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
What gets measured gets managed — even when it’s pointless to measure and manage it, and even if it harms the purpose of the organisation to do so. Simon Caulkin, management editor of the Guardian summarizing Ridgway (1956)
The saying “what gets measured gets managed” is often thought to be from Peter Drucker, a management expert. But in fact, Drucker never said it. We know that even in 1956, this “what gets measured gets managed” idea had some major flaws. In his paper “Dysfunctional Consequences of Performance Measurements” Ridgway (1956) already concluded that not everything that matters can be measured and not everything that we can measure matters.
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)
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
- 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
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
Mintzberg (2000) structures traditional planning into two domains—performance control and action planning.
Performance control sets general performance standards (i.e., the desired output) over a period of time, without specifying any particular actions. The aim is to regulate the overall results of a given unit (i.e., standardizing outputs). Objectives, budgets, operating plans and other general standards are set for the unit, and its performance is later measured against these standards and the results fed back up the hierarchy.
- Budgets allocate resources to different parts of the organization. They are essential for translating strategic plans into actionable financial plans, ensuring that resources are available to achieve the set objectives.
- Objectives are the broad goals that an organization aims to achieve. Objectives provide a sense of direction and purpose, guiding the overall strategy.
Action planning is about making decisions about specific actions – things like marketing new products, building new factories or selling old machines. Some of the actions can be done by one unit, but others need to be done across different units. Because it’s about making specific decisions, action planning isn’t a pure form of standardising outputs. It’s somewhere between that and standardising work processes.
- Strategies are the specific plans or courses of action designed to achieve the objectives. They outline how the organization intends to compete in the market and achieve its goals.
- Programs are the detailed steps or initiatives that implement the strategies. They include specific projects, timelines, and responsibilities to ensure that the strategies are executed effectively.
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 3 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.
Mintzberg (2000) argues that these hierarchies often operate independently rather than in a cohesive, integrated manner. This separation can lead to misalignment and inefficiencies within the organization.
Strategic planning procceses move through the planning hierarchies. As a result of strategic planning, objectives are set, strategies developed, budgets created, and programs implemented. However, the focus and approach differ. Mintzberg (2000) identifies three main types of strategic planning:
- Conventional strategic planning emphasizes comprehensive, long-term planning.
- Numbers game focuses on achieving specific numerical targets.
- Capital budgeting prioritizes financial returns and efficient resource allocation.
Conventional strategic planning
This approach involves a formalized process where organizations attempt to predict the future and develop detailed plans to achieve their strategic goals. It typically includes extensive data analysis, forecasting, and the creation of comprehensive strategic plans. Mintzberg (2000) criticizes this method for being too rigid and often disconnected from the realities of day-to-day operations.
- In this process, organizations start by setting broad, long-term objectives based on extensive data analysis and forecasting.
- Detailed strategic plans are developed to achieve these objectives. This involves identifying specific actions and initiatives that align with the overall goals.
- Financial resources are allocated to support the strategic plans. Budgets are created to ensure that the necessary funds are available for each strategic initiative.
- The strategies are broken down into specific programs and projects. These programs include detailed steps, timelines, and responsibilities to ensure effective implementation.
Strategic planning as a “numbers game”
In this process, strategic planning becomes more about meeting numerical targets and less about genuine strategic thinking. Organizations focus on setting and achieving specific financial or performance metrics, often driven by short-term goals. This approach can lead to a narrow focus on quantitative measures, potentially neglecting qualitative aspects and long-term strategic vision. Mintzberg (2000) 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.
- The focus is on setting specific numerical targets, often driven by short-term goals and performance metrics.
- Strategies are developed with the primary aim of meeting these numerical targets. This can sometimes lead to a narrow focus on achieving specific metrics.
- Budgets are aligned with the numerical targets, ensuring that resources are allocated to meet the set performance metrics.
- Programs and projects are designed to achieve the numerical targets. These programs are often closely monitored to ensure they meet the specified metrics.
Capital budgeting as ad hoc control
This approach is on the action planning side of the diagram. It is characterized by being bottom-up driven and more ad-hoc than planned. Capital budgeting involves allocating financial resources to various projects and initiatives based on their expected returns. It is a more financially driven approach, where strategic decisions are heavily influenced by capital investment considerations. While it ensures that resources are allocated efficiently, it can sometimes overlook broader strategic objectives and the need for flexibility and adaptability.
- Objectives are often financially driven, focusing on maximizing returns on investment.
- Strategies are developed based on capital investment considerations. The focus is on identifying projects and initiatives that offer the best financial returns.
- Budgets play a central role in this process. Financial resources are allocated based on the expected returns of different projects and initiatives.
- Programs are designed to implement the strategies, with a strong emphasis on financial efficiency and return on investment.
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.
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.
- Chakravarthy’s paper highlights the limitations of traditional financial metrics in measuring strategic performance. How can slack resources provide a more comprehensive understanding of a firm’s strategic health? Discuss with reference to the concepts of quality of transformations and stakeholder satisfaction.
- Consider a scenario where a firm is facing a significant market disruption. How can slack resources be leveraged to navigate this disruption effectively?
- 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?