Most control systems are concerned with costs, or quality or safety. Budgets
Planning is carried out in order to ensure the organisation gets the best out of its limited resources, and a strategic plan is essentially made up of inputs to achieve a desired output.
The inputs are the resources (personnel, materials, machines, buildings, etc.) and the budget is a simple financial statement of the resources necessary in order to carry out the plan. It is also a quantitative plan of activities designed to control the allocation, flow and use of
resources over a given period of time. Management control will consist of a number of budgets and forecasts. This consolidated budget will reflect corporate mission, objectives and strategies.
(a) Marketing Budget
Part of this consolidated management budget is the marketing budget which we will consider here in a little detail. The marketing budgets include:
sales volumes, values and incomes selling expenses
distribution and warehousing costs advertising and public relations expenses market research costs
marketing salaries, commission, expenses customer services
marketing administration costs. (b) Budget Headings
Costs are usually considered under five budget headings:
Cash Budget: liquidity, opening and closing balances, inflow and outflow of cash
(share issues to bring cash into the company, dividends to shareholders which pay it out).
Budgeted Profit and Loss Account: matching income received with costs
incurred over a set period of time (in order to measure profitability).
Budgeted Balance Sheet: looking at the total assets of a SBU and its liabilities,
such as repayment of loans (to the corporate body).
Budgeted Funds Statement: the sources of funding and how they are linked to
corporate objectives.
Capital Budget: concerned with resource capacity and the budgets for
alternative strategic choices. (c) Appreciation
The basis on which a budget is set is referred to as "appreciation", and this can be: % of past or projected future sales
% increase (decrease) on previous budget in order to match the competition
what is considered to be needed for the task. Quality Control
Those areas which need to be considered for quality control include personnel, materials, and products.
Controlling the quality of personnel involves the recruitment of the right staff in the
first place, training and developing staff once they are employed, and carrying out regular appraisal in order to identify any areas which require further training and development.
Controlling the quality of materials requires control over suppliers by means of selection of the right suppliers in awarding contracts and checking that quality standards of the suppliers are maintained.
Production control systems need to be put in place in order to maintain the quality of
the product which meets customer's expectations.
The maintenance of machinery and buildings is also an important part of quality control. Safety
Anything which is concerned with safety of personnel, customers, plant, etc. is always a priority use of resources.
Market Share Measurement
Many companies use market share as a key control mechanism, for the following main reasons:
Market share is felt to be one of the best indicators of the overall effectiveness of corporate strategies.
Market share is very closely related to profitability. Even a small change in market share sometimes has a major impact on profit.
Loss of market share is often the first sign that strategies are not working or that competitors' strategies are more effective.
Market share measurement is central to some of the techniques of portfolio analysis and planning, such as the BCG matrix.
For effective market share measurement and control it is essential to define the market accurately. There must also be effective information systems to measure and track market share. In consumer markets many companies use retail audits to continuously track market share.
Customer Satisfaction Monitoring (a) Value as Control Mechanism
In addition to market share measurement as a control mechanism many companies track and measure customer satisfaction as a key area in evaluating and controlling corporate strategies.
The advantages of including customer satisfaction as a control mechanism are that so doing:
helps and encourages a stronger customer focus in a company
can be used as a potential source of competitive advantage by a company helps support and improve product and service quality
helps to motivate and encourage staff to offer better customer service. (b) Signs of Customer Dissatisfaction
Companies should constantly monitor customer satisfaction through "customer tracking". Signs of problems with customer satisfaction include the following: falling sales and market share (see above)
increased customer complaints increased returns/order cancellations increased customer turnover.
(c) Benefits of Customer Satisfaction
Increased customer satisfaction can give rise to: increased sales
reduced marketing costs increased market share
increased lifetime value of customers
increased brand loyalty and customer retention new customers through recommendation. The Balanced Scorecard
(a) Purpose of Balanced Scorecard
This approach to the evaluation of corporate strategic performance was developed in the early 1990s by Robert Kaplan and David Norton. It is an attempt to overcome the problems and limitations of some of the more traditional approaches to the evaluation and control of strategic plans.
The balanced scorecard is based on the notion that the more traditional approaches to the evaluation of strategic performance are too narrow and focus too much on
quantitative, easy-to-measure, elements of organisational performance which are then translated into strategic control processes. These more traditional control measures tend to centre on areas such as financial performance (e.g. return on capital employed) or perhaps market performance (e.g. market share or growth). Very often control is based on a few measures of performance, or even just one measure.
Kaplan and Norton suggest that this focus on measurable but often narrow areas of performance does not provide a useful way for an organisation to understand and control what needs to be done to make strategies work or, indeed, to evaluate how well the strategies are working. They suggest that traditional measures often concentrate on past rather than future performance and are unbalanced in focusing only on a relatively few areas of strategic activity. The balanced scorecard technique for controlling strategic planning has been developed in order to overcome these problems.
(b) Nature of the Balanced Scorecard
The balanced scorecard combines both quantitative and qualitative measures of performance. It also concentrates on evaluating the processes and activities
associated with the effective implementation of a particular organisation's strategies. In addition, the balanced scorecard approach acknowledges the different expectations of various stakeholders in measuring and controlling organisational performance.
A key element of the balanced scorecard approach is the recognition that every strategy is unique. So, as mentioned above, the specific control processes which an organisation needs to focus on must be related to and stem from that organisation's strategies. The balanced scorecard approach identifies four key strategy areas that need to appear on every scorecard (though perhaps with differing specific measures of performance). These four areas are as follows, with examples of each.
Financial: return on capital, economic value added, cost reduction, shareholder
value, cash flow, and financial ratios.
Customer: customer satisfaction, customer retention, acquisition of new
Internal: personnel turnover, personnel satisfaction, product quality, output, stock turnover.
Growth/future: innovation performance, training and development, application of
new technology, employee empowerment.
By including these four key areas, the balanced scorecard immediately forces a wider perspective on what constitutes effective performance and therefore what constitutes effective control with regard to strategies. It also links control not only to short-term performance and outputs, but also to the way in which processes are managed. This can particularly be seen with regard to the inclusion of the "Growth/future" category in the scorecard.
(c) Value of the Balanced Scorecard
There is no doubt then that this indeed is a much more "balanced" approach to measuring and controlling strategic performance. It also emphasises the interrelationships between different performance areas in an organisation.
But the balanced scorecard approach to control has its problems and limitations. There is still a danger of measuring those activities and areas of performance which are most easy to measure and not necessarily those which are strategically crucial. In addition, the balanced scorecard can lead to problems and conflict with regard to what to
include. For example, the marketing personnel of a business may have a very different view on what are important strategic areas of control from, say the accountancy
function. Finally the balanced scorecard can lead to excessive measurement and control, potentially detracting from implementing action.
Great care therefore needs to be used in the design, application and interpretation of the balanced scorecard technique. Managers throughout the business should be involved in the process: it is important to secure their agreement with regard to what should be on the scorecard.
Overall, however, the balanced scorecard has much to recommend it. It reflects the inter-dependence of a wide range of different performance factors which together determine strategic success.