately te effects of vario!s aspects of te firm%s e'ternal environment, s!c
as c!stomers, s!ppliers, dereg!lation and globalisation, tecnological processes,
competitors, government reg!lationsIpolicies, te economic environment and
ind!strial relations. Empasis is nlact,
#,.. toF !iaii=DC7Q% percept
i ons of teir
organisation%s economic, political, legal, tecnological and competitive
environments, rater tan te act!al environmental !ncertainty )see /ordon and
Garayanan, 7?@=& Tymon et al., 7??@*.
Contingency teory literat!re )Tompson, 7?DC& /ailbrait, 7?CC*
s!ggests tat tere is no $best% (ay to approac organisations, b!t tat te
organisational design so!ld reflect te environment in (ic it is fo!nd. Te
greater te environmental !ncertainty, te greater te diffic!lty in predicting
f!t!re events )1a(rence and 1orsc, 7?DC& K!ncan, 7?C2*. Hence, greater care
m!st be ta5en in designing te appropriate ,C+, (ic is essential to
organisational effectiveness. Tere is te vie( tat an organisation%s s!rvival
depends !pon $fitness% for te canging environment. Researc as so(n tat
environmental !ncertainty is a major infl!ence on managers% !se of acco!nting
information and control systems )/ordon and Garayanan, 7?@=& Cenall and
7?@D& ,ia and Cenall, 7??=& HoA!e, 2JJJb*.
Te c!rrent literat!re in tis area s!ggests tat te environmental
!ncertainty4 of most companies as been increasing rapidly in te 7??Js driven
by factors li5e an acceleration in te rate of tecnological dissemination, greater
dereg!lation and globalisation )Hamel and Praalad, 7??=& Cooper,
/oldman et al., 7??>*. Companies are adapting to tis !ncertainty by adopting
strategies, str!ct!res )incl!ding si-e, $do(nsi-ing% and $rigt si-ing%* and systems
)incl!ding performance eval!ation* tat allo( fle'ibility, 5eep options open
and s!pport a fast response capability
)7??<* s!ggests tat vario!s approaces to strategy
form!lation differ (idely in teir advice to management !nder conditions of
greater environmental !ncertainty. He s!ggests tat management%s strategic
coices are directly associated (it teir perceived environmental !ncertainty.
According to :ittington, tis lin5age, o(ever, is positively associated (it
management%s coice and !se of organisational control systems. +colars also
s!ggest tat alto!g firms competing in te same ind!stry face te same set of
potential environmental !ncertainties, management%s strategic coice strongly
infl!ences (ic !ncertainties are critical and (ic acco!nting information
system is appropriate for managerial planning and decision4ma5ing. Tere is an
association ben. ee . 4 "" rental !ncertainty. 8or e'ample, since
defender )or arvest
rn tD, c.a s.earcing ,nays to red!ce prod!ction and
distrib!tion costs, to c!t n4.ar5eting e'penses and to improve prod!ct A!ality to
ma'imise sort4term fi ar.cia te4 tend to e'perience lo( !ncertaint ,.
+ince prospector )or b! ri" r,.E ccr"ipete in a broad prod!ct mar5et domain.,
by b
yinrrnARr4ing ne( prnd!cr& and developing ne( mar5ets tey are li5ely to face
44 0
ig !ncertainty. T!s te level of !ncertainty is ig for firms follo(ing a
prospector% )or b!ild* strategy and it is relatively lo( (en a $defender%
arvest* strategy is p!rs!ed )HoA!e, 2JJJb*.
Capter s!mmary
A b!siness !nit strategy foc!ses on t(o interrelated aspects" )7* its mission or
goals& and )2* te (ay te b!siness !nit cooses to compete in its ind!stry to
accomplis its goals. +t!dies ave so(n te management control systems
),C+* need to reflect and be able to adapt to te differing strategies. +t!dies
ave concl!ded tat ,C+ are contingent !pon strategy and differing degrees of
!ncertainty attac to differing strategies.
Key terms to learn
+trategic b!siness !nit
,iles and +no(
+trategic decisions
,ission statement
+trategic goals
0bjectives +trategy
Porter%s competitive strategy Vision
Kisc!ssion A!estions
:y do yo! tin5 it (o!ld be important for yo! as a manager to
!nderstand iss!es of strategy coice in organisations;
2.2 :at factors migt infl!ence te (ay an organisation form!lates its
b!siness strategy; Kisc!ss.
2.< E'plain o( vision, mission and strategy relate to eac oter. Provide
Ho( does te organisational environment affect te organisational
2.% J
Ass!me yo! are a manager in te otel ind!stry. Kevelop yo!r o(n
company vision, mission and strategy.
Ho( (o!ld te vision, mission, goals and strategy differ for a non4profit
:at is a strategic b!siness !nit%
E'plain te types or levels of strategy.
:at is te difference bet(een te b!ild 2 nd arvest strategies;
0rganisations can adopt a n!mber of strategies to compete in te
b!siness environment incl!ding"
# c!stomer &'rv%$'
# prod!ct differentiation
Provide e'amples of companies tat may !se te strategies for
competitive advantage )e.g. ,cKonald%s
reA!ires a cost strategy*.
E'plain (y different companies reA!ire different strategies.
Kisc!ss o( a company can !se strategy to create barriers to entry. /ive
$2y improving s!pplier relations te organisation can red!ce te
bargaining po(er of teir s!pplier.% Critically eval!ate tis statement.
Kisc!ss te relationsips among te !ncertain environment, strategy
management control system and management acco!nting system.
Te disc!ssion contained in tis section is based, in part, on ,icael Porter
)7?@J*. A detailed disc!ssion on te topic is beyond te scope of tis boo5
Readers are terefore advised to cons!lt Porter%s boo5 for f!rter details on
te topic.
Te a!tor (ises to tan5 Qon San1& at /riffit 3niversity +cool of
Acco!nting, 2an5ing and 8inance, 2risbane, A!stralia, for is insigtf!l
advice on tis iss!e.
Te basics of management control
Key learning objectives
After reading tis capter yo! so!ld be able to"
# e'plain te concept $management control%#
o!tline te emergence of te concept of %control%&
describe te differences bet(een planning, strategic planning, strategic
management and programme planning&
# demonstrate an !nderstanding of te effectiveness of a management
control system&
# describe te differences bet(een economy, efficiency and effectiveness&
# demonstrate an !nderstanding of te empirical evidence on te relation
bet(een b!siness !nit strategy and management control systems.
0ver te past decades, a large amo!nt of literat!re as gro(n !p aro!nd te
area of management control systems ,C+* in organisations. Te s!bject
management control% is rapidly approacing a teoretical and practical
(atersed. Te myts and traditions of management control systems design
and practice are all facing profo!nd canges sim!ltaneo!sly. +ocial e'pectations
of employing organisations and te managerial tas5s (itin tem are canging
rapidly All tese, o(ever, raise profo!nd A!estions abo!t te traditional
concept of management control systems (itin organisations. Tis capter
attempts to revie( briefly vario!s approaces to date to defining $management
control% and also s!ggests a (ider definition of control in its social
organisational conte't. Tis attempt peraps (ill elp managers, academics and
st!dents interested in tis area to !nderstand te 5ey iss!es in te c!rrent
debate concerning teories of management control <@ years after te
p!blication of Robert Antony%s )7?D>* control models of organisation.
,anagement control" (at is it;
Te term $control% originated from te 8renc (ord $controller%, (ic means
inspection% or $to cec5 or verify%. According to :eber%s Kictionary, control
Application of policies and proced!res for directing, reg!lating and
coordinating prod!ction, administration and oter b!siness activities in a (ay
to acieve te objective of te enterprise. )Cited in 0tley and 2erry, 7?@J,
p. 2<2*
Te management control system ),C+* as traditionally been vie(ed as an
analytical and calc!lative process to ma5e decisions in te accomplisment of
an organisation%s objectives. 6n is seminal boo5, Professor Robert Antony
)7?D>* defined management control as $te process by (ic managers ass!re
tat reso!rces are obtained and !sed effectively and efficiently in te
accomplisment of an organisation%s goals%. Horngren, 8oster and Katar )2JJJ,
p. =* define $control% as $)a* deciding on and ta5ing actions tat implement te
planning decisions and )b* deciding on performance eval!ation and te related
feedbac5 tat (ill elp f!t!re decision ma5ing%. 8eedbac5 refers to te
e'amination of past performance and systematically e'ploring alternative (ays
to ma5e better informed decisions in te f!t!re )Horngren, 8oster and Katar,
,!c of te literat!re as been devoted to e'ploring te rational processes
of controlling people, tings and events (itin organisations. Tese processes
ave tree common elements" )a* a process of comparing performance (it
standard& )b* a process of feedbac5& and
)c* corrective actions to cange te
process if necessary to maintain its performance as near as possible to te
standard. +!c a rational control model stresses te tecnical aspects of control
$*%s%4er"a %v"ic, te aim of rationality fostering efficiency& order and stability
(itin organisations, and it forms te basis of te range of formal coordination
and control systems tat e'ist (itin organisations.
6n s!mming !p, te ,C+ is a means of gatering data to aid and
coordinate te process of ma5ing planning and control decisions tro!go!t
te organisation. Te literat!re foc!ses on a n!mber of interrelated
components tat comprise an organisation%s ,C+"
strategy, strategic planning and strategic management&
acco!ntability str!ct!re )corporate governance*&
# responsibility acco!nting )s!c as b!dgeting*&
performance meas!rement&
Te 5ey to form!lating an ,C+ is in !nderstanding te interdependence of te
components. Gone can effectively be managed (ito!t considering its impact
on oter components and o( tey s!pport eac oter
)Rotc, 7??<*.
According to Emman!el et al. )7??J*, a complete ,C+ (ill encompass internal
f!nctions, people%s reaction and controls design. Ansari )7?CC* proposes
integrating str!ct!ral and beavio!ral vie(s in relation to an effective ,C+. He
s!ggests tat te str!ct!ral vie( is concerned (it informational content, (ile
beavio!ral vie(s reflect te relationsip bet(een managers and s!bordinates,
and te interaction needed to acieve desired o!tcomes. 6t is also s!ggested tat
if tese t(o vie(s are not considered in !nison, tere may be problems
associated (it te neglect of eiter. Terefore management m!st coose a
s!itable mi' of ,C+, (ereby te cognitive conflict bet(een managers and
s!bordinates is minimised )for a good revie( of te ,C+ literat!re, see Rotc,
7??< and +imons, 2JJJ*.
Te emergence of te concept of $control%
Tere area n!mber of contM ides regarding te best manner in (ic to
manage an organisation. Ho"D.(ever, teorists as (ell as practising managers agree
tat good management reA!ires effective %control%. A combination of planned
objectives, organisation str!ct!re. capable direction and motivation as little
probability of s!ccess !nless tere e'ists an adeA!ate system of control. Tere
are many factors tat ma5e control a necessity in today%s organisations. Tey
incl!de te canging environment of organisations, te increased comple'ity
(itin organisations, te fallibility of organisational members and te need of
managers to delegate a!tority.
Control is closely interrelated (it organisations, as traditional teorist
Arnold Tannenba!m )7?D@*, (ile st!dying te control of many different types
of organisations, arg!es" )"(a0%&at%)0 w%th)3t &)4' /)"4 )/ $)0t")* %&
A general nat!re of control is tat it places empasis !pon performance and
te monitoring of activities tat facilitate te accomplisment of an
organisation%s objectives. Te concept $control% (itin organisations as a tool of
management acco!nting emerged a long time ago from te management (riter,
8. : Taylor )7?=?*, (o considered $control% to be a scientific form of
management, (ereby r!les of t!mb are applied to all organisational actors,
incl!ding te (or5ers. 1ater, Alfred +loan )focmer president of te /eneral
,otors Corporation* also, among oters, contrib!ted to te emergence of te
concept of $control% in organisations.
6n te early part of tis cent!ry, /eneral ,otors faced serio!s problems in
its s!rvival in te economy d!e to te fail!re of its management systems to cope
(it rapid gro(t, large si-e and a volatile environment. +loan form!lated a
pilosopy of management, $decentralised (it coordinated control%, (ic
proved central to /eneral ,otor%s s!rvival in ind!strial istory. +loan )7?D<* in
is boo5 A/6 Y'a"& w%th G'0'"a* M)t)"& noted" $6f (e ad te means to
and j!dge te effectiveness of operations (e co!ld safely leave te prosec!tions
of tose operations to te men in carge of tem% )p. 7=J& A!oted in ,acintos,
7?@>, p.
2<?*. Te traditional to!gts of effectiveness in financial controls
became 5no(n later as $management controls% ),acintos, 7?@>*.
,anagement teorists )s!c as Koont- and 0%Konnell, 7?C2* as (ell as
acco!nting scolars
)s!c as Antony, 7?D>& 6jiri, 7?D>* vie( control as a
feedbac5 process, so tat objectives are ma'imised. Tey vie( management
control as a s!bset of te total of managerial activity )planning, motivating,
coordinating, staffing, directing, controlling*, designed to ens!re tat
individ!als, organisations and societies satisfy teir goals.
T!s management controls ave tended to concentrate on te optimal4
means4end relationsip. +!c a relationsip foc!ses on economy, efficiency and
effectiveness (itin an organisation. Ho(ever, tese vie(s are regarded as
problematic, beca!se of teir restricted conceptions of te
odd a ,d
teir ass!mptions of objectivity and economic rationality )C!a, 7?@?*.
A n!mber of acco!nting researcers ave !sed alternative approaces, s!c as
te open systems and cybernetic approaces, to st!dy control systems in
organisations )0tley and 2erry, 7?@J& Hofstede, 7?@7*. :en vie(ed from an
$open systems approac%, organisations are being seen as organisms tat process
inp!ts from te environment bac5 as o!tp!ts )Ansari, 7?C?*. +!c an approac
provides a means of vie(ing and describing environmental infl!ences and
interdepartmental dependencies.
Cybernetic notions are central to te open systems approac )Asby,
7?>D*. Vie(ed as a cybernetic concept, management control as been defined
as te process of ens!ring tat te organisation is adapted to its environment
and is p!rs!ing co!rses of action tat (ill enable it to acieve its p!rposes
)0rley and 2erry,
7?@J, p. 2<<*. 8rom te (or5 of Tocer )7?CJ*, 0tley and
)7?@J* derived a model of te cybeanetic control process aving
identified fo!r necessary conditions tat any control system m!st incl!de"
te e'istence of an objective or standard tat is desired )oter(ise control
as no meaning*&
# te meas!rement of process o!tp!ts along te dimension specified by te
objective )o!tp!t of te process m!st be meas!rable*&
# te ability to predict te effect of potential control actions )a predictive
model of te system is reA!ired*&
# te ability to act in a (ay tat (ill red!ce deviations from te objective )a
selected action reA!ires to be implemented*.
0f te fo!r necessary conditions stated above, te constr!ction of predictive
models for control is li5ely to be a central concern of te control system design.
Having identified a discrepancy bet(een act!al and standard o!tcomes, a
predictive model process is necessary for a control action to be determined.
According to 0tley and 2erry )7?@J*, tis predictive model provides a4means
for forecasting te li5ely o!tcomes of vario!s alternative co!rses of action&
(ito!t s!c a model, control <s impossible and may be co!nterprod!ctive
8rom te cybernetic vie,'p&D&t. Hofstede
)7?@7* arg!es tat different
forms of activities may demand A!ite different forms of control. 2ased on tis
notion e form!lated a cybernetic control model, (ic e believes can be
a--h$ M "0 - 7h acid itvi f!i4Pivii1 dDri des. He proposes si' types of
)e.g. ro!tine, e'pert, trial and error, int!itive, j!dgmental or political control*
applicable to an organisation, depending on te nat!re and type of activities
(itin it. 6t is t!s clear tat te nat!re of te activities is f!ndamental to te
adoption of any control mecanism )for details, see Hofstede, 7?@7*.
Te f!ndamental concern of te cybernetic model of control is negative
feedbac5 controls. Te basic control is terefore to red!ce differences tat may
occ!r bet(een act!al o!tp!ts and tose considered desirable.
6n recent years, scolars ave foc!sed on social interactions and decision4
ma5ing in organisations (itin te broad frame(or5 of impersonal forces s!c
as !ncertainty, interdependence among organisational components,
specialisation arrangements, integrative mecanisms and tecnology. As
disc!ssed in Capter 7, scolars ave labelled tis te $contingent approac%.
According to tis approac, an ,C+ depends !pon certain contingent
variables. 6n oter (ords, te control system m!st be matced (it
environmental circ!mstances and also (it different parts of te organisation.
Vie(ing from s!c a perspective, acco!nting scolars ave investigated (y
acco!nting and control. practices differ from sit!ation to sit!ation and (at
factors infl!ence te design and f!nctioning of acco!nting and control systems
in organisations.
+ome scolars )e.g. ,arc and +imon, 7?>@& 1indblom, 7?>?& Cyert and
,arc, 7?D<& ,arc,
7?@?* ave advocated a more realistic approac to
control, labelling it $political% or $pl!ralistic% control. Tis model s!ggests tat
control (itin an organisation can be acieved by maintaining a net(or5 of
r!les and reg!lations tat permit bargaining bet(een gro!ps. 8ollo(ing tis
approac, management control is seen to be (itin te (ider conte't of te
diversity of interests among organisational members, teir conflicts and te
po(er str!ct!re prevailing in te organisation.
As opposed to te pres!mptions of traditional control models, te
pl!ralistic approac ass!mes te organisation to be pl!ralistic and divided into
vario!s interests and s!b!nits. T!s, in vie(ing organisations as coalitions, tis
approac provides a so!rce of ideas and insigts into organisational control to
so( o( control is acieved tro!g political processes (itin organisations.
+een in s!c a conte't, political models attempt to diagnose te po(er
distrib!tion in an organisation, tat is tey consider (o te players are and
(ir teir relative positions so!ld be.
Planning, strategic planning, strategic management and
programme planning o( do tey relate;
P*a00%0( is te ma5ing of decisions tat determine what te company (ill do
a01 h)w it (ill do it 4 what prod!cts to sell, wh'"' to acA!ire tem,
h)w to
mar5et tem and wh'"' and so on. Planning, terefore, can be defined as
coosing goals, predicting res!lts !nder vario!s alternative (ays of acieving
tose goals and ten deciding o( to attain te desired goals. Planning isn%t a
single process 4 it is a series of related processes, some (it long time ori-ons,
some foc!sing on te immediate f!t!re.
St"at'(%$ -*a00%0( is te process of deciding in broad terms o(
implement te organisation%s goals, tat is te reasons (y te organisation
e'ists. Antony, Kearden and Vancil )7?D>, p.
definition of strategic planning"
=* provide a compreensive
+trategic planning is te process of deciding on te objectives of te
organi-ation, on canges in tese objectives, on te reso!rces !sed to attain
tese objectives and on te policies tat are to govern te acA!isition, !se and
disposition of tese reso!rces.
T!s, strategic planning incl!des decisions abo!t te types of b!sinesses and
mar5ets tat an organisation operates in and decisions abo!t o( tose
b!sinesses and activities (ill be financed. +trategic planning elps managers
form!late te plans and activities tat (ill bring teir organisation closer to its
St"at'(%$ 4a0a('4'0t is te process of analysing and practising
strategy, incl!ding te implementation of strategic plans.
P")("a44' -*a00%0( is te process by (ic management decides o(
best to implement its strategy, given te reso!rces available to it in a specified
time period. 6f te time period is a year or less, (e refer to programme planning
as 731('t%0( and its o!tp!t as a 731('t, for longer periods, te term is long4
term planning and te prod!ct is a *)0(!t'"4 -*a0#
Taylor )7?C>*, in is ar.,c.e "r tegies for planning%, disc!sses te main
differences bet(een +rrategic ar. 0perational planning. Tese are s!mmarised
in Table <.7.
Table <.7 +trategies for planning
+trategic planning
8oc!s 1onger4rerm s!rvival and
0bjective 8!t!re profits
Constraints 8!t!re reso!rces environment
0perational planning
0perational problems
Present profits
Present reso!rce environment
Re(ards Kevelopment of f!t!re potentialEfficiency, stability
6nformation 8!t!re opport!nities Present opport!nities
0rganisation Entreprene!rialIfle'ible 2!rea!craticIstable
1eadersip 6nspires radical cange Conservative
Problem solvingAnticipates, finds ne( approaces Reacts, relies on past
Hig ris5 1o( ris5
S)3"$'. Adapted from Taylor, 2. )7?C>*, $+trategies for planning%, L)0( Ra0(' P*a00%0(,
@, no. =, p. <@.
Effectiveness of management control systems
Tere are many factors tat ma5e control necessary in today%s organisations.
Tey incl!de" te canging environment of organisations& te increased
comple'ity (itin organisations& te fallibility of organisational members& and te
need of managers to delegate a!tority.
T!s, an organisation%s ,C+ is infl!enced by te beavio!r of
competitors, te nat!re of te ind!stry (itin (ic te organisation operates,
and canges in its b!siness environment. Te system effectiveness depends on
o( (ell its components are responded to. An effective ,C+ so!ld
demonstrate te follo(ing attrib!tes"
G)a* $)0("3'0$'# To (at e'tent te ,C+ contrib!tes to te goal
congr!ence of te corporate company. /oal congr!ence refers to te
consistency bet(een te personal goals tat a manager as beca!se of te
control system%s infl!ence and te goals of te organisation tat derive from
its strategy. 8or e'ample, if te performance meas!re is not s!itable, it niati
res!lt in agency costs to te organisation as te manager attempts to
acieve is o(n goals rater tan te strategic
Tis in t!rn leads to goals being incongrn nr
D#D.D .t necessary to
select appropriate meas!res tat give appropriate dire
ctions to te manager.
6f tese directions are not consistent (it corporate
strategy, te control
syste.n as promoted incongr!ence and led to goal i
ncon gr!ence ii, te
E4-*)6'' 4)t%2at%)0# An employee%s desire to acieve a selected goal )set
management*. An ,C+ so!ld foc!s on o( (ell it motivates individ!als
to strive to(ards acieving organisational goals. Tis is often acieved
tro!g te selection of related performance indicators and setting
appropriate re(ards for acieving te desired res!lt.

<)"4a= a01 %0/)"4a* $)0t")* 4'$ha0%&4&# :at sorts of formal and

control mecanisms are in place in te organisation; 8or e'ample, re(ard
systems, c!lt!re, etc.
S6&t'4 ()a*& a01 "%&N &ha"%0(# 6s tere a system of ris5 saring among
vario!s divisions of te organisation; 8or e'ample, (at team
meas!rement systems and s!bseA!ent re(ard systems are in place;
,ercant )7?@2* s!ggests tat good control can be acieved by avoiding
beavio!ral problems andIor by implementing one or more types of te
follo(ing tools"

C)0t")* -")h*'4 a2)%1a0$'# ,anagers can avoid some control problems by

allo(ing no opport!nity for improper beavio!r. 0ne e'ample of tis
action (o!ld be a!tomation. 0ter options incl!de centralisation, ris54
saring scemes and elimination of a b!siness or an operation entirely.
C)0t")* )/ &-'$%:$ a$t%)0&# Tis type of control attempts to ens!re
employees and (or5ers perform )or do not perform* certain actions tat are
desirable )or !ndesirable* by management. 0ter control tools may incl!de
feedbac5 control )action plan*, direct s!pervision, formal planning and
C)0t")* )/ "'&3*t&# Tis type of control foc!ses on act!al o!tcomes or res!lts.
C)0t")* )/ -'"&)00'*# Tis empasises a reliance on te personnel involved
to do (at is best for te organisation. 6t incl!des s!c actions as improved
comm!nications, peer revie( and ed!cation and training.
A general g!ideline for comparing alternative systems is to foc!s on predicting
ors4 eac system (ill affect te collective actions of managers. Te management
t. l
" l l.,
acco!nting !terat!rc s! Cs1s t aD L! r
+ ###7# ##; ! "# Y
!!!#! et ti%
env ronment in i
(ic companies operate and teir comple' organisational str!ct!res may
ca!se 4 company to fail if te interrelated conj4ponents are not (or5ing in
Economy, efficiency and effectiveness" (at are tey and
o( do tey relate;
E$)0)46 concerns inp!ts. 6n a broad sense it means te acA!isition of s!fficient
A!ality and A!antity of financial, !man, pysical and information reso!rces at te
appropriate times at te lo(est cost )Par5er, 2JJ7*.
6n contrast efficiency concerns bot inp!ts and o!tp!ts. 6t means te !se of
financial, !man, pysical and information reso!rces so tat o!tp!t is
ma'imised for any given set of reso!rce inp!ts, or inp!t is minimised for any
given A!antity and A!ality of o!tp!t )Par5er, 2JJ7*.
EB'$t%2'0'&& refers to te performance or act!al o!tcome of an organisation.
6t is te acievement of te objectives or oter intended effects of activities.
0rganisational effectiveness depends on o( (ell canges in te
)ind!strial str!ct!re* and macro4environment
tecnological, economic and political factors* are responded to. 6n addition to
financial performance, organisations m!st loo5 at non4financial performance,
s!c as c!stomer and employee satisfaction, beca!se
th'6 are important
organisational elements. Te c!stomer as a strong desire to obtain %ig4
A!ality prod!cts or services, b!t no( te major foc!s is also on $ig val!e%.
Tis means tat te c!stomer (ants (at is perceived as ig A!ality, b!t it
m!st be available for (at is perceived as a fair price )Hansen and Riis, 7??D*.
Ho(ever, te biggest callenge to te organisation is o( to motivate
employees to perform very (ell so tat it can acieve tis goal. Tis means tat
tis ne( corporate c!lt!re m!st be related to te re(ards. Employees ave to
be ed!cated in acieving c!stomer satisfaction. To yield a ig4A!ality prod!ct
or service, tey (ill need to be ed!cated in te principles of c!stomer
satisfaction and (ill ave to be so(n its benefits for teir organisation as (ell
as temselves. Te main foc!s of strategic management acco!nting is to elp
te management team by providing te relevant acco!nting information for te
acievement of economy, efficiency and effectiveness.
2!siness !nit strategy and management control systems"
empirical evidence
Kefenders tend to ave a f!nctional str!ct!re and formalised ierarcical
information flo(s, are planning intensive and are centralised& finance and
prod!ction are te most important f!nctions and controls empasise efficiency.
0n te oter and, prospectors tend to ave a fle'ible str!ct!re, tat is lo(
formalisation and lo( division of labo!r, are decentralised and ave lateral
information flo(s& mar5eting and researc and development are te most
important f!nctions and performance meas!res stress effectiveness in
+imons )7?SCL. fo!nd tat prospector firms !se a ig degree of forecast
data in teir ,C+, empasise tigt b!dget goals and o!tp!ts are closely
monitored. Kefender firms !se b!dget systems less intensively, li5e little cange
in systems and managers% re(ards are related to b!dget acievement. +imons
fo!nd a negative association bet(een profit performance and rigt and close
b!dget controls.
6nterestingly, in is
7??J case st!dy of top managers% !se of controls in
t(o large companies )one defender and one prospector*, +imons fo!nd similar
,C+ b!t !sed differently by managers. His res!lts are s!mmarised in Table <.2.
Competitive strategy and costing systems"
Researc )+an5 and /ovindarajan, 7?@?* as fo!nd significant variation in
cost systems bet(een strategic empases by firms. Table <.< s!mmarises tese
Table <.2 ,anaDgDrD rent control tools in defender and
prospector firms
,anagement Kefender 8irm Prospector firm
control systems
+trategy revie(s 6ntensive, ann!al, debated
7Tinannof onoDc
T%D 7.. 8r ".f"o/,...7 D..
b!siness !nits and intensive
2!dget preparation,!st meet financial targetsPrepared by segments, strategic
8inance coordinate8oc!s, coordinated in
meetings meetings
2!dget revie( Gone in year
Programme revie(Prod!ct and process
programmes monitored and
c!t at all levels
1ittle formalisation
Reb!ilt tree times a year
Programmes limited to RUK
2on!s on profits over target+!bjective eval!ation in ,20
)management by objectives*
Table <.< Cost systems and strategic empasis
Cost systems
Prod!ct differentiationCost leadersip
strategy strategy
+tandard costs and performanceGot very important
Very important
3se of costing, e.g. fle'ible
,oderate to lo( Hig to very ig
b!dgeting, for man!fact!ring
cost control
Perceived importance of meeting,oderate to lo( Hig to very ig
6mportance of mar5eting cost Critical to s!ccess
0ften not done
analysis formally
6mportance of prod!ct costing 1o(
for pricing decisions
6mportance of competitor cost
1o( Hig
2!siness !nit mission and incentive systems" empirical
/ovindarajan and /!pta
)7?@>* fo!nd significant variation in te !se of
incentive plans and
performance meas!rement systems bet(een te b!ild
strategy and arvest strategy. Teir res!lts are s!mmarised in Table <.=.
Table <.=
6ncentive plans and performance meas!rement systems in b!ild
and arvest firms
2!ild )increase mar5et sare in
gro(ing mar5et, lo( profits and
cas flo(*
Harvest )ig b!t declining
mar5et sare, ma'imise sort4r!n
earnings and cas flo(
Capter s!mmary
Tis capter as revie(ed te body of researc and iss!es tat ave emerged in
te area of ,C+ in organisations since te 7?2Js. 6t as critically e'amined te
vario!s approaces to control (it a vie( to more clearly foc!sing on te 5ey
iss!es in tis body of 5no(ledge.
K!ring its formative years ,C+ teory concerned itself (it te
development of general principles and ideal types of control systems. 6t (as
believed tat once tese principles (ere developed, tey co!ld be applied
!niversally. Tis line of reasoning, o(ever, is giving (ay slo(ly to a different
idea. A beavio!ral approac s!ggests tat !man forces (itin organisations
infl!ence organisational processes. ,any st!dies in te
7?=Js and 7?>Js
follo(ed tis lead. 6n te 7?DJs, a separate line of inA!iry em
erged integrating
vario!s approaces to organisation. Tis approac arg!es tat e
nvironment and
tecnology ave a good deal of infl!ence on te str!ct!re of c
ontrol systems.
Tis body of 5no(ledge establises te infl!ence of several conti
ngent variables
on te control systems in practice (itin organisations. Ano
ter gro!p of
scolars vie( te organisation as a coalition and stress te diversi
ty of interests,
te conflicts bet(een an.i r,Gc po(er str!ct!re of individ!als (itin
organisations, (ic ma impinge !p!n te f!nctioning of control processes in
te organisation.
Key terms to learn
Economy Planning
Effectiveness Programme planning
+trategic management
6ncentive systems +trategic planning
,anagement control systems +trategy
Kisc!ssion A!estions
:at is te management control system ),C+*; Kescribe o( te
components of te control system are interrelated.
<.2 :y do yo! ave to consider beavio!ral vie(s (en designing te
<.< Kisc!ss te relationsips among strategic planning, strategic
management and programme planning.
<.= Kescribe o( goal congr!ence relates to ,C+ effectiveness.
<.> :at are te relationsips bet(een economy, efficiency and
effectiveness; Kefine eac of tese concepts and disc!ss.
<.D. :at is te difference bet(een te formal and informal control system;
Provide e'amples.
<.C Kisc!ss (y informal systems are important;
<.@. Kevelop te cost system strategy for a retail company s!c as Coles ,yer
:at factors do yo! ave to consider (en designing incentive systems;
:y is it necessary to ave a long4term foc!s for incentive plans;
<.77 Performance meas!res so!ld incl!de non4financial and financial
meas!res. Critically eval!ate tis statement.