Page 236 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Unit 12: Management Control for Differentiated Strategies

Notes
Table 12.2: Different Strategic Implications for Budgeting
Build Hold Harvest
Role of budget More a short-term More a control
planning tool (document of
restraint)
Business unit manager’s Relatively high Relatively low
Influence in preparing the
budget.
Revisions to the budget Relatively easy Relatively difficult
during the year
Frequency of informal More frequent on policy Less frequent on
reporting and contacts issued; less frequent on policy issues; more
with superiors operating issues frequent on
operating issues.
Frequency of feedback Less often More often
from superiors on actual
performance versus the
budget
“Control Limit” used on Relatively high (i.e. Relatively low (i.e.
periodic evaluation against more flexible) less flexible)
the budget
Importance attached to Relatively low Relatively high
meeting the budget
Output versus behaviour Behaviour control Output control
control

1. In contrast to harvest units, budget revisions are likely to be more frequent for build units
because of the more frequent changes in their product/market environment.
2. Build unit managers may have relatively greater input and influence in the formulation of
the budget than harvest unit managers. This is so because “build” managers operate in
rapidly changing environments and have better knowledge of these changes than does
the senior management. For harvest units with stable environments, the knowledge of
the manager is less important.

Incentive Compensation System

In designing an incentive compensation package for business unit managers, the following are
some of the questions that need to be resolved:

1. What should be the size of incentive bonus payments relative to the general manager’s
base salary? Should the incentive bonus payments have upper limits?
2. What measures of performance (e.g., profit, return on investment, sales volume, market
share, product development) should be employed as the basis for deciding the general
manager’s incentive bonus awards? If multiple performance measures are employed,
how should they be weighted?
3. How much reliance should be placed on subjective judgements in deciding on the bonus
amount?
4. With what frequency (semi-annual, annual, biennial and so on) should incentive awards
be made?

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