Strategic Planning and Control

a.y. 2022/2023

PM&MCS AND
ORGANIZATIONAL DESIGN:
STRUCTURAL TOOLS AND
INFORMATION FLOWS
Simons, Performance Measurement and Control
Systems for Implementing Strategy, 2014, Ch. 3

Dr Sonia Quarchioni
Department of Economics, Business and Statistics, University of Palermo
 PM&MCSs and organizational design
2

 The relationship between PM&MCSs and

organizational design:

 which are the main structural tools that allow organizing

for performance?
 which are the main information flows needed to support
the functioning of PM&MCSs?
The Organizational structure
1. which are the main structural tools that allow organizing
for performance?

Organizational structure  is the skeleton of the

organization which arises out of strategic directions
- Formally dictates how jobs and tasks are divided
and coordinated between individuals and groups
within the company
- Varies in three elements of structure: work unit, span
of control, span of accountability
 The work unit (1/2)
4

 Work unit  represents a group of individuals who

use specific firm’s resources and are accountable for
performance
Principle of accountability:
-each work unit is expected to produce an output
-each work unit is expected to meet some performance
standards

E.g.
-workers organized around a production line to provide physical products with high
quality standards
-accounting staff grouped together to provide accounting services respecting high
reliability standards for transaction processes
 The work unit (2/2)
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 According to the criteria through which people and

resources are grouped, a work unit can be a

FUNCTION DIVISION or BU
groups of people groups of people
and resources and resources
engaged in focused on a specific
a similar work- market
process
 The work unit as a function
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 FUNCTION  the organizational work unit is composed of a group

of people who specialize in a specific work process
 Specialization  individuals and resources of a function are specialized in
specific tasks that require the same expertise, training, and dedicated resources

Marketing and Controller’s

IT function Production unit
sales function department

Specialized Specialized Specialized Specialized in

in selling to in accounting in supplying manufacturing
customers and keeping technological goods
records services
Benefits  specialized resources and knowledge allow to maximize effectiveness
(the extent to which a function achieves desired outcomes) and efficiency (the level
of resources consumed to achieve a certain level of output)
 The work unit as a division
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 DIVISION  individuals and resources are

clustered by a specific market, and specifically,

 by product market
 by customer market

 by geography market
 The work unit as a division: product market
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 PRODUCT DIVISION  the work unit is

composed of production facilities, resources
and employees dedicated exclusively to
support a specific product line

 Typical in a multiproduct company

 Zucchetti Centro Sistemi

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 The work unit as a division: product market
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 PRODUCT DIVISION Benefits:

1. product division can create:
-economies of scale (reduction in unit costs due to utilization of efficient,
large-scale resources and high-volume processing). E.g. Specialized plant
facilities can be dedicated to high-volume productions of a specific
product)
-economies of scope (reduction in unit costs due to utilization of the same
resources across multiple products). E.g. Use of the same distribution
channel for multiple products categories

2. increased responsiveness to customers and competitors: managers

can devote their full attention to a narrow, defined set of product-market
opportunities
 The work unit as a division: customer market
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 Division dedicated to a single

customer or category of customer

Typical in firms with a small number of

large, important customers, each with
distinct needs and attributes
12 McGraw-Hill Education
(educational publisher)

Benefits  development of specialized

expertise and knowledge about a
fundamental customer which are essential
to competitive success (increased
responsiveness); more opportunities to do
business with the customer
 The work unit as a division: geographical market
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 Regional Business Units  BUs

that produce, market and sell the
company’s products in a defined
geographic territory

Typicalfor multinational
corporations
14 Benefits  specialization
to local languages,
needs, regulations since
the energies of the BU
are devoted to serve the
local market; increased
responsiveness since all
energies can be devoted
to gathering information
about that local region
 Work units in hybrids structures
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 Matrix structure
(Kedrion)
 Span of control
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 Within any organization chart (functional, division,

hybrid) there are two related spans
 Span of control indicates how many (and which)
subordinates report to each manager in the organization,
outlining reporting relationships—who is accountable to
whom
 Span of accountability
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Span of accountability indicates the range of performance

measures used to evaluate managers’ achievements - what they are
accountable for. Organizational units as ‘responsibility centers’

Units that act Units that act Units that act

as cost center as revenue as profit
center center

Functional units (such as production
function, R&D function etc.) are set
up as cost centers:
-managers of those units are
accountable only
for the amount of costs sustained or
their unit’s level of spending
- they are asked minimizing costs
(or maximizing outputs for a given
level of inputs)
Functional units (such as sales
unit) are set up as revenue
centers:
-managers of those units are
accountable only
for their unit’s level of
revenues (and the related
costs)
- they are asked maximizing
revenues
Any function or business unit
that accounts
for its own revenue and
expenses on an income
statement:
- managers are asked to
make
trade-offs between costs and
revenues to achieve their
profit goals
 Zucchetti Centro Sistemi Revenue center
Profit center Cost centers
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 Span of attention
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 (1) the work unit to which the manager belongs, (2) the people
and functions under the manager’s direct control, and (3) the
performance measures for which the manager is held
accountable to superiors, are the main structural tools to
influence the:
Span of attention  domain of activities that are within a
manager’s field of view; i.e. the activities that the manager will
influence and on which he will gather information

PM&MCSs must be designed to ensure that everyone is working towards

pre-set goals, is accountable for those goals and evaluated on them
 E.g. PM&MCSs and organization design
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Managers pay attention to the resources they control and the

performance drivers on which they are measured
PM&MCSs are designed differently according to the extent
of spans
Narrow span of accountability Wide span of accountability
(e.g. cost or revenue center) (e.g. profit center)

Performance Performance targets based on overall profit

targets refer to specific lines on a business’s
profit and loss statement (e.g. Marketing
manager: amount of sales revenue;
Manufacture manager: cost of goods
produced)
plans to assure
that the business is producing adequate
returns
Combination ‘authority’- ‘responsibility’!
 Using information for PM&MCSs
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2. which are the main information flows needed to

support the functioning of PM&MCSs?

Organizational structure is a static concept that needs

to be combined with the information flows that are
necessary to support work flows and accountability
 Information on:
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 Information/measure* on the ‘performance’ of each internal

process can be referred to the measurement of:
 inputs, such as material, energy, labor, and support services that
are needed to create a product or service  managers want to
know if they are adequate in quality and quantity
 transformation activities, that consumes these inputs to create or
sustain something of value  managers want to know if they are
efficient
 outputs, in the form of intermediate or final products or services 
managers want to know if they meet expectations

*It can be financial (expressed in monetary terms) or non-financial (expressed in

quantitative but not monetary terms)
 Examples of performance measures
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1. The process of development of a new product

Input measure Process measure Output measure
Financial Labour and Cost of % of sales from
materials (€) prototyping (€) new products
n. of n. of product delivery n. of new products
Non-Financial engineering
milestones achieved introduced
hours

2. The process of product manufacturing

Input measure Process measure Output measure
Cost of Cost of Cost per unit (€)
Financial
components(€) rework(€)

Setup time % of units

Non-Financial n. of components meeting standards
meeting specifications
 The choice of what to control (1/3)
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 Managers must choose to control inputs, process, or

outputs

Control of inputs:
rarely sufficient (the
good quality of
inputs does not
necessarily lead to
good products or
services)
 The choice of what to control (2/3)
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 To ensure that inputs are transformed into high-quality

outputs, managers must focus their performance
measurement and control activities on either the
transformation process itself or the outputs being
produced
 Both control processes and control outputs are possible
when:
 Processes/outputs can be observed and/or measured
 Cost of measuring and monitoring process/outputs is low
Contribution of a salesman:
control outputs  control of daily sales reports is (a) easily measurable and (b) much more
economical than observing the daily activities of the salesman
Quality of the services provided to the customers:
control process controlling if services standards are being met is (a) easily observable and
(b) important to avoid the cost of non monitoring, i.e. the lost of quality which is critical to
maintain the customer loyalty
 The choice of what to control (3/3)
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 If cause and effect relationships are not well understood,

control outputs is preferred to control processes (even if it is
possible to monitor processes directly)
 E.g. monitoring the creative activity of software programmer. Even if
gathering information about actions and behaviors is feasible, there is
not confidence that following a set of pre-specified activities will lead to
the desired outcomes

 If processes standardization is important and can result in

strategic advantage, control processes is preferred to control
outputs
 E.g. when speed (time to market) is a critical success factor, standard
processes allow to drive efficiency in the roll-out of new products
 Uses of information/measures
Uses of information Purpose Type Needs
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To improve decision
processes (for both Information about cause - Need for most
Decision-making
planning and and effect relationships accurate information
coordination)
- Need to distinguish
To have feedback between
Profit plans and variance
Control and evaluation and evaluate controllable and
information
employees uncontrollable
factors

To have timely - Need for prompt

Signalling/Early
feedback about Variance information information to
warning
important issues ensure ready action

To communicate to Business plan (strategy) - Need for

External communication investors, suppliers, and performance data information which
customers (e.g. liquidity, sales) sustains credibility
 Potential distortions in information use: an example

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% of defected product units. If this measure is used:

 to decision-making  the measure must be most accurate as
possible in order to take the best strategic decision and learn from
the experience
 to be effective as early warning  the measure must be most
ready as possible in order to have time to correct actions
 to motivate employees  the target % of defected products
should be reduced in order to challenge workers to exert maximum
effort to avoid defections
 to evaluate employees  the actual % should be adjusted to take
into account factors outside the employee’s control (controllability
principle)
 to external communication  the target % should be lower than
the standard in order to be sure results are achieved and credibility
maintained
 Next time:
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 The profit planning systems

 Functionsof a profit plan
 How to build a profit plan
 Case-study