Page 238 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Unit 12: Management Control for Differentiated Strategies

Finally, frequency of bonus awards influences the time horizon of managers. More frequent Notes
bonus awards encourage concentration on short-term performance since they have the effect of
motivating managers to focus on those facets of the business that they can affect in the short run.
Less frequent calculation and payment of bonus encourages the manager to take a long-term
perspective. Thus, build managers tend to receive bonus awards less frequently than harvest
managers.

Self Assessment

Fill in the blanks:

1. ………………………segment themselves into business units and typically assign different
strategies to the individual business units.
2. ……………………..amounts might also be based on a combination of formula based and
subjective (non-formula) approaches.

12.3.2 Competitive Advantage

A business unit can choose to compete either as a differentiated player or as a low-cost player.
The choice of a differentiation approach, rather than a low-cost approach, increases uncertainty
in a business unit’s task environment for three reasons.
First, product innovation is likely to be more critical for differentiation business units than for
low-cost business units. This is partly because a low-cost business unit, with its primary emphasis
on cost reduction, typically prefers to keep its product offerings stable over time; whereas a
differentiation business unit, with its primary focus on uniqueness and exclusivity, is likely to
engage in greater product innovation. A business unit with greater emphasis on new product
activities tends to face greater uncertainty, since the business unit is betting on unproven products.
Second, low-cost business units typically tend to have narrow product lines to minimize inventory
carry costs as well as to benefit from scale economies. Differentiation business units, on the
other hand, tend to have broader set of products to create uniqueness. Product breadth creates
high environmental complexity, and consequently, higher uncertainty.

Third, low-cost business units typically produce no-frill commodity products, and these products
succeed primarily because they have lower prices than competing products. However, products
of differentiation business units succeed if customers perceive that the products have advantages
over competing products. Since customer perception is difficult to learn about, and since customer
loyalty is subject to change resulting from actions of competitors or other reasons, the demand
for differentiated products is typically more difficult to predict than the demand for commodities.

Objectives of the Company

The fixing of objectives is closely linked to the company’s organisation structure. At the first
level of responsibility, the overall objective is usually, earning the required return of the funds
invested in the business, consistent with maintaining the sound financial position of the business.
At the second level of responsibility, typical functional objectives that may be fixed are related
to the following functions:
1. Marketing

2. Production
3. Research and Development

LOVELY PROFESSIONAL UNIVERSITY 233