Management Control

How to effectively evaluate strategic performance?

Andy Weeger

Neu-Ulm University of Applied Sciences

November 13, 2023

Learning outcomes

After this session, you should have a solid understanding of

• differences and relationships between strategic planning and implementation and control,
• the formal strategy and management control process according to the management control perspective,
• difficulties of accurately measure strategic performance,
• the planning hierarchies according to Mintzberg and their objectives and measures,
• the reasons that lead companies to set different priorities in their management and planning approach, and
• different performance measurement frameworks including their key differentiating characteristics.

Prologue

You can’t manage what you can’t measure. Peter Drucker

Reflection

Form small groups of 3 to 4 students, take 10 minutes to discuss your findings from reading Chakravarthy (1986) and to create a 5 minutes presentation that answers following questions:

• Why is it difficult to accurately measure strategic performance?
• Why are traditional financial metrics limited in capturing the strategic impact of various strategic initiatives and decisions?
• How can the quality of a firm’s adaptation be evaluated?
• How should, according to the findings of the study, strategic performance be evaluated?
• How do the findings relate to the balanced score card method?

Management control

Definition

Management control is the process by which managers influence other members of the organization to implement the organization’s strategies Anthony and Govindarajan (2014, 6)

What are examples for management control decisions?

Examples for management control decisions:

• Introduce new product or brand within product line
• Expand a plant
• Determine advertising budget
• Issue new debt
• Implement minority recruitment program
• Decide inventory levels
• Control research organization

Part of strategy implementation

Anthony and Govindarajan (2014)’s perspective on management control

 

Figure 1: Anthony and Govindarajan (2014)’s perspective on management control

• Organization structure specifies the roles, reporting relationships, and division of - responsibilities that shape the decision-making within an organization.
• Human resource management is the selection, training, evaluation, promotion, and termination of employees so as to develop the knowledge and skills required to execute organizational strategy.
• Culture refers to a set of common beliefs, attitudes, and norms that explicitly or implicitly guide managerial actions.

The formal strategy and management control process

Formal management control system (Anthony and Govindarajan 2014, 105)

 

 

 

Figure 2: Formal management control system (Anthony and Govindarajan 2014, 105)

Management control’s task is the implementation of the set organizational strategies, which means that divergences have to be controlled. Thus, MCS are defined as “[…] system[s] used by management to control the activities of an organization is called management control system” (Anthony and Govindarajan 2014, 17).

Such traditional management control approaches often focus on top-down command and control mechanisms, where authority and decision-making are centralized at the top levels of the organization. The emphasis is on planning, setting targets, monitoring performance, and taking corrective actions if necessary. The control mechanisms are typically based on formal rules, procedures, and hierarchical structures.

Planning hierarchies

Four hierarchies

Figure 3: Four planning hierarchies according to Mintzberg (2000)

 

 

 

 

Mintzberg (2000) structures traditional planning into two domains—performance control and action planning.

Performance control imposes general performance standards (i.e., desired output) over a period of time, with no reference to specific actions and assess whether or not that standard has been achieved. The purpose of performance control is to regulate the overall results of a given unit. Objectives, budgets, operating plans, and various other kinds of generalo standards are established for the unit, and its performance is later measured in terms of these standards and the results fed back up the hierarchy.

Action planning specifies decision that call for specific actions—to market new products, build new factories, sell old machines. Some of the proposed actions may be taken within single units, but others can cut acrros unit boundaries. By its imposition of specific decisions, action planning turns out to be a less than pure form of standardizing outputs; more exactly, it falls between that and standardizing work processes.

So whereas performance control says, “Increase sales by 10 percent this year [in any way you care to]”, action planning says, “Do it by introducing blue widgets”.

The diagram in Figure 4 explains how performance control and action planning work. The arrows in the diagram go in both directions, showing that performance control can happen in two ways. The first way is top-down, where objectives set by top management become more detailed as they move down the hierarchy. The second way is bottom-up, where lower-level units set their own performance standards. These standards are then combined as they move up the hierarchy and eventually become overall objectives for the entire organization at the top level.

In real-world practice, the performance control system is likely to operate not just as a pure top-down or bottom-up process, but as a combination of both. Some performance standards are detailed by top management and trickle down the hierarchy, while others are proposed by employees and aggregate up. At each level, managers try to set standards for their teams, and employees may suggest less strict ones. Through this negotiation process, a mix of composite and detailed performance standards emerges at all levels of the organization.

The action planning system primarily follows a top-down approach. In theory, it starts with strategic planning, where the organization evaluates its strengths and weaknesses based on environmental trends. It then creates a comprehensive set of strategies for the future. These strategies are translated into programs, which involve specific capital projects (e.g., launching a new product line and constructing a new factory) or operating projects (i.e., projects where costs are not capitalized typically evolving around enhancing and streamlining existing operations such as developing a marketing campaign). These programs are further detailed and scheduled, eventually becoming specific operating specifications that prompt direct actions.

Figure 4: Four planning hierarchies according to Mintzberg (2000)

Conventional strategic planning

Figure 5: Conventional strategic planning according to Mintzberg (2000)

Strategic planning as a “numbers game”

Figure 6: Strategic planning as a “numbers game” according to Mintzberg (2000)

In certain organizations, strategic planning gives excessive importance to the quantitative aspect. Mintzberg refers to this as the numbers game and criticizes it for being a “ritualistic strategy formation” that hinders real strategic change. Characteristics include being top-down, driven by numbers, and formalistic.

Capital budgeting as ad hoc control

Figure 7: Capital budgeting as ad hoc control

The third type of strategic planning is on the action planning side of the diagram, but it’s unique because it moves upward, bypassing the mysterious process of strategy formation. This is primarily capital budgeting, a system for approving major capital expenditures. It is characterized by being bottom-up driven and more ad-hoc than planned.

Performance measurement frameworks

Overview

Du Pont Pyramid, Tableau du Bord, Balanced Scorecard, Performance Pyramid, and Performance Prism.

• The Du Pont Pyramid focuses on analyzing return on investment (ROI) by breaking it down into key financial ratios. It examines profitability through the relationships between net income, sales, and asset turnover. The framework is useful for understanding the drivers of financial performance.
• A Tableau du Bord (a French term for “dashboard”) provides a comprehensive approach to performance measurement. It encompasses both financial and non-financial metrics, presenting a holistic view of organizational performance. This framework is particularly useful for monitoring and managing various aspects of performance in a visually intuitive manner.
• The Balanced Scorecard is a strategic performance measurement framework that takes a balanced approach by considering multiple perspectives. It includes financial metrics along with customer satisfaction, internal processes, and learning and growth. This framework is valuable for aligning organizational activities with the overall strategy and ensuring a balanced assessment of performance.
• The Performance Pyramid offers a hierarchical representation of performance metrics, starting from financial indicators at the top and extending to operational metrics at the base. This framework organizes metrics into different levels based on their strategic relevance and impact. It provides a structured approach to performance measurement with a clear linkage to strategic goals.
• The Performance Prism is a holistic framework that goes beyond traditional measures by considering stakeholders and their interests. It incorporates key elements such as stakeholders, strategies, processes, capabilities, and stakeholder satisfaction. This framework is valuable for providing a broader perspective on performance and assessing the impact on various stakeholders.

Each framework offers a unique perspective on performance measurement. A combination of these frameworks may provide a more comprehensive understanding of performance.

Group work

Form small groups of 3 to 4 students, take 15 minutes to do a research on one of the frameworks and to prepare a short presentation (5 minutes) that summarizes the key-tenets of the framework.

Prepare yourself to present your insights.

Conclusion

The frameworks reflect key ideas to today’s understanding of performance measurement system design:

• Inclusion of non-financial and financial metrics
• Creating a balanced set of multidimensional measures
• Identifying trade-offs between measures
• Include a mix of historical or lagged indicators and predictive measures
• Linking measures in terms of a cascading system and means-ends relationships
• Linking measures and targets with actions
• Inclusion of internal (e.g. costs, quality) and external perspectives (e.g. competitiveness)
• The integration of multiple stakeholders
• The dynamics of performance measurement systems over time (with changing priorities and strategic focus)

Review and consolidation

The following questions are designed to review and consolidate what you have learned and are a good starting point for preparing for the exam.

• Explain Mintzberg’s planning hierarchies and provide examples of how these hierarchies (may) manifest in organizational planning processes.
• Discuss the advantages and disadvantages of top-down versus bottom-up planning approaches according to Mintzberg. How can organizations effectively balance these approaches for strategic success?
• Compare and contrast the management control framework proposed by Anthony and Govindarajan with Mintzberg’s planning hierarchies. How do these frameworks complement or differ from each other?
• Identify and explain the key components of the management control framework. How can organizations use these components to enhance strategic performance management?
• Analyze the Du Pont Pyramid and its application in assessing return on investment (ROI). How does it contribute to understanding financial performance within an organization?
• Compare and contrast the Balanced Scorecard and the Tableau du Bord as strategic performance management frameworks. Discuss their strengths and weaknesses in different organizational contexts.
• Evaluate the significance of the Performance Prism in incorporating stakeholder perspectives in performance management. How does it enhance the overall understanding of organizational success?

Homework

Read Chen et al. (2010) and make notes on following questions:

• What are prominent conceptions of information systems strategy identified by the authors in the literature?
• How do these relate to the perspectivs on strategy as discussed earlier (see here)?
• How do the authors (re-)conceptualize information systems strategy?
• How might the concepts discussed in the paper be applied in real-world IT strategy formulation?

Q&A

Literature

Anthony, R. N., and V. Govindarajan. 2014. Management Control Systems. McGraw-Hill Education.

Chakravarthy, Balaji S. 1986. “Measuring Strategic Performance.” Strategic Management Journal 7 (5): 437–58.

Chen, Daniel Q, Martin Mocker, David S Preston, and Alexander Teubner. 2010. “Information Systems Strategy: Reconceptualization, Measurement, and Implications.” MIS Quarterly, 233–59.

Mintzberg, H. 2000. The Rise and Fall of Strategic Planning. Prentice Hall.