Chapter 2

UNDERSTANDING
STRATEGIES
Management Control Systems
Anthony &Govindarajan
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 STRATEGIES
• MCS are tools to implement strategies
• Strategies differ between organizations
• Control should be tailored to the
requirements of specific strategies
• Strategies are plans to achive
organization goals

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 GOALS
• Corporate goals are determined by the chief
executuve officer (CEO) of the corporation
Board of Directors

Chairman
Chief Executive Officer (CEO)

President
Chief Operating Officer (COO)

Chief Financial Officer (CFO)

Controller Audit Tax Treasury Risk Investor

Management Relations

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 1. Profitability
• In business, profitability is usually the most important
goal Revenues-Expenses
• Return on Investment =------------------------------
Investment

• Investment the shareholders’investment
= proceeds from the issuance of stock + retained
earnings
• the shareholders’investment = equity
= the amount of financing that was not obtained
by debt
• Profitability refers to profit in the long run
• GE co: focused on revenue == close correlation
between market share and return on investment

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 2. Maximing Shareholder Value
• Refers to the maraket price of
the corporation’s stock
• Maximizing == a way of finding the
maximum amount that company can earn
• Optimizing shareholder value == most
managers want to behave ethically, and most
feel an obligation to other stakeholders
• In all cases, that the course of action is
ethical and consistent with the corporation’s
other goals

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 3. Risk
• Organization’s profitability is affected by
management’s willingness to take risks
• 3 markets:
– Capital market: raises funds
– Product market: sella its goods and services
– Factor market: competes for resources (such
as human capital, raw material)

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 THE CONCEPT OF STRATEGY
• A strategy describes the general direction in
which an organization plans to move to
attain its goals.

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 Strategy Formulation
Environmental analysis Internal analysis

Competitor Technology know-how

Customer Manufacturing know-how
Supplier Marketing know-how
Regulatory Distribution know-how
Social/Political Logistics know-ho

Opportunities and threats Strengths and weakness

Identify opportunities Identify core competencies

Fix internal competencies

With external opportunities

Firm’s Strategies 8
 CORPORATE-LEVEL STRATEGY
• Where to compete than with how to compete
• Single industry firms: totally commited to one industry –
McDonald’s
• Related diversification: operates in several industries, and the
business units benefit from a common set of core
competencies – Procter & Gamble (pampers, detergent, soap,

toothpaste) core skills in several chemical technologies
and marketing+distribution through supermarkets
• Unrelated diversified firms: operate in a number of
different industries, have little in common – Textron
(writing instrument, helicopters, machine tools)

The planning control requirements of companies pursuing different

corporate level diversivication strategies are quite different
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 BUSINESS UNIT STRATEGY
Business Unit Mission: The BCG Model
Cash source
High Low

High High
“Star” “Question Mark”
Hold Build
Market Cash
growth use
rate
“Cash Cow” “Dog”
Harvest Divest
Low Low

High Low
Relative market share
Business Unit Competitive Advantage
Industry Structure Analysis: Porter’s Five Forces Model

New
Entrants

Industry
Suplliers Customers
Competencies

Substitutes

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 Generic Competitive Advantage:
Basis for Competitive Advantage

Superior Cost-Cum
Differentiation
Differentiation Advantage
Advantage
Relative
Differentiation
Position
Low-Cost Stuct-in-
Advantage the-Middle
Inferior

Superior Inferior
Relative Cost Position
 Generic Competitive Advantage:
Typical Value Chain for a Business

Product Manu- Marketing Service/

Development facturing And Sales Logistics

Support Activities: Finance, Human Resources, Information Technology

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