Essay on AG 1

Submitted By charlenebing
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AG-l: Anthony, R.K. and Govindarajan,

Control Systems, lih edition,

V.

(2007) Management

McGraw-Hill Irwin (Chapter 2-

Understanding Strategies, pp. 53-97).

Chapter

Anthony, R.K. and Govindarajan, V. (2007) Management
Control Systems, lih edition, McGraw-Hill Irwin (Chapter 2Understanding Strategies, pp. 53-71).

Understanding
Strategies
Management control systems are tools to implement strategies. Strategies differ between org,}nizations, and controls should be tailored to the require­ ments of specific strategies. Different strategies require different task prior­ ities; 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 organization goals. Therefore, in this chap­ ter we first describe some typical goals in organizations. Then we discuss strategies at two levels in an organization: the corporate level and the business unit level. Strategies provide the broad context within which one can evaluate the optimality of the elements of the management control systems discussed in
Chapters 4 through 12. In Chapter 13 we discuss how to vary the form and structure of control systems in accordance with variations in corporate and business unit strategies.

Goals
Although we often refer to the goals of a corporation, a corporation does not have goals; it is an artificial being with no mind or decision-making ability of its own. Corporate goals are determined by the chief executive officer (CEO) of the corporation, with the advice of other members' of senior management, and they are usually ratified by the board of directors. In many corporations, the goals originally set by the founder persist for generations. Examples are
Henry Ford, Ford Motor Company; Alfred P. Sloan, General Motors Corpora­ tion; Walt Disney, Walt Disney Company; George Eastman, Eastman Kodak; and Sam Walton, Wal-Mart.

S4

Part One The Management Control Environment

Profitability
In a business, profitability is usually the most important goal. Profitability is expressed, in the broadest and most conceptually sound sense, by an equation that is the product of two ratios:
Revenues - Expenses
Revenues

"

Revenues
Investment

=

Return on Investment

An example is

$10,000 - $9,500 $10,000
"
$4,000
$10,000

.
=

12.5%

The first ratio in this equation is the profit margin percentage:

($10,000 - $9,500)/$10,000

=

5%

The second ratio is the investment turnover:

$10,0001$4,000

=

2.5 times

The product of these two ratios is the return on investment: 5% " 2.5 times
12.5%. Return on investment can be found by simply dividing profit (i.e., rev­
=

enues minus expenses) by investment, but this method does not draw attention to the two principal components: profit margin and investment turnover.
In the basic form of this equation, "investment" refers to the shareholders' investment, which consists of proceeds from the issuance of stock, plus re­ tained earnings. On!,'of management's responsibilities is to arrive at the right balance between the two main sources of financing: debt and equity. The shareholders' investment (i.e., equity) is the amount of financing that was not obtained by debt, that is, by borrowing. For many purposes, the source of financing is not relevant; "investment" thus means the total of debt capital and equity capital.
"Profitability" refers to profits in the long run, rather than in the current quarter or year. Many current expenditures (e.g., amounts spent on advertis­ ing or research and development) reduce current profits but increase profits over time.
Some CEOs stress only part of the profitability equation. Jack Welch, former
CEO of General Electric Company, explicitly focused on revenue; he stated that General Electric should not be in any business in which its sales revenues were not the largest or the second largest…