The development of management control and strategic planning

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When considering the argument that management control and strategic planning and control are two distinct areas we must initially define the two processes. It is also important to review the development of these processes and further developments in accounting and strategic planning.

Historically, management tended to rely on year-end financial accounts when carrying out planning exercises, this information produces a snapshot of the organisation and does not provide the detail required for strategic planning, it is also important to note that the year-end financial statements were also out-of-date by the time they were published and also susceptible to a significant amount of manipulation to produce an answer that the market or shareholders wanted to see.

As processes developed costing and budgetary control evolved within organisations which allowed management to understand the costs incurred in producing a single unit and multiple units, allowing the calculation of break-even points, profit margins and sales prices.

With the continual development, the finance function became able to value investments, acquisitions, as well as calculating the cost of capital. The development of accounting practices and standards, on both local and global environments has made the role of the accountant key to business success as he/she can now provide detailed information that will allow the management team to take informed business decisions.

To help understand accounting development we must initially consider the differences between management control and strategic planning and control, we must fully understand how these areas have developed, and how 'management control' and strategic planning & control' add value. We must begin with defining the two areas and then drawing a comparison between them.

A dictionary definition of management control is, "an accounting procedure or system designed to promote efficiency or assure the implementation of a policy or safeguard assets or avoid fraud and error etc."

Simons (1994) defined a management control system as "the formal, information-based routines and procedures managers use to maintain or alter patterns in organisational activities". It forms an important function as it provides assurance to the Board of Directors that the organisation is being run in line with legislative requirements ensuring set goals are achieved.

Management control activities include:







Elements of a management control system include:

the characteristic or condition to be controlled,

the sensor,

the comparator , and

the activator.

These must occur in the same sequence and maintain a consistent relationship to each other in every system.

According to Henri Fayol (1918):

"Control of an undertaking consists of seeing that everything is being carried out in accordance with the plan which has been adopted, the orders which have been given, and the principles which have been laid down. Its object is to point out mistakes in order that they may be rectified and prevented from recurring."

Considering each of these elements, the first being 'the characteristic or condition to be controlled', this may be the output of a process, or a stage in the process, such as wastage in a manufacturing process. During a manufacturing process it will be important to obtain outputs from wastage in the production process. This allows management to monitor the performance of both the operators and the machinery. If wastage begins to increase the output will indicate a problem with the process, whether operator or machine failure, this may be as simple as re-aligning the machine or as extreme as it identifying the need to replace the machinery with a newer, more accurate or precise model.

The second element is the 'sensor'; this forms the means of measuring the characteristic or condition. A control subsystem must be developed to which includes the sensor or system of measurement, this could be an actual physical sensor or a manual monitoring approach, such as an operator on a machine carrying out a visual inspection as part of quality checking.

The third element is the comparator; this determines the standard to which the unit should be produced, setting out tolerances within the design specification. In any manufacturing process there are expected deviations from the original specification within which the organisation can continue to produce without impacting the final product or assembly. When production falls outside of those parameters the sensor is activated and corrective measures are taken.

The final element of the control system is the activator; this is the corrective action taken to return the process within tolerable limits. This could mean the re-calibration of a machine, re-training of an employee, replacement of sensors or the machine itself.

Eilon (1979) suggests that "information is the medium of control, because the flow of sensory data and later the flow of corrective information allow a characteristic or condition of the system to be controlled."

When considered with the process above, it is obvious that flow of information is key to the success of any management control process. In the words of George Orwell, "knowledge is power".

Johnson (1976) states:

"The objective of the system is to perform some specified function. The purpose of organisational control is to see that the specified function is achieved; the objective of operational control is to ensure that variations in daily output are maintained within prescribed limits. It is one thing to design a system that contains all of the elements of control, and quite another to make it operate true to the best objectives of design. Operating "in control" or "with plan" does not guarantee optimum performance. For example, the plan may not make the best use of the inputs of materials, energy, or information - in other words, the system may not be designed to operate efficiently. Some of the more typical problems relating to control include the difficulty of measurement, the problem of timing information flow, and the setting of proper standards."

Having now defined 'management control', we must now define 'strategic planning and control'.

Strategic planning and control looks at the organisation's future direction, what will the organisation do, how will it do it, what resources it will need, how will it beat the competition? Strategic planning is deciding how to implement the strategies of the organisation.

Strategic planning began in the late 1950's but was generally unsuccessful. A formal strategic planning process allows the organisation:

a framework which will allow the for the development of an annual budget;

a development tool for management;

a process which encourages or requires managers to think ahead and take a long term view on the future of the business and their section; and

provides a method which aligns managers with the strategic plans of the organisation.

The strategic planning process assumes:

Strategies are the outcome of rational, sequential, planned and methodical procedures.

Definite and precise strategic objectives are set.

The organisation and environment are analysed using a range of relevant tools.

Potential strategic options are generated and the optimum solution chosen.

Defined procedures for implementation and the achievement of the strategic objectives are developed.

The strategy is made explicit in the form of detailed plans.

A number of tools can be used within the strategic planning process, which includes:

SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats);

Porters Fives Forces Analysis;

PEST analysis (Political, Economic, Social, and Technological);

BCG Growth Share Matrix;

Competitor Analysis;

Value Chain Analysis;

PIMS (Profit Impact of Market Strategy;

STEER analysis (Socio-cultural, Technological, Economic, Ecological, and Regulatory factors); and

EPISTEL (Environment, Political, Informatic, Social, Technological, Economic and Legal).

It is important to note that planning process requires a significant amount of preparation for the budget alone, it is therefore key that the following steps are followed to ensure a robust plan and budget are established:

Carry out a review and update the previous strategic plan ( assuming one exists);

Review the assumptions and guidelines, update, modify or change as appropriate;

Produce a draft plan for review;

Analysis - review of business unit and departmental budgets and plans to ensure alignment and incorporation with Organisation's overall plan;

Produce second version of plan, incorporating all necessary changes for review and comments by senior management and Board; and

Final review of plan, then formal approval from the Board and stakeholders.

A simple graphical representation shows the differences in approaches between an organisation with a strategic planning process and one without. You see from the first diagram that the organisation considers too many strategies at the budgeting stage which in turn produces a significant amount of data. The problem at this stage is which strategy to choose, how do you evaluate these and which do you finally select? This environment will impact resource allocation and the future of the organisation.

This process narrows the options for the organisation and allows the allocation of resources more effectively.

A definition of strategic control offered by Schendel and Hofer (1975) when developing their Matrix:

"Strategic control focuses on the dual questions of whether: (1) the strategy is being implemented as planned; and (2) the results produced by the strategy are those intended."

Management control is the measurement, analysis, and actions required for the timely management of the continuing operation of a process.

The strategic planning process is supported by strategic control, which although similar in concept to the management control process it is much more difficult in execution. When we consider the differences management control involves working within a framework set by the strategic plans, whereas strategic control deals with forecasts and projections.

The development of these processes into areas such as Strategic Management Accounting is defined as is defined by the Chartered Institute of Management Accountants as "a form of management accounting in which emphasis is placed on information which relates to factors external to the firm, as well as non-financial information and internally generated information."

When considering how this compares to traditional management accounting and why it is not sufficient to provide information for strategic decisions, we must understand what it is. According to CIMA, management accounting is defined as:

"The process of identification; measurement; accumulation; analysis; preparation; interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities".

From this definition we can see immediately that management accounting is inward facing, i.e. it only looks at the information within the organisation and does not consider the environment within which it operates.

To expand on this, it is perceived by many as inadequate because it:

Focuses on the process and does not consider the high cost post conversion activities;

It does not consider the impact of other activities;

It does not assess how the cost of the product or service compares to the competition; and

It is over reliant on accounting systems already in place.

Accounting systems and processes have developed over many years and have been criticised by many. In 1988, Pryor stated that conventional cost accounting systems did not provide adequate detail or information that allowed an organisation to make strategic decisions; they were too geared towards the needs for financial reporting. The main conflict arises between the need to produce financial report and to provide accurate adequate information required during the strategic planning process. This conflict continued and was reinforced by comments from Bromwich in 1990, where it was suggested that accountants could provide adequate information for strategic planning and control, but required them to be strategically focused.

This led to the development of the Strategic Management Accounting (SMA) is attributed and was pioneered by Ken Simmonds in 1981, at this time he saw SMA as a collection of management accounting information for both the business and its competitors. The information collated was then used to monitor the business strategy. The focus was to compare actual levels and trends in a number of areas, such as, volume, market share and cashflow. To date there remains no textbook definition but a number of key authors have contributed to the development of this approach and tried to provide definitions. In 1993, Smith and Dixon presented a four stage approach:

Strategic business unit identification;

Strategic cost analysis;

Strategic market analysis; and

Strategy evaluation.

Bromwich (1994) suggested that to include the strategic perspective to standard management accounting required the traditional role of accounting to extend in two key directions. Initially, the integration of the business's strategy through strategic cost analysis, and secondly, to obtain details of competitors cost structures and monitor the changes made over time.

To add to this Bromwich also identified two key approaches:

Fully costing the attributes provided by the products produced by the company; and

Costing the functions within the value chain which are viewed by the customer as 'value adding'.

Lamb (1984) defines strategic management as "an ongoing process that evaluates and controls the business and the industries in which the company is involved; assesses its competitors and sets goals and strategies to meet all existing and potential competitors; and then reassesses each strategy annually or quarterly (i.e. regularly) to determine how it has been implemented and whether it has succeeded or needs replacement by a new strategy to meet changed circumstances, new technology, new competitors, a new economic environment., or a new social, financial, or political environment."

The fundamental reason behind performance measurement systems is to enhance performance. As processes have developed and organisations have developed their strategic planning processes, a number of performance evaluation techniques have also been developed and deployed. These processes include:

Balanced Scorecard (Kaplan and Norton, 1993, 1996, 2001);

Economic Value Added (Stern Stewart & Co.);

Performance Prism (Neely, 2002);

Cambridge Performance Measurement Process (Neely, 1996);

TPM Process (Jones and Schilling, 2000);

7-step TPM Process (Zigon, 1999),;

Total Measurement Development Method (TMDM) (Tarkenton Productivity Group, 2000)

Behn provides 8 reasons for adapting performance measurements:

Evaluate how the business is performing;

Budget to control improvement;

Control how managers are ensuring that their subordinates are doing the right thing;

Motivate - to provide goals which will allow the workforce to achieve a feeling of accomplishment;

Celebrate achievements - to help develop a bond within the workforce;

Promote - to convince stakeholders that the orgainsation is doing a good job;

Learn from good or bad performance; and

Improve its processes and controls.

Considering a few of the suggested methods

The Balanced Scorecard (BSC) is a strategic performance management tool initially developed by Kaplan and Norton in 1993 and has been reviewed on a number of occasions in the past 10 years. The balanced scorecard is designed to consider both financial and non-financial measures and set targets for each of these areas. The in initial version of the Balanced Scorecard proposed "four perspectives", which were:



Internal Processes; and

Innovation and Learning.

This approach does not replace the traditional measures for financial or operational reports but provides a succinct summary of the most relevant targets within the organisation.

The purpose of the Balanced Scorecard is to translate the vision of an organisation into a strategy; communicate the strategic objectives and link them to measures; allow the organisation to plan, set targets and align these to the strategic initiatives; and finally, to feedback and learning from the strategic objectives.

The Balanced Scorecard can be used as an effective tool to ensure strategic objectives are met, while providing a significant amount of focus on non-financial areas.

The second performance measure we will consider is Economic Value Added (EVA). In 1999, an article in the CMA Management Magazine, titled "EVA: To boldly go?" described EVA as "a revolution in management, alleged to be the sole true indicator of business and management performance." The article then went on to criticise the process and identify seven key weaknesses.

EVA is a concept of economic profit developed and advocated by Stern, Stewart and Company as a result in GAAP-based accounting adjustments.

The formula for EVA is:

(r -c) x K = NOPAT - (WACC x Capital Employed)


R is Return on Invested Capital

NOPAT is Net Operating Profit After Tax;

WACC is Weighted Average Cost of Capital

Many financial writers consider this approach as a reincarnation of the Residual Income concept. General thought is that EVA is very sensitive to the cost of equity component of the model. Another flaw in the model is its insensitivity to the cost of debt component. EVA also appears to be strongly affected by the organisation's growth policies because leveraging effects. The method is also considered significantly unstable when compared to traditional return on investment and return on equity measures.

Another approach to consider would be the Performance Prism developed by Professor Andy Neely, Cranfield School of Management in 2002. This process has five aspects: the top and bottom facets are Stakeholder Satisfaction and Stakeholder Contribution respectively, the three side facets are Strategies, Processes and Capabilities.


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Eilon, Samuel (1979). Management control. Boston, Mass., Harvard Business School Press;

Johnson, R.A. (1976). Management, systems, and society : an introduction. Pacific Palisades, Calif.: Goodyear Pub. Co.. pp. 241-244;

Fayol, Henri (1918) (in French), Administration industrielle et générale; prévoyance, organisation, commandement, coordination, controle, Paris, H. Dunod et E. Pinat;

Helfert, Erich A. (2001). "The Nature of Financial Statements: The Income Statement". Financial Analysis - Tools and Techniques - A Guide for Managers. McGraw-Hill. p. 40.

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Ryszard Barnat, LLM., DBA, Ph.D. (Strat. Mgmt) Strategic Control: A New Perspective.;

Bromwich M (1990); The Case for Strategic Management Accounting: The Role of Accounting Information; Accounting, Organizations and Society, January-March 1990, Vol 15, Issue ½, pp27-47;

Bhimani A and Bromwich M (1991); Accounting for Just-in-Time Manufacturing Systems; CMA Magazine Feb 1991, Vol 65, Issue 1, pp31-34;

Behn, Robert D: Why Measure Performance? Different Purposes Require Different Measures, Public Administration Review, Vol. 62, No. 5 (September/October 2003), pp. 586-606.