Page 235 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes 4. Since build business units are often in new and evolving industries, the experience of
build managers in their industries is likely to be less. This also contributes to the greater
uncertainty faced by managers of build units in dealing with external constituencies.

Mission and Time Span

The choice of build versus harvest strategies has implications for short-term versus long-term
profit trade-offs. The share-building strategy includes (a) price cutting, (b) major R&D expenditures
(to introduce new products), and (c) major market development expenditures. These actions are
aimed at establishing market leadership, but they depress short-term profits. Thus, many decisions
that the manager of a build unit makes today may not result in profits until some future period.
A harvest strategy, on the other hand, demands attention to tasks with a view to maximize
short-term profits.
We now discuss how the form and structure of control systems might differ across business units
with different missions.

Programming

While designing a programming process, several design issues need to be considered. There are
no single answers on these design choices; rather, the answers tend to depend upon the mission
being pursued by the business unit.

Table 12.1: Different Strategic Implications for Programming Process

Build Hold Harvest
Importance of Relatively high Relatively low
programming
Formalization of capital Less formal DCF More formal DCF
Expenditure decisions analysis; analysis, shorter
Longer payback payback
Capital expenditure More emphasis on non- More emphasis on
Evaluation criteria financial data (market financial data (cost
share, efficient use of efficiency, straight cash
R&D dollars etc.) on cash incremental
return)
Hurdle rates Relatively low Relatively high

Capital investment analysis More subjective and More quantitative and
qualitative financial
Project approval limits at Relatively high Relatively low
the business unit level

Budgeting

Implications for designing budgeting systems to support varied missions are contained in the
table shown below. The calculation aspects of variance analysis comparing actual results with
the budget identify variances as either favourable or unfavourable. However, a favourable
variance does not necessarily imply favourable performance; similarly, an unfavourable variance
does not necessarily imply unfavourable performance. The link between a favourable or
unfavourable variance, on the one hand, and favourable or unfavourable performance, on the
other hand, depends upon the strategic context of the business unit under evaluation.

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