Page 141 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes 1. Renewing and updating the strategic plan from last year: Actual experience for the first
few months of the current year is already reflected in the accounting reports and these are
extrapolated for the current best estimate of the year as a whole. If the computer programme
is sufficiently flexible, it can extend the impact of the current forces to years beyond the
current year, if not, rough estimates are made manually. The implications of new plans
decisions on revenues, expenses, capital expenses and cash flows are incorporated.
2. Deciding as assumptions and guidelines: The updated strategic plan includes broad
assumptions as the growth in gross national product, cyclical movements, the rate of
general inflation, labour rates, prices of important raw materials, interest rates, selling
prices, market conditions, including the actions of the competitors and the impact of
government legislations in each of the countries in which the company operates. These
assumptions are re-examined and if necessary, changed to incorporate the latest
information.
The updated strategic plan contains the implications on revenues, expenses and cash flows
of the existing operating facilities and changes in these facilities due to opening new
plants expanding existing plans, closing plants and relocating facilities. It reflects the
business unit “charters”, that is, the product lines that are permitted to manufacture or to
sell or both. These conditions are examined to see that they are currently valid and the
amounts are extended for another year.
The resulting update is not done in great detail. A rough approximation is adequate as a
basis for senior management decisions about objectives that are to be attained in the
program years and about the key guidelines that are to be observed in planning how to
attain these objectives.

3. First iteration of the strategic plan: The business units and other operating units prepare
their “first cut” of the strategic plan. It may include different operating plans than those
included in the current plan such as change in marketing tactics; these are supported by
reasons.
The completed strategic plan consists of income statements, of inventory, accounts
receivable and other key balance sheet items, of the number of employees, of quantitative
information about sales and production, of expenditure for plant and other capital
acquisitions, of any other unusual cash flows; and of a narrative explanation and justification.
4. Analysis: The analysis is done both by the planning staff and by the marketing, production
and other functional executives at headquarters through discussions.

In many cases, the sum of the business unit plan reveals a planning gap i.e., the sum of the
individual plans does not add up to the attainment of the corporate objectives. There are
three ways to close a planning gap: (a) to find opportunities for improvements in the
business unit plan, (b) to make acquisitions or (c) to revise the corporate objective. Senior
management usually focuses on the first option.
Comparisons with past performance, with the performance of other companies or with
standard costs for certain types of activities may indicate opportunities for improvement.
5. Second iteration of the strategic plan: Analysis of the first submission may lead to revision
of the plan of certain business units, but it may also lead to change in the assumptions and
guidelines that affect all business units.

Example: The aggregation of all plans may indicate cash drain because of increasing
inventories, and capital expenses is more than the company can safely tolerate, if so, there may
be a requirement for postponement of expenditures throughout the organization. These decisions
lead to a revision of the plan.

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