Formal Control Process Model

A strategic plan implements the organization’s goals and strategies. All available information is used in making this plan. The strategic plan is converted to annual budget that focuses on the planned revenues and expenses
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Formal Control Process A strategic plan implements the organization’s goals and strategies. All available information is used in making this plan. The strategic plan is converted to annual budget that focuses on the planned revenues and expenses for individual responsibility centers. Responsibility centers are also guided by rules and other formal information. They carry out the operations assigned to them, and their outcomes are measured and reported. Actual results are compared with those in the budget to determine whether performance was satisfactory. If it was, the responsibility center receives feedback in the form of praise or other reward. If it was not the feedback leads to corrective action in the responsibility center and possible revision of the plan. Formal control process figure are given below- The formal control process: Goals and strategies Rules Other information Reward Yes Strategic planning Budgeting Responsibility center performance Report actual versus plan Was performance satisfactory No Revise Revise Corrective Action Measurement Feedback Communication 1|Page Goal Goals of a corporation refer to the end results that it wants to attain and which is set the chief executive officer and other top executives or sometimes by the owners. The major forms of goals include the following:  Profitability: percentage of profit margin and investment turnover.  Maximizing shareholder value: profitability, seeking growth ,paying dividend and retention of stock market price.  Multiple stakeholder approach: capital market stakeholder, product market stakeholder and factor market stakeholder. On the other handThe general goal of all businesses is to meet a particular demand in the market by providing a service or goods while maintaining profitability. Business goals for are an articulation of a future condition. Setting specific goals for a business involves creating written statements of the future condition desired as well as how the business plans to accomplish each stated goal. The written description of each business goal should include actions or tasks to be completed by particular individuals or departments within the business venture. A goal is a statement of a desired future an organization wishes to achieve. It describes what the organization is trying accomplish. Goals may be strategic (making broad statements of where the organization wishes to be at some future point) or tactical (defining specific short-term results for units within the organization). Goals serve as an internal source of motivation and commitment and provide a guide to action as well as a means of measuring performance (Barton, 2000). Defining organizational goals helps to conceptualize and articulate the future direction of the organization, thus allowing those 2|Page responsible for setting that direction to develop a common understanding of where the organization is heading. Goals provide a way of assuring that an organization will get where it wants to go. Types of Goals Official goals are the general aims of an organization as expressed in the corporate charter, annual reports, public statements and mission statements. Their purpose is to give the organization a favorable public image, provide legitimacy, and justify its activities. Operative goals reflect the actual intention of an organization. They describe the concrete steps to be taken to achieve the organization's purpose. They often don't correspond with official goals. For example: Many organizations mention environmentally friendly behavior as a goal of the organization. However in a study of organizations actually including environmental friendly behavior as an organizational goal, very few had corresponding operative goals, i.e. very few delineated how such behavior would be implemented in the different departments of the organization. Additional examples: Most prisons have rehabilitation of prisoners, preparing them for re-integrations into society as their official goal, however in practice, most of their operative procedures involve aspects of custodial care. For many voluntary organizations, especially in these days of funding cutbacks, the community service which is their official mandate or goal takes secondary precedence to the fundraising activities which will ensure their survival. Benefits of organizational goals 3|Page 1. Goals serve as guidelines for action, directing and channeling employee efforts. They provide parameters for strategic planning, allocating resources and identifying development opportunities. 2. Goals provide constraints in the organization. Choosing certain goals reduces discretion in pursuing other goals. E.g. The goal of maximizing stockholder dividends immediately reduces financial resources available for expense accounts. 3. Goals act as a source of legitimacy by justifying an organization's activities and existence. For new organizations the struggle for legitimacy is great. Maintaining legitimacy is easier but still, some organizations do lose legitimacy. For example imagine a hospital whose goal was to increase occupancy by performing as much surgery as possible. Such a goal would surely reduce its legitimacy. 4. Goals define standards of performance. To the extent that goals are clearly stated, they set standards for evaluation. 5. Goals provide a source of motivation . By presenting a challenge and how to achieve it, organizational goals act as behavioral incentives. For example: the path-goal theory of leadership. Understanding Strategies Management control systems are tools for implementing strategies. Strategies differ between organization, and control must be tailored to the requirements of specific strategies. Different strategies require different task priorities different key success factors and different skills, perspectives and behaviors. Thus a continuing concern in the design of control systems should be whether the behavior induced by the system is the one called for by the strategy. 4|Page On the other hand The dictionary meaning of strategy is “the art of so moving or disposing the instrument of warfare as to impose upon enemy, the place time and conditions for fighting by one self” In management, the concept of strategy is taken in more broader terms. According to Gluck, “Strategy is the unified, comprehensive and integrated plan that relates the strategic advantage of the firm to the challenges of the environment and is designed to ensure that basic objectives of the enterprise are achieved through proper implementation process” The concept of strategy Strategy describes the general direction in which an organization plans to move to attain its goals. Every well managed organization has one or more strategies, although they may not be stated explicitly. According to Haberberg and Rieple, “A strategy is the set of action through which an organization, by accident or design, develops resources and uses them to deliver services or products in a way which its users find valuable while meeting the financial and other objectives and constraints imposed by stakeholders” A firm’s strategies are formed or crafted by matching its vision, mission, objectives, external opportunities and threats and internal strengths and weaknesses. The main sprit of strategy is to gain competitiveness by satisfying customer and beating the completive forces. 5|Page Characteristics of Strategy  A set of actions arrived by accident or design.  The development of resources.  Developing products and service that users find valuable.  Meeting stakeholder objectives and constraints.  Unique or distinctive features.  Renewing advantage as the environment changes.  Central to the basic intents of the organization. Level of Strategies Strategies can be found at four levels of an organization Corporate levels strategy  Business levels strategy  Functional levels strategy  Operating levels strategy Corporate level strategy: At the corporate level, strategies are formulated according to organization wise policies. These are value oriented, conceptual and less concrete than decisions at the other two levels. These are characterized by greater risk, cost and profit potential as well as flexibility. Mostly, corporate level strategies are futuristic, innovative and pervasive in nature. They occupy the highest level of strategic decision making and cover the actions dealing with the objectives of the organization. Such decision are made by top management of the firm. The examples of such strategies include acquisition strategies, diversification, structural redesigning, etc. The board of directors and chief executive officer are the primary groups involved in this level of strategy making. In small and 6|Page family owned businesses, the entrepreneur is both the general manager and the chief strategic manager Business Level Strategy: The strategies formulated by each SBU to make best use of its resources given the environment it faces, come under the gamut of business level strategies. At such a level, strategy is a comprehensive plan providing objectives for SBUs, allocation of resources among functional areas and coordination between them for achievement of corporate level objectives. These strategies operate within the overall organizational strategies i.e. within the broad constraints and policies and long term objectives set by the corporate strategy. The SBU managers are involved in this level of strategy. The strategies are related with a unit within the organization. The SBU operates within the defined scope of operations by the corporate level strategy and is limited by the assignment of resources by the corporate level. However, corporate strategy is not the sum total of business strategies of the organization. Business strategy relates with the “how” and the corporate strategy relates with the “what”. Business strategy defines the choice of product or service and market of individual business within the firm. The corporate strategy has impact on business strategy. Functional level Strategy: This strategy relates to single functional operation and the activities involved therein. This level is at the operating end of the organization. The decisions at this level within the organization are described as tactical. The strategies are concerned with how different functions of the enterprise like marketing, finance, manufacturing, etc contribute to the strategy of other levels. Functional strategy deals with a relatively restricted plan providing objectives for specific function, allocation of resources among different operations within the 7|Page functional area and coordination between them for achievement of SBU and corporate level objectives Sometimes a fourth level of strategy also exists. This level is known as the operating level. It comes below the functional level strategy and involves actions relating to various sub functions of the major function. For example, the functional level strategy of marketing function is divided into operating levels such as marketing research, sales promotion, etc Operating levels strategy: Operating levels strategy concerns the even the narrower strategic initiatives and approaches for managing key operating units (plants, sales districts, distribution center) and for handling daily operating tasks with strategic significance (advertising campaigns, materials purchasing, inventory control, maintenance shipping). Rules Rules are shorthand for all types of formal instructions and controls including standing instructions , job descriptions standard operating procedures, manuals, and ethical guidelines. Some specific types of rules are as follows:     Physical control Manuals System Safeguards Task control 8|Page Other Information Other information includes of the organization responsibility center this topic describe are other page. Strategic Planning The objectives of strategic planning including understanding the benefits of strategic planning; understanding the products of strategic planning; and learning the keys to successful planning and implementation. Many organizations spend most of their time reacting to unexpected changes instead of anticipating and preparing for them. This is called crisis management. Organizations caught off guard may spend a great deal of time and energy "playing catch up". They use up their energy coping with immediate problems with little energy left to anticipate and prepare for the next challenges. This vicious cycle locks many organizations into a reactive posture. It does not have to be that way. A sensible alternative is a well tested process called strategic planning which provides a viable alternative to crisis management. Strategic planning is a step by step process with definite objectives and end products that can be implemented and evaluated. Very simply, it is a process by which we look into the future, paint a picture of that future based on current trends, and influence the forces that will affect us. Strategic planning looks three to five years ahead. It charts a definite course based on strong indicators of what the business environment will be like in those years. Indicators include census demographic statistics, economic indicators, government policies, and technological advances. They reveal strong trends 9|Page regarding changes in lifestyles and the economic and political climates, which are important factors influencing the facilities planning and management industry. Some of these trends are potential opportunities, some potential threats, and some are both. Examining the possibilities and formulating strategies to meet the challenges can help the organization take full advantage of opportunities and minimize threats. In short, we can take control of the future. We can use our energies and resources more effectively and conduct our business more successfully, despite changes in the environment. Strategic planning cycle are given below: 10 | P a g e Why Strategic Planning? Besides the personal satisfaction of taking charge of the organizations future, strategic planning offers at least five compelling reasons for its use: 1. Forces a look into the future and therefore provides an opportunity to influence the future, or assume a proactive posture. 2. Provides better awareness of needs and of the facilities related issues and environment. 3. Helps define the overall mission of the organization and focuses on the objectives. 4. Provides a sense of direction, continuity, and effective staffing and leadership. 5. Plugs everyone into the system and provides standards of accountability for people, programs, and allocated resources. In summary, strategic planning is the key to helping us collectively and cooperatively gain control of the future and the destiny of our organization. Budgeting A budget is a plan for your future income and expenditures that you can use as a guideline for spending and saving. Although many Americans already use a budget to plan their spending, the majority of Americans also routinely spend more than they can afford. The key to spending within your means is to know your expenses and to spend less than you make. A good monthly budget can help ensure you pay your bills on time, have funds to cover unexpected emergencies, and reach your financial goals. 11 | P a g e Budgeting Process Having a formal and structured budgeting process is the foundation for good business management, growth and development. Very similar to our personal finances, discipline and planning should be the cornerstone of a business budgeting process. So where do we begin? As with most things in managing an organization, budgeting needs to be driven by the vision of the organization and the strategic plan. Organizations that stay focused on their strategy and plan know exactly where they want to spend their resources and have a plan to help keep them from spending in areas that do not line up with the vision. So what are the steps to budgeting? Strategic Plan Having a well thought out strategic plan that supports the vision of the organization is the first step in any budgeting process. When company resources are used, it is imperative that the spending supports the strategy and development of the organization. Business Goals A well thought-out strategic plan generates annual business goals. It is these goals that need to be funded by the annual budget. Developing goals is the first step to the budgeting process. Accountability for achieving goals is the responsibility of the board or business owner. 12 | P a g e Revenue Projections Revenue projections should be based on historical financial performance as well as projected growth income. The projected growth may be tied to organizational goals and planned initiatives that will initiate business growth. For example, if a goal is to increase sales by 10%, those sales projections should be part of the revenue projections for the year. Fixed Cost Projections Projecting fixed costs is simply a matter of looking at the monthly predictable costs that do not change. Employee compensation costs, facility expenses, utility costs, mortgage or rent payments, insurance costs, etc. Fixed costs do not change and are a minimum expense that need to be funded in the budget. For example, if there are open staff positions, the cost to fill those positions should be part of fixed cost projections. Variable Cost Projections Variable costs are costs that fluctuate from month to month supply costs, overtime costs, etc. These are expenses that can and should be budgeted and controlled. For example, if Christmas sales drive overtime costs temporarily, those costs should be budgeted. Annual Goal Expenses Goal initiatives should also be given budgets. Each initiative should have projected costs associated with the goals. This is where the cost of implementing goals are incorporated into the annual budget. Projections of costs should be identified, laid out and incorporated into the departmental budget that is responsible for that goal. 13 | P a g e Target Profit Margin Every organization, whether they are for-profit or not-for-profit, should have a targeted profit margin. Profit margins allow for returns for investors. Not-forprofits profit margins go back into the facilities and development of the organization. Profits are important for any and all organizations. Healthy profit margins are a strong indicator of the strength of an organization. Responsibility Center Performance A decentralized environment results in highly dispersed decision making. As a result, it is imperative to monitor and judge the effectiveness of each manager. This is easier said than done. Not all units are capable of being evaluated on the same basis. Some units do not generate any revenue; they only incur costs in support of some necessary function. Other units that deliver goods and services have the potential to be assessed on the Basis of profit generation. . As a generalization, the part of an organization under the control of a manager is termed a "responsibility center." To aid performance evaluation it is first necessary to consider the specific character of each responsibility center. Some responsibility centers are cost centers and others are profit centers. On a broader scale, some are considered to be investment centers. The logical method of assessment will differ based on the core nature of the responsibility center. There are four major types of responsibility centers: cost centers, revenues centers, profit centers and investment centers. 14 | P a g e COST CENTER Obviously most business units incur costs, so this alone does not define a cost center. A cost center is perhaps better defined by what is lacking; the absence of revenue, or at least the absence of control over revenue generation. Human resources, accounting, legal, and other administrative departments are expensive to support and do not directly contribute to revenue generation. Cost centers are also present on the factory floor. Maintenance and engineering fall into this category. Many businesses also consider the actual manufacturing process to be a cost center even though a saleable product is produced (the sales "responsibility" is shouldered by other units). It stands to reason that assessments of cost control are key in evaluating the performance of cost centers. This chapter will show how standard costs and variance analysis can be used to pinpoint areas where performance is above or below expectation. Cost control should not be confused with cost minimization. It is easy to reduce costs to the point of destroying enterprise effectiveness. The goal is to control costs while maintaining enterprise effectiveness. Nonfinancial metrics are also useful in monitoring cost centers: documents processed, error rates, customer satisfaction surveys, and other similar measures can be used. The concept of a balanced scorecard is discussed later in this chapter, and it can be very relevant to evaluating the performance of a cost center. REVENUE CENTER A revenue centre is a responsibility centre whose budgetary performance is measured primarily by its ability to generate a specified level of revenue. PROFIT CENTER Some business units have control over both costs and revenues and are therefore evaluated on their profit outcomes. For such profit centers, "cost overruns" are 15 | P a g e expected if they are coupled with commensurate gains in revenue and profitability. A restaurant chain may evaluate each store as a separate profit center. The store manager is responsible for the store's revenues and expenses. A store with more revenue would obviously generate more food costs; an assessment of food cost alone would be foolhardy without giving consideration to the store's revenues. INVESTMENT CENTER At higher levels within an organization, unit managers will be held accountable not only for cost control and profit outcomes, but also for the amount of investment capital that is deployed to achieve those outcomes. In other words, the manager is responsible for adopting strategies that generate solid returns on the capital they are entrusted to deploy. Evaluation models for investment centers become more complex and diverse. They usually revolve around various calculated rates of returns. Report actual versus plan The report displays information on the actual and planned values incurred in several business areas. Reporting Requirements The example Actual/Plan Comparison report should contain the following information:   Actual and plan values in several business areas The absolute and percentage variances between the actual and plan values 16 | P a g e  The reporting period should cover any number of periods in a given fiscal year Before you define the report, you must decide:   Which characteristics are to be used in the report Where the characteristics are to be entered in the report definition (in the rows, columns, or as data selection criteria) Which characteristics are to be entered as variables, individual values, intervals or values, or groups  Performance Measurement systems The goal of performance measurement system is to implement strategy. In setting up such systems, senior management selects measures that best represent the company strategy. These measures can be seen as current and future critical success factors if they are improved, the company has implemented its strategy. The strategy’s success depends on its soundness. A performance measurement system is simply a mechanism that improves the likelihood the organization will implement its strategy successfully. Framework for designing performance Measurement system What counts, gets measured What gets rewarded, really counts STRATEGY What gets measured, gets done What gets done, gets rewarded 17 | P a g e