Chapter 2

Understanding Strategies

Management control systems are tools for implementing strategies. Strategies differ between
Page | 1 organizations, and controls 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.

Strategies are plans to achieve organizational goals. Therefore, in this chapter we first
describe some typical goals in organizations. Then we describe strategies at two levels in an
organization: the corporate level and the business levels. Strategies provide the broad context
within which one can evaluate the optimality of the elements of management systems.

Goals
The goal of management control, also known as managerial control, is to ensure that an
organization's activities and operations are aligned with its objectives and strategic goals.
Management control involves monitoring and influencing various aspects of an organization,
such as processes, performance, and resources, to achieve desired outcomes.

1. Profitability: The goal of profitability focuses on maximizing the organization's

financial performance and ensuring that it generates consistent profits. For example, a
manufacturing company may set a goal to achieve a specific profit margin by
implementing cost reduction measures, improving operational efficiency, or
increasing sales.
2. Maximizing shareholder value: This goal aims to increase the wealth and value of
the organization for its shareholders. For instance, a publicly traded company may
focus on increasing its stock price through strategies such as expanding into new
markets, launching innovative products, or delivering strong financial results that
attract investors.
3. Risk management: The goal of risk management is to identify, assess, and mitigate
risks that could impact the organization's objectives. For example, a financial
institution may have a goal to minimize credit risk by implementing strict lending
criteria, conducting thorough credit assessments, and monitoring loan portfolios to
minimize the likelihood of defaults.
4. Multiple stakeholder approach: This goal recognizes the importance of considering
the interests of various stakeholders. An example could be a socially responsible
company that aims to minimize its environmental impact, ensure fair labor practices,
and contribute to the well-being of the communities in which it operates. The
management control systems in such a company would incorporate goals related to
sustainability, employee welfare, and community engagement.
 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
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• 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 spirit of strategy is to gain competitiveness by satisfying customers and
beating the competitive forces.
• Strategies can be found at four levels of an organization: corporate strategy, business
levels strategies, functional level strategies, and operating level strategies.
 Corporate-Level Strategy
Corporate-level strategy refers to the overall direction and scope of an organization as it seeks
to achieve its objectives and create value across its portfolio of businesses. It involves making
strategic decisions at the highest level of the organization, typically by top management or the
board of directors. Corporate-level strategy provides guidance on how the organization will
Page | 3 allocate resources, determine its business portfolio, and create synergies among its various
businesses

In terms of their corporate-level strategy, companies can be classified into one of three
categories:

1. Single Industry Firms: These companies focus on operating within a single industry
or a closely related set of industries. They specialize in a particular product or service
and channel their resources and efforts toward maximizing their performance and
competitiveness within that industry. Single industry firms typically have a narrow
scope and may benefit from economies of scale, deep industry expertise, and focused
strategies. Examples of single industry firms include companies like Coca-Cola, Nike,
or Boeing, which primarily operate within their respective industries.
2. Unrelated Diversified Firms: Unrelated diversified firms, also known as
conglomerates, engage in businesses that are unrelated or only loosely connected to
each other. They operate in multiple industries with distinct products, markets, and
value chains. The rationale behind this strategy is to spread risk and capture
opportunities across different sectors. Unrelated diversified firms often acquire or
invest in businesses that offer potential for financial returns rather than relying on
synergies between the businesses. Berkshire Hathaway, led by Warren Buffett, is a
 well-known example of an unrelated diversified firm with investments in various
industries such as insurance, manufacturing, energy, and retail.
3. Related Diversified Firms: Related diversified firms operate in multiple industries
that are strategically related to each other. They seek to leverage synergies and shared
capabilities across their businesses to create competitive advantages. These firms aim
Page | 4 to achieve economies of scope and gain operational efficiencies through the strategic
fit between their different business units. An example of a related diversified firm is
General Electric, which has operations in sectors such as aviation, healthcare, power,
and renewable energy. The common thread among GE's businesses is the application
of technology and engineering expertise.

Core Competence and Corporate Diversification

Research results suggest that related diversified firms, on an average, perform the best, single
industry firms perform next best, and unrelated diversified firms do not perform well over the
long term.

Implications of Control Systems

• Corporate strategy is a continuum with single industry at the end of the spectrum and
unrelated diversification at the other end (related diversification is in the middle of the
spectrum). Many companies do not fit neatly into one of the three classes.
• The planning and control requirements of companies pursuing different corporate
level diversification strategies are quite different.
• The key issues for the control systems designers, therefore, is:
• How should the structure and form of control differ across a single industry firm, a
related diversified firm and an unrelated diversified firm.
 Business Unit Strategies

Business unit strategies deals with how to create and maintain competitive advantage in each
of the industries in which a company chosen to participate. The strategy of a business unit
depends on two interrelated aspects:
Page | 5 (a) Mission
(b) Competitive advantage

Business Unit Mission

In a diversified firm one of the important tasks of senior management is resource deployment,
that is, make decisions regarding the use of the cash generated from some business units to
finance growth in other business units.

BCG Model

The BCG matrix categorizes products or business units into four quadrants: Stars, Cash
Cows, Question Marks, and Dogs.
1. Stars: Stars represent products or business units that have a high market share in a
rapidly growing market. These entities have the potential to generate substantial
revenue and profit. They require significant investment to maintain their growth rate
and market position. The objective is to nurture stars and eventually transition them
into cash cows.
2. Cash Cows: Cash cows are products or business units that have a high market share
in a low-growth or mature market. They generate substantial cash flows and profits
due to their dominant position. Cash cows typically require minimal investment to
maintain their market share. The goal is to extract as much cash as possible from cash
cows to finance the growth of other business units or invest in new opportunities.
3. Question Marks (also known as Problem Children or Wildcards): Question marks
are products or business units that have a low market share in a high-growth market.
They have the potential for growth, but they also require significant investment to
increase their market share. The future prospects of question marks are uncertain, and
they need careful evaluation and strategic decisions to determine if they should be
developed into stars or phased out.
4. Dogs: Dogs represent products or business units that have a low market share in a
low-growth or declining market. They neither generate substantial cash flows nor hold
a strong competitive position. Dogs often require a reassessment of their viability and
may need to be divested or discontinued to free up resources for more promising
areas.
Page | 6

Business Unit Competitive Advantage

Every business unit should develop a competitive advantage in order to accomplish its
mission. Three interrelated questions have to be considered in developing the business unit’s
competitive advantage.
• First, what is the structure of the industry in which the business unit operates
• How should the business unit exploit the industry’s structure
• Third, what will be the basis of the business unit’s competitive advantage.
Michael Porter has described two models useful in strategic analysis and formulating
strategies:
• Five-Force Model of Competition
• Value Chain Model

Porter’s Five-Force Model

1. Threat of New Entrants: This force assesses the ease with which new competitors
can enter the industry. Factors such as barriers to entry, economies of scale, product
differentiation, and access to distribution channels are considered. Higher barriers to
entry make it more difficult for new entrants to compete, reducing the threat to
existing firms.
2. Bargaining Power of Suppliers: This force examines the power that suppliers have
over the industry. Factors such as supplier concentration, availability of substitute
inputs, and the importance of suppliers' inputs to the industry are considered. Strong
supplier power can allow suppliers to dictate terms, increase prices, or reduce the
quality of inputs, affecting industry profitability.
3. Bargaining Power of Buyers: This force analyzes the power that buyers or customers
have over the industry. Factors such as buyer concentration, buyer switching costs,
and the importance of the industry's product to buyers are considered. Strong buyer
power can give customers the ability to negotiate lower prices, demand higher quality,
or switch to alternatives, impacting industry profitability.
4. Threat of Substitute Products or Services: This force evaluates the availability of
substitute products or services that can fulfill the same customer needs as the
 industry's offerings. Factors such as the price-performance trade-off, ease of switching
to substitutes, and the level of product differentiation are considered. The presence of
close substitutes can limit an industry's profitability.
5. Intensity of Competitive Rivalry: This force examines the level of competition
among existing firms in the industry. Factors such as the number and size of
Page | 7 competitors, industry growth rate, product differentiation, and exit barriers are
considered. High levels of rivalry can lead to price wars, aggressive marketing, and
reduced profitability for firms in the industry.

Generic Strategies
1. Low-Cost Provider Strategy: In this strategy, the organization aims to become the
lowest-cost producer or provider of its products or services within the industry. The
objective is to achieve a cost advantage over competitors, allowing the organization to
offer products or services at lower prices while still maintaining profitability. This
strategy requires efficient operations, cost control, economies of scale, and possibly
technological advancements.
2. Broad Differentiation Strategy: With this strategy, the organization seeks to
differentiate its products or services from those of competitors across the industry. The
goal is to create a unique and valuable position in the market that is not easily
replicated by competitors. Differentiation can be achieved through product features,
superior quality, exceptional customer service, innovative design, or brand image.
This strategy often allows organizations to command premium prices for their
differentiated offerings.
3. Best-Cost Provider Strategy: The best-cost provider strategy aims to offer products
or services with a combination of low cost and differentiated features. The
organization strives to deliver better value to customers by providing reasonably
priced products or services that possess desirable attributes. This strategy requires
balancing cost efficiencies with investments in differentiation to provide customers
with a superior value proposition compared to competitors.
4. Market Niche Based on Low Cost: In this strategy, the organization focuses on
serving a specific market segment or niche by offering products or services at the
lowest cost. By tailoring their operations and value proposition to the specific needs
and preferences of a particular target market, organizations can achieve a competitive
advantage within that niche. This strategy requires a deep understanding of the niche
market and the ability to deliver cost efficiencies while meeting the unique demands
of customers.
5. Market Niche Based on Differentiation: Similar to the previous strategy, this
approach focuses on serving a specific market segment or niche. However, in this
case, the organization aims to differentiate its products or services to meet the specific
needs and preferences of the target market. By tailoring the value proposition and
offering unique features or benefits that cater to the niche market, organizations can
differentiate themselves from broader competitors and capture a loyal customer base.
 Value Chain Analysis
The value chain consists of the various activities associated with the procurement of inputs to
the end-user point services. The major activities associated with the value chain include the
following:
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Primary Activities:
1. Procurement and Logistics: This activity involves sourcing and purchasing inputs,
managing relationships with suppliers, and coordinating the inbound logistics of
materials and resources.
2. Operations: Operations encompass the activities related to transforming inputs into
finished products or services. It includes manufacturing, assembly, packaging, quality
control, and other operational processes.
3. Outbound Logistics and Distribution: This activity involves the storage,
distribution, and transportation of finished products to customers. It includes activities
such as warehousing, order processing, inventory management, and delivery.
4. Sales and Marketing: Sales and marketing activities involve promoting and selling
products or services to customers. It includes market research, advertising, sales
channels management, pricing, and customer relationship management.
5. Customer Services: Customer service activities focus on providing after-sales
support, addressing customer inquiries and complaints, and maintaining customer
satisfaction. It includes activities like warranty services, technical support, and
customer feedback management.
Support Activities:
1. Human Resources: Human resource management activities involve recruiting,
hiring, training, and developing employees. It includes activities related to employee
benefits, performance management, and workforce planning.
2. Finances: Financial activities encompass managing the organization's financial
resources, including budgeting, financial planning, accounting, financial reporting,
and capital allocation.
3. Engineering and R&D: This activity involves research and development activities to
create new products, improve existing products, and enhance operational processes. It
includes activities like product design, engineering, testing, and innovation.
4. General Administration: General administration activities support the overall
functioning of the organization. It includes activities like strategic planning, legal and
regulatory compliance, information technology management, and corporate
governance.