"..

ln

Cb+qter 2

Approaches to Management
1,1-t.,'
-,,
Control Systems,f,'ir''
i...- - ,
 In the introductory chapter, we discussed the imporlance of controls in
acl,ieving organizational objectives. In addition to the amount of control, the
appropriate mix of controls should be used to maintain the right balance in an
organization. In this chapter, we discuss the various approaches to the
implementation of management controls. Organizations are cornplex
stn"tctures; hence, there is a need to design controls for tliem to function
effectively, The cybernetic approach helps us to understand the elements and
design ofthe control process in an organization. The contingency approach to
tnanagement control systems provides a potential explanation for the
bewildering variety of management control systems ar:tually practiced.
Strategies at the corporate and business unit levels have a bearing on the fornr
and structure of control systems in an organization.

CYBERI{ETIC APPROACH TO MANAGEMENT' CONTROL SYSTEMS

Cybernetics has its origin in the Greek worl< 'l(ybernetes' rvhich rneans
"steersman." A steersman is a person who directs the movernerrt of the ship
along the planned course or dilection. In the 1940s, Norbert Weiner coined the
term cybemetics. According to his definition, cjrbernetics is the study of "the
entire field of control and communication theoly, whether in the machine or
the animal". Cybernetics deals with the self-regulating principles in a variety
of systems ranging from the hLrman biological system to machine systems.
The hr-rman brain is a complex structLre that helps in regulating tl-ie body
functions and helps the body pgrforrir complex activities. Organizations too
are complex, as they are made up of different individuals. Cybemetics has
been applied in such djverse fields as radar control, animal genetics,
inf'erential automation, cryptography and cleciphering, ar:tomatic maciine tool
control, language translation, teaching machines, artificial intelligence and
robotics. Due to its'broad applicability, it has been popular with general
systems theori5ts as a unifi,ing theory of self-regulation.

Characteristics of a Cybernirtic System

The follbwing are the characteristics of a cybernetic system:
Complix structures
There are number of heterogeneous interacting cornponents in a cyber.'netic
system, rnaking it complex.
Mutual interaction
The various components of a cybernetic system interact in a way that creates
multiple interactions within and among the subsystems.
Complementary
In cybernetic systems ntultiple interactions take place as a resuit of multiple
processes and structures. There are a nulber of subsystems which interact;
and hence, there is a need for multiple levels of analysis r,vhich complement
one another.
Evolvability
Cybenretic systems tend to evolve and grow in an opporlunistic manner. rather
tiran being designed and planned in an optirnal manner.
16
 Constructivity
Cybemetic systems are constructive. They increase in size and complexity by
building on their existing characteristics ard also developing new traits.

Cybernetic Paradigm and the Control Process

The cybemetic paradigm devised by Griesinger in the late 1970s helps in
designing the control process in an organization. The cybernetic paradigm not
only helps in capturing the essential elements of the repetitive control process
(refer Figure 2.1), but also does it economically. The essential elements of the
repetitive conkol process are the following;
. Setting goals and performance measures
o Measuringachievement
. Comparing achievement with the results
r Computing the variances resulting from the p
. Reporling the variances
l
t Identifying the causes of the variation ,:i-::
ir.)l
a Taking the required action to eliminate thp, variances in the future
r Follow-up to ensure that the goals are met.
All goal-oriented controls reflect^(hd basic elements of the cybernetic
paradigm. The paradigm begins with the assumption that decisions are made
because of the interaction betw'gpn the decision maker and the external
environment. The managq( of each business unit scans the external
environment for data thatr could be useful for the organization, The
mechanisms through.y.Eich managers collect data are called sensors. Sensors
can collect data tfuoiigh formal methods like reports, or through informal
ia/^.
Figure hftlfhe
//
Cybernetic Paradigm of the Control Process
. .-
,1
EnvlronnLent

Source: Joseph A Maciariello and Calvin J Kirby, Manltgement Control Sygtems. (USA
Prentice-Hall, Inc, Second edition) 42.

t7
 methods like interactions r,vith the members of the organization. Sensors can
be used to collect data witl-r regard to both the internal and external
perfotmance of the business unit. Based on the data collected, the rnanager
btrilds up certain assumptions about the external environment and the present
performance of the unit. These assumptions are a starting point for the
analysis and are termed as'factual premises'. Factual premises are forrned on
the basis of perceptions, which are affected by past experiences,
organizational goals and personal goals"
The next step involves conipaling the factual premises rvith the organizational
goals and performance measures. When there is difference between the
decision tnaker's assumptions (value premises) and the assumptions rlacle
about the environrnent (iactual premises), then every possible step is taken to
bridge the gap. This is done witl-r the help of a comparator that analyzes tire
difference between performance as measured and performance information
desired. When there is a sl-rorlfall in performance, tlre decision maker searches
lbr a course of action that will help to cover the shor1lall; this is referred to as
behavioral choice. Choice of behavior could involve selecting a solution ou
the basis of previous experiences. In case thele is rnote than one alternative
solution to the problem, the feasible alternative with the highest subjective
rLtility is chosen" In case no suitable alternative is found, the decision maker
expar.rds his searcl-L for a viable option. After an appropriate method is found to
cover the shortfall, the next step is the irnplententation process.
The ir.r.rplementation process stalls with:the manager (effector) acting as an
agent fbr change b1, itnplementing the'desired controls. After implenrentation,
the next step is to get the required feedback to detennine the effects of the
action. 'I'his feeciback helps the rnanager to judge whether the chosen behavior
or action has helped move forvards the desired performance. Ilthe feedbacl< is
positive, tliis action can be selected again r,vhen similar sitr-rations arise in the
tuture. The feedbac[< also heips in assessing whether the goals set are being
achieved. If the goals are not achieved, the manager has to go through the
whole process again. Hence all goal-oriented controls reflect the basic
elements of'a cybernetic paradigm. To achieve goals, organizations need to
design effective individr-ral controls lor each activity.
:

Designing Management Controls

There are many issues to keep in mind while designing controls for an
activity:
e The process of establishing controls should be seen as a constructive
exercise that will help in enhancir-rg the performance of tlie ernployees.
The standards set should be challenging, but at the same time, attainable.
. The objectives should be measurable to elrable evaluation of performance.
r Controls should fbcus on the objectives and key results of an activity.
There should be a restricted nr"unber of ob.jectives.
. There should not be too much focus on easily measurable factors and
short-run variables. Altention should be paid to all the imporlant
variables in a balanced fashion.
o Responsibility for results shouid rest witl-r a single individual to avoid
Cirplication oIworl<.
18
 To get the desired results, it is important to compare the actual
performance with the desired results. Comparing actual performance with
the desired results could be useful for setting controls for the next year.
When establishing controls, the factors that could be hampering the work
process, such as stress, tiredness at worl< and absenteeist.r.r, should be
identified. Good feedback is an indication of the quality of the control
process. Early predictors, can help organizations to irnprove their
performance.
It is advisable to take a sample of the variables to be controlled. This can
be done statistically or throLrgh observation.
An acceptable range of variation for the value ol each variable should be
establisl-red.
While preparing reports there should be exceptions to desired results and
these should be pronrptly reported to the person,,responsible for the
repo |ts "

1"he severity of the problern should be determined,by analyzing the car.rse

ofthe problem and then corrective action should be taken. The results ol
these actior.rs have to be monitored and comp'ared to the expected values.
A systern of controls requiles judgrnent ancl insight by those establishing
thern arrd in{erpretirrg re5ults.

Control Process Hierarchy

:
The control process in an organization involves the relationship between the
superior and the sr-rbordinates. The relationship can be termed as a nreans-encl
relationship because the superior comn-runicates the goals of the organization
to the subordinates, whe, in turn, devise strategies to achieve those ends. The
goals of the sLrbordinates should be congruent to the goals of the superior.
Congruency in.goals can be achieved through negotiation, and depends on the
style of managerient and the comnurrication plocess in the organization. The
hierarchy of tlie control process can be ilh"rstrated with an exanrple. In a
hierarchical organization with decentralized decision-mal<ing and authority.
the control process begins with the superior meeting the sr-rbordinates and
negotiating goals, objectives and targets for the next year. After the goals are
flnalized, the perforu.rance is tracl<ed at periodic intervals. The superior and
subordinates review the overall performance. In areas where performance has
been unsatislhctory, they try to find the reasons for the uusatisfactory
perforntance. Once the reasons are identified, a plan ofcorrection is prepared.
This plan is prepared on the basis of past corective actions and the current
performance. Thus the targets and course ofaction for the next year are set.
The same process is can'ied out throughout the organization. A reward s1'stenr
based upon the performance of the employees is designed. First, managers
decide on the targets tl.rey rvant to give their subordir-rates. Next, there is
r-regotiation betrveen the superior and the subordinates rvith regard to the
targets. At this stage, it can be analyzed whether the subordinates' objectives
are in congruence rvith the objectives of the sr"rperior" All the targets should be
specific and ureasurable. There should be a limited number of targets, so that
they can be managed r.vell. The tal'gets should cover qualitative variables

l9
 (emptoyee training and development, and new product development) as well
as quantitative variables.
To summarize, the goal-oriented control process follows the cybemetic
paradigm and involves planning, decision-making and controls. It operates
through a hierarchy of conffol, and its main purpose is the attainment of
organizational goals and objectives.

CONTINGENCY APPROACH TO MANAGEMENT CONTROL SYSTEMS

Contingency theory is based on the premise that the d..6!gq1$r!{,a$9

ey..r&eiifr#:gq.-
_sjru&mstie q.-li+ggl! +i ,iqqtiq{r.e*,, hg
!e1+&|qh;'# .f "gg-,.ffiF. Contingency tliiory- was propounded in
response to the
response istic anoroach
the universalistic argues that there is an
approach that arsues au ontimnl
optimal
scheme for control design which is applicable in all seJtings and firms. In
t
#-
contrast, contingeney fheory stdes that the appropriateapsJdof dtfferent control
systems depends on the business seffing. Conlingency approach is an
extension of scientific management tleory The th"ory also states that the
appropriateness of different control systems ddperids on the setting of the

The term 'contingency' implies that the qeture end.process are:gsntiqg.q4t

a&,*6***g*@ as4.iaiernai frctsr+";Prior to the contingency theory;the
classical theory developed by man'agement scientists like Fayol, Bums and
Stalker, and Lussato assumed that people were motivated bv economic
rggds. It also assumed division of
d-elegation of routine tasks{o siibbrdinates by hierarchicai superiors.
Contingency theory.egry.ae,i@iet*'anO
'iec,ffiffit. It i{,:assumed that the organization 'importi' energy and
resources from the:eiivironment, and converis them into goods, services and
by-products. flrq goods, services, and by-products are thin ,exported, to the
environmens changing the environmental circumstances in which the
-tl1ps
organizati ori.operates.

The Need for the ContingencV$nnroacn

G S.)
Factors such as teqHnerlogy, organizational structure and the environme nt have
led to the emergilce oTcontiigrcrrclrTffififfiis in conkol systems.

Technology
It has long been recognized that technology influences the design of control
jx:!ems. New computer syslems
the environment and refashion corporate policies rapidlf Revision of plans
and estimates and new incentive and
passed echnology can help managers to use
rdEources more efftctively, and to collect data for strategic and operational
decision-making. The increased use of technology has brought in new control
systems that can help managers identi& specific problems in administration or
factory operations. The contingency approach is able to utitize the new
technology very effectively in control systems.

2A
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ffiffi
k#:

0rganizational structure
A modern organization's structure should be such that it can cope with a high
degree of uncertainfr, as new tasks are constantly incorporated into the
production or work process. An 'organicr' organizational structure adapts
easily to unstable conditions in rapidly changing environments. As a business
grows, the work of the management increases, and the organization's structure
becomes more complicated as ner"v tasks or lines of production are added. The
management control system for such organizations is complex. The
contingency approach helps in designing a conhol system that meets the
demands of complex organizational structures.

Environment
In order to survive, organizations have to adapt to the demands of their
environment. Management controls in an organization are greatly influenced
by the type of competition faced by the firm. The continggncy approach helps
to develop a highly sophisticated control system in line_with the intensity of
competition the firm faces. ,,,.1
. _,
Contingency theory greatly expanded the scope strategy and management
control. It emphasizes the "fif'between extemal_gnvironmental factors ind the
intemal resources of the organization. It,j4alizes the components of the
organization, its structure and cultural sgf,ting, and its ability to adapt to
technological and structural changes*, .a,,'
Fisherz (i998) developed an approach to contingency theory and management
control by reviewing- contingeney. tleory, management control systems and
firm outcomes. He suggesledlhatlthe assumptions that underlie contingency
theory are too narrow. Fipher's approach focuses not only on the unique,
characteristics of control syltems, but also on the environment in which some
control systems havg-5'better fit. Fisher points out that the contingency
approach has enabl.ed'researchers to develop generalizations about control
systems rel$fng fo business and organizational settings. By studying
contingency'-faLtors in different business settings, Fisher identified five
contingent control variables: uncertainty; technologr aad interdependence;
industry,':-.firm and unit variables; competitive strategy; and miision and
obse#abiiity fuctors. These factors * t" either extemal or intemal to the
organization, and can affect organizational outcomes, performance, resource
allocation and distribution of rewards.
He suggested potential research areas in contingency control that include:
causal relationships of multiple variables; study of control systens in relation
to other organizational aspects; human resources policies and cultural systems.
These also included non-financial factors such as cycle time, lead time,
frequency oforders and production performance factors. The financial factors
included budgeting and standard cost systems. Fisher suggested new
directions in contingency control research that would move from financial to
operational and production control factors critical organizational to
I The organic organization is structured to encourage flexibility and change. The structure also
motivates and creates a rervarding work environment.
2 Fisher, Joseph G "Contingency theory, management control systems and firm outcomes: pasl
results and future direction." Behavioral Research in Accounting 1998 Supplemen! Vol. 10,
p47

21
 perfonnance. For exan.iple, the contingency approacli could be used to explain
variations in the acloption ofjust-in-tirne and activity-based costing methods in
di fferent orsanizatious.

STRAT'EGY AND CONTROL SYSTEMS

According to I(enneth Il Ar.rdrews, "strategv is a process by which senior

executives evalLrate company's strengths and weaknesses in light of the
opporlunities and threats present in the environrnent, and decide on a product
flts the comparry's distinctive competencies with environrnental
turariiet that
opporlunities." Organizations usually treat strategy and control as distinct
organizational firnctions. Strategies are developed first, as managers str-rdy
their current and potential role in the enviromrent atrd determine the
appropriate response. Controls are designed to help organizations to achieve
their goals. An organization can gain competitive advantage,by integrating the
usually separate functions of strategy and control. Managernent contlol
systems are the tools rvhich help in the effective implementation of strategy. it
is important to analyze the dilferent kinds of strategies, as control systems can
be designed based on the types of strategies. ,11,,

Strategies can be considered at two levels in an organization. There are

strategies for the organization as a rvhole (corpolate strategy) and strategies
for each business unit (business unit strategy). Iror the fbrmulation of
corporate sfrategy, an organization should considel the suitability of the area
of'business lbr the finn, and the urission or purpose of each br-rsiness unit. This
analysis will help the firm decide whether to divest or retain a particular
business, and the amount, of resources to allocate for each L-usiness. At the
level of the btrsiness uLrir. a firm has to analyze tlie business unit's ntission,
and the steps it slrould tal<e to accomplish the mission. Corporate stlategy is a
guide to the iridividual business units, helping tl-rem io fb-rction in accorclance
with the organization goals and strategies.

Corportte Strategy
Corporate strategy relates to the firm as a whole. Corporate strategy involves
ntaking plans regarding where and }row the fimt can compete in an indLrstry.
At the level of corporate strategy, controls refer to the rnechanism by ivhich
corporate executives influence the strategic direction of tl're firrrr ancl the level
of achievernent of the firm's objectives. Corporate strategy and cor.rtrols should
be integrated in order to keep eniployee behavior in congrueuce r.viih
n.ranagerial goa1s.
An organization has a well-aligned stnrcture, it will not function effectively
without a control system in place. The organizational structr-rre of a firm refers
to its hierarchies arrd repofiing patlerns. For
tl"re effective tunctioning ol the
structure, appropriate control systems are needed. Since plaming and control
requirements are different for dilferent corporate strategies. they need to be
designed in accordance r,vith tl.re corporate strategies. For exar.nple, in the
electronics business, channels of communication and transfer of competencies
act oss various business ur.rits are critical for effective lunctioning, and
therefore the r,arious deparlments are interdepenclent. In suoh cornpanies, tlie

22
corporate level managers need to have wide range of control across various
deparh.nents. Managers should also have extensive knoivledge about the
various departments and their work processes.
Control systems can be lranred according to the class into which a colxpany
fits. Companies can be classified into tl.rree categories: a singie business firm
operating in one line of business; a firrr which has underlaken diversification
into businesses that are related to one another; and, a finn rvhich has
diversified into businesses that are not related to one another, (except in being
owned and managed by a common concern.) Corporate strategies of flrms are
distinctly different in fir'rts with different levels of diversification. Firms can
be classified into three categories based on the extent and type of
di versifi cation undertaken by them.
Single bu,siness firm: The finn concentrates on a single business. For example,
Apple Computers pnrsues a silrgie business strategy of manufacturing
cornputels.
Related diversilicatictr: The firm has diversified- into businesses that are
related to one another and have a colnmon set of coibl coinpetencies.
[Jnrelqted diversificcrtion; The firm operates in different areas of business
which are unrelated to one another. The only iommon link between thern is
that they are managed and financed by a cornmon concern.
Control systems will differ on the basiS of corporate strategy with regard to
d iversificat ion.
. More diversification requiles that ihe lnallagers at the corporate leve1
shor-rld have a rvide range of expertise and knowledge relating to the
various activities of the firm. Manageurent control in cliversified fims is
often difflcult. .

. Singie business fir'ms and finns with related diversification are based on
company-wide rcore competencies. Hence it is itr-rportant to have good
ohannels ,of .cornrnunication that can allow interdependence among the
dilferent units.
r i4 : {lre case of undiversified firms, there is comparatively less
interdependence alrong various units. As a firm becomes more
diversified, cor,trol systems should be altered to fostel better cooperation
among the diverse units and to encourage their entrepreneurial spirit.
There are specific activities that need to be considered when designing a
control system for ditGrent corporate strategies
Sn,arcgic planning: Conglomerate businesses usually use verlical strategic
plans i.e" the different business units prepare strategic plans, which are
reviewed by the senior management. Strategic planning systems [or
diversified business ur.rits are usually both horizontal and vedic.al. T'he
horizor-rtal process involves the preparation of a plan on behalf, of each unit or
group by an executive, with synergistic inputs fiom the different business
units of the organization. The managers of the individr"ral business units
identify the varior-rs linkages to other business units so that they can synergize
tl-reir operations. These interdependent units also reqr-rire joint strategic p1ans.

23
 T'he strategic plans of the individual business units are often ciroulated among
the various business units as this helps in getting feedback.
tsudgeting; In a single business firm, the chief executive can control the
budgeting operations through infbrmal methods and personal intervention. In a
congiomerate, it is not possible to rely on infonnal interpersonal lelationships,
and the chief executive officer may is unlikely to be able to control all the
budgeting activities in all the businesses. Hence, business unit managers have
greater influence in developing their product/market environments.
lncentives and compensation: The plan for employee ir-rcentives and
corupensation in organizations varies according to the level of diversification
of the organization. ln the case of conglornerates, bonus is usually fonnula-
based. Formula-based plans are not usually popular in highly interdeperrdent
firms as their perfonnance is based on the decisions and actions of other units.
In a sir-rgle business fim, bonus is detemined on the basis of subjective
factors such as the perforrnance of the business. In the caSe of a business unit
manager, the bonus is tied to the perfomance of the parlicular unit rather than
the profitability of the whole finn. In the case ef ,gingle business tr-rnrs and
those with related diversification, the compensation is usually tieci to the
perfbrmance of the unit and also the performarlce of the rvhole firnr. Linking
ir.rcentives to the overall perfonrrance of the organization helps to increase
teamwork and interdependencies.

Business Unit Strategy

Diversified cornpanies segrnent ther-nselves into business units and assign
different strategies to different busir.ress Lrn.its. Such companies do not havs a
standardized approach fcr ail their business nnits, but develop separate
strategies fbr each busir"ress. Business unit strategy deals with creating and
nrair.rtair.ring competitive:advantage in all the businesses the company operates
in. Br-tsiness unit sli'ategy for an organization l-ras two interrelated aspects:
rnission and cornpetitive advantage.

Mission .

A rnission staternent is a broad organizational goal, based or.r planning

preinises. which justifies an organization's existence. There should be
congruence between the mission stater.nent of tl-re organization and the controls
being used. Management control systems help the manager to n.rake decisions
on tl.re trade-off between the short tern-r and the long term" In a diversified
business, the primary task of the CEO is to make basic decisions on the
businesses to undertake, the resources to deploy in each, and the integration of
the r"nultiple businesses to mal<e them rnost effective. There are varions
planning models that help managers at the corporate level to allocate resoLlrces
arnong different businesses" '['hese models of planning also help in identifying
the r.nissions of individual business units. The focus of all the planning
decisions are based on certain factors:
r Concentrating on the internal and external factors of the business that
detertnine t1-re attractiveness of the market opportunities available to
business units.

24
r The competitive ability of the business r-rnit is likely to vary fron-r one unit
to another. So a firm has to emphasize on the peribrmance of each
business unit before allocating resollrces.

" in which a unit is operating is likely to

TI.re attractiveness of the industry
vary. Hence it has to be considered when allocating resources.
Two of the planning approaches most widely used are the Boston Consulting
Group's two-by-two grorvth share matrix and General Electric Company's
three-by-thlee industry attractiveness-business strength matrix. While the
models diff'er on the methodologies aclopted, they have the same set of
missions for a business unit to choose from: Build, Hold, Flarvest and Divest.
The company should have a clear idea of the type of mission the business
units have chosen, as this will help in deciding on the conrrol systems to be
used.
Bttild: This urission inclicates that the bursiness unit's goal is to increase its
n.rarket share, even at the expense of short-terrn eamings- and cash flolv. A
business unit following this mission is typically a resource user dne to the
heavy investment required to build a competitive position. Business Ltnits with
low market share in high growth industries typically pursue a 'build' rnission.
Hotcl; This stratcgic rnission airrs to protect the business lrnit's nrarket share
and competitive position. The cash outtlows, for a business unit follou,ing this
mission, wouid usually be approxirnately equal to cash inflows. Typicaily,
businesses rvith high marliet share in high glowth industries pursue a 'hold'
rrr ission.

Hqrvest'. This mission has thr goal of nraxirnizing shorl-temt eantings ancl
cash florv, even at the expense of market share. A br-rsiness unit follorving suclr
a mission rvor"rld be a resource provider in that it generates more cash than tlrat
required for further investrnent. Typically, businesses with high nrarket share
in low growth industries pursue a 'harvest' rnission.
Divest. This strategic mission indicates a decision to withdraw fi'om the
br"rsiness eithei through a process of slow liquidation or outright sale.
Typically, business units with lor,r, marl<et share in 1or,r, growtlr indr-rstries are
divested,
The rnissions discussed above should not be used in a rnechanistic rlanner.
They have to be sombined with creativity, innovation and initiative by the
managers for effective control systents.
f'hus while fiaming control systems a manager has to be aware of the rirission
adopted by each of its business units. The fonrr and structure of a cor.rtrol
system aflects business units r.r,ith different missions. Strategic plantring,
bLrdgeting, and the incentive/compensation system are the mai11 aspects
deterrninirrg the form and structure of the control system.
Strategic planning process: Strategic planning needs to be designed keeping
in rnind the enviromnent in which the con-rpany operates. In an environment
rvl.rere there are greater r-rncertainties, strategic planning assumes more
iurportance. For this reason, the process of strategic planning is rnore critical
for 'build' business r-rnits than fbr 'harvest' business units. A 'build' rnission is
usually undertaken in the growth stage of the prodr-rct life cycle, and the

25
 objective of the 'buiid' mission is to increase the market share. Increasing a
company's market share involves uncerlainty, parlicr"rlarly with regard to
cornpetitors. lor'build' urrits.
Budgeting: Budgeting involves decidir-rg on tl-re allocation of resources and
targets of each business unit. Budget revisions are more likeiy in the case ol
'build'units than for'harvest'units because of frequent changes in tlie market
environment of 'build' urlits. 'Build' managers, however, usually have greater
influence on the fbrmulation of budgets. and other important managenrent
decisions. For 'harvest' units, the environrnent is usually stable, and so inputs
from rnar,agers of 'halvest' units are less essential.
lnc:enti,-e compensation systeru: When several elements enter into the design
of an incentive compensation system fbr business units. Managers have to
decide on the size ol incentive bonus payments, the measures of perfonnance
to be considered for incentive bonuses ( sales volume, product development,
return on investment etc.), the criteria on the basis of which sulrjective
judgments are to be made, the fiequency of incentive payments (annual,
monthly, bienniai), etc. The n.rissior.r of the business-uhit, influences the type of
incetrtive package fonlulated. In many firms, the completion of riskier
projects is rewarded by higher compensation., Managers in'build'units are
therefore lil<ely to have higher incentive payrnents than rnanagers in'harvest'
units. Performance may be measured eitlier over the shorl tenn or the long
term. If a firm links incer-rtives to perforniance in terms of profits. cash flows
ancl returns on inveshnerrt, it is said to have a shoft-term focus, lvhereas if it
links incentives to perfbnnance in temrs of market share, neu, product
it is said to have a long-
development and developrnent of hurnan resources,
ternr lbcus.

ComJlctitire advanhge oIa business unil

In order to accomplish its rnission, every business unit should clevelop a
competitive adr4antage. In order to identify its cornpetitive advantage, a
business unit should analyze the competitive structure of the industry in which
it plans to operate. Pofter's Five Forces Moclel analyzes the competitive
structure of an indr,rstry on the basis of the follorving factors:
. Intensity of rivalry among the existing players
r Bargaining power of the buyers
. Bargaining power of the sr"rppliers
r Threat from substitutes
o Threat ofnew entrants
An understanding of tirese factors, can help a business unit to fi'an.re generic
strategies through which it can respond to the opportunities in the external
environment. Altemative generic strategies rnay be developed ir.r tenns of:
Low Cost: The prirnary focus of this strategl, is to achieve lou,cost relative to
competitors. Cost leadership can be achieved through economies of scale in
production, learning curve eff'ects, tight cost control and cost Lninimizatior.r in
areas such as research and development, service, sales force, or adverlising.
D(ferenticttion: The goal of this strategy is to differentiate the product of the
business r.rnit, in order to create a product that is perceived by custonters as
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 uniclue. Diff'erentiation may be based on brand loyalty, customer service,
dealer network, product design and features, and product technology.
Focus: This strateg;/ requires the business unit to focus on a particular buyer
group, segment of the product line, or geographic mat'ket. The focus strategy
helps the unit to achieve core competency by narrowir-rg its rnarl<et segment.
Additionql considerqtions.' Although a firm should adopt diflerent controls for
its units, there are some problems associated with this strategy. The external
environment of a business unit changes over time and shifts in strategy may be
reqLrired. If a control system is over-cornrnitted to a single strategy or level of
diversification, it may become difficult for the manager to shift to a new
strategy.
Secondly, the controI system should be appropriate for both the mission and
the cornpetitive advantage of the finn. Trying to design a control system that
fits both uTay result in coni'lict. ln such situations, the manager has to decide
rvhether to give priority to the finn's urission or to its comp_etitive advantage.

SUMMARY

The cybernetic approach to managentent control systems helps in analyzing

cornplex activities in an organization. The cybernetic paradigm helps to
manage the repetitive control process in an organization. Contingency theory
was propolrnded in response to the universalistic approach that argues that
there is an optirnal scheme fbr control design, whicl-r applies in ali settings and
firms. Clranges in technology, arganizational structure and the need to adapt to
the environrlent of the industry have contributed to the emergence of
contingencv formulations in control systerns. Managernent control systerns are
tools that hetp in eff'ectiye implernentation of strategy. Flence, it is important
to understand the typils of strategies finns use in respect of divelsification and
l-row control slistems can be devised for each strategy. Strategies can be
considered a{,two levels'the corporate level and the level of tlie business nnit.
Corporate strategy relates to the whole olganization and involves decisions on
rvhere to compete and how to compete. Strategies at the corporate level can be
diflereirtiated on the basis of the level of diversification undertaken by the
firn:r i.e., whether it is a single business firnl, a firrn with related diversification
or a firm with unrelated diversification. Business ur-rit strategies deal with
creating and r-nair.rtaining corlpetitive advantage in all the areas of business in
ivhich the company operates. Business unit strategy has two interrelated
aspects: mission and competitive advarrtage. The business unit's mission
could be: to build, to hold, to harvest or to divest; while it can develop its
cornpetitive advantage in terms of low cost, differentiation or focus.

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