QUESTION : 5

(I) Introduction to investment centre:

An investment centre is responsible for both profits and investments. The investment centre
manager has control over revenues, expenses and the amounts invested in the centres assets. He
also formulates the credit policy which has a direct influence on debt collection, and the
inventory policy which determines the investment in inventory. The manager of an investment
centre has more authority and responsibility than the manager of either a cost centre or profit
centre. Besides controlling costs and revenues, he has investment responsibility too. Investment
on asset responsibility means the authority to buy, sell and use divisional assets.

(II) Definition:
Department or an area of responsibility, where a manager controls revenues and associated costs,
assets, and liabilities. His or her performance is assessed largely on the basis of return on
investment (ROI) achieved.

(III) Methods of evaluating performance of an investment centre:

Performance measurement is aimed in aimed in respect of all responsibility centres. Whether
dealing with a cost profit or investment centre, performance can be evaluated by comparing
results with something. Probably the best way to encourage managers to act in the firms best
interests is to measure their performance of a division:

1. Variance analysis:
Variance analysis may be:
(i) Cost variance analysis and
(ii) Revenue variance analysis
Performance of a cost centre can be evaluated using cost variance analysis, i.e., by comparing the
actual costs with the standard costs. Standard cost display the costs the cost centre should have
incurred, given their actual activity. Any variance between the actual costs and standard cost
require corrective action by the management. On measuring the performance attempts are made
to minimize the costs of cost centre.

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Revenue variance analysis can be used in evaluating the performance of a revenue centre. If
actual sales (revenues) are different from the budgeted sales, they become the primary focus of
the management attention. While evaluating the performance of revenue centre, costs incurred
are not used as yardstick.

2. Division contribution Margin:

Division contribution margin is defined as the total division revenue less the direct cost of the
division. The measure of performance emphasizes the contribution of each division to overall
company profit. In this measure, all revenues and costs are traceable to the division are included
and all common, indirect costs of the company are excluded.

Top management of the company often use the direct contribution margin to decide in which
divisions additional investments should be made and in this decision will surely prefer those
divisions which are giving greatest contribution margin.

3. Division Net Profit:

The division net profit is the most appropriate profit measure for evaluation of a divisions
performance. This analysis can be used to judge the performance of a profit centre as both cost
and revenue data measured in financial terms are available.

It is claimed that while measuring the performance of a profit division, it is better to use a
measure of divisional revenue less divisional costs and divisional revenue less divisional
controllable costs should be used to measure the performance of a divisional manager.

4. ROI:
This measure expresses divisional profit as a percentage of the firms investment in the division
and is similar to the widely accepted return on capital employed measure used in the external
analysis and interpretation of accounts.
This is calculated as:
ROI = Divisional
The first part of the ratio is called Profit
Profit margin and second part is called Asset turnover ratio.
Divisional
Advantages: Investment
Net Profit Sales
= Sales * Investment Page 2 of 28
(i) It relates net income to investment made in a division giving a better measure of divisional
profitability.
(ii) It can be used as a basis for other ratios which are useful for analytical purposes.
(iii) It is easy to understand as it is based on financial accounting measurements.
(iv)It may be used for inter-firm comparision, provided that the firms whose results are being
compared are of comparable size and of the same industry.

Dis-advantages:
(i) Satisfactory definition of profit and investment are difficult to find. Profit has many concepts
such as PBIT, PAT, controllable profit. Similarly, the term investment may have many
conations such as gross book value, net book value, historical cost of assets, current cost of
asset, asset including or excluding intangible assets.
(ii) While comparing ROI of different companies it is necessary that the companies use similar
accounting policies and methods in respect of valuation of stocks, valuation of fixed assets,
apportion of overheads, treatment of research and development expenditure.
(iii) ROI may influence a divisional manager to select only investments with high rates of
return. Other investments that would reduce ROI but could increase the value of business
may be rejected by the divisional manager.

5. Residual Income:
Residual income can be defined as the net income of a division, less the imputed capital charge
on the assets used by the division. The capital charge is the minimum acceptable rate of return
and is calculated by applying this required rate of return to the divisions investment base. RI is
calculated as:

RI = Divisional Profit (Percent charge * Divisional investment)

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Advantages:
(i) It avoids suboptimal decisions as investments are not rejected merely because they lower
divisional managers ROI.
(ii) It maximizes growth of the company and increases shareholders wealth by accepting
opportunities which earn a rate of return in excess of the cost of capital.
(iii) The cost of capital charge on divisional investments ensures that the divisional managers
are aware of the opportunity cost of funds.
(iv)Charging each division with the companys cost of capital ensures that decisions taken by
different divisions are compatible with the interests of the organization as awhole.

Dis-advantages:

(i) Like ROI, it is difficult to have satisfactory definition of divisional profit and divisional
investment.
(ii) It may be difficult to calculate an accurate cost of capital. Also decision has to be taken to use
companys cost of capital or specific divisional cost of capital. The former enhance divisional
goal congruency and the later reflects each divisions level of risk.
(iii) Identifying controllable and uncontrollable factors at divisional level may be difficult.

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 QUESTION : 6 (a)
PROFESSIONAL ORGANISATIONS AND THEIR CHARACTERISTICS::

Professional organization (also called a professional body, professional association or

professional society) is an organization seeking to further a particular profession, the interests of
individuals engaged in that profession, and the public interest.
The roles of these professional associations have been variously defined: "A group of people in a
learned occupation who are entrusted with maintaining control or oversight of the legitimate
practice of the occupation;" also a body acting "to safeguard the public interest; organizations
which "represent the interest of the professional practitioners," and so "act to maintain their own
privileged and powerful position as a controlling body."

Such bodies generally strive to achieve a balance between these two often conflicting mandates.
Though professional bodies often act to protect the public by maintaining and enforcing
standards of training and ethics in their profession, they often also act like a cartel or a labor
union (trade union) for the members of the profession, though this description is commonly
rejected by the body concerned.

Therefore, in certain dispute situations the balance between these two aims may get tipped more
in favor of protecting and defending the professionals than in protecting the public. An example
can be used to illustrate this. In a dispute between a lawyer and his/her client or between a
patient and his/her doctor, their remains a conflict of interest in (a) its wish to defend the interests
of the client, while also (b) wishing to defend the interests, status and privileges of the
professional. It is clearly a tough call for it do both.
Organizations that provide professional services are:
Law firms
Consulting firms
Engineering firms
Sports organization
Hospitals
CHARACTERISTICS OF PROFESSIONAL ORGANIZATION
1. SMALL SIZE
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 Most professional organizations are small in size and operate in a single location, with the
exception of law and accounting firms. Senior management personally monitors and
motivates their subordinates. This brings down the need for sophisticated control systems.
Even though professional organizations are small, they still need to prepare budgets, compare
the budgeted and actual performance, and compensate employees on the basis of their
performance.

2. LABOUR INTENSIVENESS
Professional organizations are labour intensive and they employ individuals who are
specialist in respective fields. Professionals, who are also managers, prefer working
independently rather than in teams. Professionals are the most valuable asset of an
organization. Due to this, some management thinkers advocate the idea that these
professionals should be valued highly and their value highly included in the companys
balance sheet. A system called human resource accounting was developed by Likert for
valuing the professionals but very few companies used it.

3. DIFFERENT OBJECTIVES AND GOALS

The goal of manufacturing organization is to earn satisfactory return on the assets it
employed. As more assets are tangible, they appear in the balance sheet. In professional
organizations, as most assets assume the form of the employees skills, it is difficult for the
company to set for itself a goal in terms of returns on assets employed. The financial goal of
professional organizations is to provide satisfactory compensation to its employees. Another
goal of professional organizations is to increase their sizes and networks.

4. DIFFICULTY IN MEASURING OUTPUT

The output of manufacturing organizations can be measured in terms of units, tons, gallons,
etc but this method cannot be applied to professional organizations. For example, the output
of physician, can be measured in terms of number of patients treated but one cannot measure
whether the service provided by the physician satisfy the patient. In some cases, the revenues
earned indicate the measure of output but only in terms of quantity. In a professional service
organization, the non-repetitive nature of work compounds the problem of measuring output.
Since no two professionals work in the same way, it is difficult to set standards in terms of
the time spent for a task and the way in which the task is performed.

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5. DIFFERENT MARKETING STRATEGY (How marketing is done in professional
organization?)
In manufacturing companies, production and marketing activities are clearly demarcated. But
no such demarcation is done in professional organizations. These organizations do not market
themselves openly. It is done through the use of articles, personal and professional contacts,
speeches, etc. an auditing firm may market itself through the articles written by its auditors
(on contemporary issues) or through the marketing activities done by the professionals who
spent much of their time working for clients. Thus, it becomes difficult to identify a small
employee who is responsible for promoting the organization.

PERFORMANCE EVALUATION OF PROFESSIONALS

Performance of professionals can be evaluated by considering the following criteria:
Key Responsibilities and Duties
Describe the major responsibilities. For each one, identify the most significant tasks and duties
involved which will have the most importance in determining the employees overall
performance level.
Scope of Control/Responsibility
Describe the span of control in terms of budget, size of staff, impact of decisions and other
relevant indices.
Knowledge and Adaptability
Understanding and use of assignments; demonstrated confidence and professionalism;
willingness to grow in a position.
Leadership
Effectiveness in directing, motivating, and evaluating the work of staff in the unit; quality of
development assistance provided employees for professional growth; effectiveness in delegating
and controlling work of subordinates.
Interpersonal Skills and Communication
Contribution to cooperative relationships with other university departments, students and the
public; effectiveness of written and verbal communication; ability to create a positive
environment; ability to build teamwork and cooperation with others within the outside of the
department.
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 Planning and Organizational Skills
Success in planning, implementing and monitoring new and existing methods, procedures and
programs; ability to set and achieve realistic objectives and to determine priorities; effectiveness
in use of time; achievement of position deadlines.
Judgment and Initiative
Resourcefulness in accomplishing and solving problems; ingenuity in finding new solutions;
ability to function with minimal supervision and control; decision making ability; desire for new
responsibilities; ability to make program contributions and develop new methods and procedures.
Financial Management and Control
Ability to analyze and control expenditures with appropriate concern for cost control; effective
use of available resources and maintenance of budget within prescribed limits.
Problem Solving/Decision Making Skills
Understanding factors in developing sound practical solutions; making prompts decisions,
accepting responsibility; making creative contributions to solution of problems and resolution of
disputes.
Supervision Received
Describe the level of supervision over this position in terms of decisions, authority level,
expected amount of independent decision making, judgment and initiative required, etc.
Professional Development
Efforts to continue professional development in a specialized area of skill or expertise; research
activities; publications; attendance at professional conferences; workshops and seminars,
presentation of papers at professional meetings, conferences, etc.
QUESTION : 6 (b)

(I) Introduction to Non-Profit Organization:

As the nature of the organization declares its goal as other than profit, it is obviously rendering
service such as schools, colleges and other educational institutes, hospitals, clubs, etc. measuring
the quantity and quality of their service is difficult, and that is why measuring the attainment of
goals in a non-profit organization is much less precise than similar measurement in a business.

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However, non-profit organizations do have a financial goal, and that is to earn revenues enough
to recover all expenses of running the service and leave a surplus sufficient to provide:
(a) Some unforeseen expenses for rainy days and
(b) For some additional working capital or addition to fixed assets, if needed.

Interestingly a non-profit organization cannot accumulate large profit, because in that case it is
not providing services for which the revenues are collected.

(II)Definition:

Associations, charities, cooperatives, and other voluntary organizations formed to further

cultural, educational, religious, professional, or public service objectives. Their startup funding is
provided by their members, trustees, or others who do not expect repayment, and who do not
share in the organization's profits or losses which are retained or absorbed. Approved,
incorporated, or registered NPOs are usually granted tax exemptions, and contributions to them
are often tax deductible. Most non governmental organizations (NGOs) are NPOs. Also called
not for profit organization.

(III) Nature and goals

NPOs are often charities or service organizations; they may be organized as a not-for-profit
corporation or as a trust, a cooperative, or they may be purely informal.

Sometimes they are also called foundations, or endowments that have large stock funds. A very
similar organization called the supporting organization operates like a foundation, but they are
more complicated to administer, they are more tax favored, and the public charities that receive
grants from them must have a specially determined relationship.

Foundations give out grants to other NPOs, or fellowships and direct grants to participants.
However, the name foundations may be used by any not-for-profit corporation even volunteer
organizations or grass roots groups.

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Applying Germanic or Nordic law (e.g. Germany, Sweden, Finland), NPOs typically are
voluntary associations, although some have a corporate structure (e.g. housing cooperatives).
Usually a voluntary association is founded upon the principle of one-person-one-vote.

(IV) Performance evaluation of NPO:

1. Spending Measurements:
One approach used to judge an NPOs performance is to measure the amount of resources the
organization spends on providing program services (to carry out its purpose) vs. what it spends
on management and general expenses and fundraising. For most organizations, a higher
percentage of resources spent on program services than on management and fundraising is
considered a positive performance indicator

Although this type of measure is useful, it doesnt indicate how effectively an organization uses
its resources to meet its objectives. For example, an NPO may spend 80% of its resources
providing a particular program service, but may be ineffective in reaching the programs goals.
Just spending money on a service is not an effective performance measure.

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2. Output and outcome measures:

Service efforts and accomplishment measures fall into four categories:

Input measures,
Output measures,
Outcome measures and
Efficiency measures.

They quantify the effort expended on a program (inputs), the level of services provided (outputs),
the effect a service has on the programs stated objectives (outcomes) and a comparison of the
level of inputs with outputs or outcomes (efficiency).

NPOs are very accustomed to reporting input measures. For example, they report the financial
resources dedicated to specific programs in their financial statements. Many also report
nonfinancial information about the effort they expend, such as the hours spent meeting a program
goal.

Output measures are often stated in nonfinancial terms. For example, a university may report the
number of students that graduated or a homeless shelter may report the number of people housed.

Outcome measures gauge how well a program accomplished its goal. For example, a program
designed to teach reading to adults may use the literacy rate for the area served as an outcome
measure. One limitation of outcome measures is many factors other than a specific program can
affect them.

Often, the final step an NPO can take in using service efforts and accomplishments techniques is
to employ them to measure efficiency. These measures compute either inputs/outputs or
inputs/outcomes indicators and provide information on how efficient an organization is at
achieving its program goals. For example, a program that teaches reading to adults could
compute a cost (input) for each adult who reaches a certain reading level (output).

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 QUESTION : 7

The balanced scorecard is a strategic planning and management system that is used extensively
in business and industry, government, and nonprofit organizations worldwide to align business
activities to the vision and strategy of the organization, improve internal and external
communications, and monitor organization performance against strategic goals. It was originated
by Drs. Robert Kaplan (Harvard Business School) and David Norton as a performance
measurement framework that added strategic non-financial performance measures to traditional
financial metrics to give managers and executives a more 'balanced' view of organizational
performance. The balanced scorecard has evolved from its early use as a simple performance
measurement framework to a full strategic planning and management system. The new
balanced scorecard transforms an organizations strategic plan from an attractive but passive
document into the "marching orders" for the organization on a daily basis. It provides a
framework that not only provides performance measurements, but helps planners identify what
should be done and measured. It enables executives to truly execute their strategies.

Kaplan and Norton describe the innovation of the balanced scorecard as follows:

"The balanced scorecard retains traditional financial measures. But financial measures tell the
story of past events, an adequate story for industrial age companies for which investments in
long-term capabilities and customer relationships were not critical for success. These financial
measures are inadequate, however, for guiding and evaluating the journey that information age
companies must make to create future value through investment in customers, suppliers,
employees, processes, technology, and innovation."

Implementing Balanced Scorecards typically includes four processes:

1. Translating the vision into operational goals;

2. Communicating the vision and link it to individual performance;

3. Business planning;index Setting

4. Feedback and learning, and adjusting the strategy accordingly.

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Reasons for being balance scorecard superior

Performance measurement and management have never been hotter. Three factors have fueled
the need for improved performance reporting: the recent spate of corporate accounting scandals,
a longstanding reliance on financial measures of performanceas the one true way to gauge
success, and the inability of many organizations to successfully execute their strategies

Four general perspectives have been proposed by the Balanced Scorecard which make it
superior:

Financial perspective;
Customer perspective;

Internal process perspective;

Innovation and learning perspective.

The financial perspective examines if the companys implementation and execution of its
strategy are contributing to the bottom-line improvement of the company. It represents the long-
term strategic objectives of the organization and thus it incorporates the tangible outcomes of the
strategy in traditional financial terms. The three possible stages as described by Kaplan and
Norton (1996) are rapid growth, sustain, and harvest. Financial objectives and measures for the
growth stage will stem from the development and growth of the organization which will lead to
increased sales volumes, acquisition of new customers, growth in revenues etc. The sustain stage
on the other hand will be characterized by measures that evaluate the effectiveness of the
organization to manage its operations and costs, by calculating the return on investment, the
return on capital employed, etc. Finally, the harvest stage will be based on cash flow analysis
with measures such as payback periods and revenue volume. Some of the most common
financial measures that are incorporated in the financial perspective are EVA, revenue growth,
costs, profit margins, cash flow, net operating income etc.

The customer perspective defines the value proposition that the organization will apply to
satisfy customers and thus generate more sales to the most desired (i.e. the most profitable)
customer groups. The measures that are selected for the customer perspective should measure
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both the value that is delivered to the customer (value proposition) which may involve time,
quality, performance and service and cost and the outcomes that come as a result of this value
proposition (e.g., customer satisfaction, market share). The value proposition can be centered on
one of the three: operational excellence, customer intimacy or product leadership, while
maintaining threshold levels at the other two.

The internal process perspective is concerned with the processes that create and deliver the
customer value proposition. It focuses on all the activities and key processes required in order for
the company to excel at providing the value expected by the customers both productively and
efficiently. These can include both short-term and long-term objectives as well as incorporating
innovative process development in order to stimulate improvement. In order to identify the
measures that correspond to the internal process perspective, Kaplan and Norton propose using
certain clusters that group similar value creating processes in an organization. The clusters for
the internal process perspective are operations management (by improving asset utilization,
supply chain management, etc), customer management (by expanding and deepening relations),
innovation (by new products and services) and regulatory & social (by establishing good
relations with the external stakeholders).

The innovation and learning perspective is the foundation of any strategy and focuses on the
intangible assets of an organization, mainly on the internal skills and capabilities that are
required to support the value-creating internal processes. The Innovation & Learning Perspective
is concerned with the jobs (human capital), the systems (information capital), and the climate
(organization capital) of the enterprise. These three factors relate to what Kaplan and Norton
claim is the infrastructure that is needed in order to enable ambitious objectives in the other three
perspectives to be achieved. This of course will be in the long term, since an improvement in the
learning and growth perspective will require certain expenditures that may decrease short-term
financial results, whilst contributing to long-term success.

Thousands of businesses and other organisations all around the world using a balanced scorecard
methodology: Reasons for the superiority of Balance score card are:

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 Focusing the whole organisation on the few key things needed to create
breakthrough performance
A balanced scorecard might show that an organisation is only weak in a couple of areas
but that these areas are impeding its overall success. By focusing everyone in the
organisation on improving those areas, overall performance gets better.

Helping to integrate various corporate programmes (like quality and customer

service)
Looking at different organisational programmes or units from different perspectives can
be a way of getting everyone singing from the same songsheet. If the balanced scorecard
shows customer service to be weak, focusing on everybodys customer service
performance behaviours will lead to small improvements in each department or unit; the
overall effect will be a bigger improvement in the organisations customer service
performance across the board.

Breaking down strategic measures to lower levels of the organisation, so managers

and employees both know what is required to achieve excellent overallperformance
An organisation might have overall goals to increase productivity by 5 per cent, for
example. By breaking down its productivity measures to granular levels of the
organisation as part of a balanced scorecard, every member of the organisation will have
clear targets that support the overall goals.

Conclusion: Using management techniques based on the balanced scorecard techniques can
also have a positive impact on an organisations people, as it will recognise strengths and
weaknesses of different people in different areas. People can feel valued in ways not
recognised by traditional measurement approaches. At the same time, an organisation can use
its peoples strengths to their greatest effect while working to improve their areas of
weakness

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 QUESTION : 8

What are different types of strategic missions at sbu level ? how do these missions affect
strategic planning process and budgeting at sbu level

Strategic Business Unit or SBU is understood as a business unit within the overall corporate
identity which is distinguishable from other business because it serves a defined external market
where management can conduct strategic planning in relation to products and markets. When
companies become really large, they are best thought of as being composed of a number of
businesses (or SBUs).

These organizational entities are large enough and homogeneous enough to exercise control over
most strategic factors affecting their performance. They are managed as self contained planning
units for which discrete business strategies can be developed. A Strategic Business Unit can
encompass an entire company, or can simply be a smaller part of a company set up to perform a
specific task. The SBU has its own business strategy, objectives and competitors and these will
often be different from those of the parent company. Research conducted in this include the BCG
Matrix.

This approach entails the creation of business units to address each market in which the company
is operating. The organization of the business unit is determined by the needs of the market.

An SBU is an operating unit or planning focus that groups a distinct set of products or services,
which are sold to a uniform set of customers, facing a well-defined set of competitors. The
external (market) dimension of a business is the relevant perspective for the proper identification
of an SBU. Therefore, an SBU should have a set of external customers and not just an internal
supplier. (Arnoldo C. Hax and Nicholas Majluff)

A Strategic Business Unit ( SBU ) is generally defined by what it has in common, as well as the
traditional aspects defined by McKinsey, of separate competitors and a profitability bottom line

The commonalities are five in number:

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An SBU may be defined by its common raw materials. Such a company, Kimberly-Clark for
example has a variety of paper products such as Kleenex, Kotex (sanitary napkins ), Huggies
( originally based on cellulose).

Another SBU may be defined by its common manufacturing processes: A company such as
General Motors may have separate units making automobiles, trucks, diesel-electric locomotives,
all based on such engineering and assembly processes.

Another SBU relies on a common distribution method; The Sharper Image started by utilizing
advertisements only in airline magazines using direct mail . Its success eventually brought it to
using regular retailing stores as well

Yet another SBU is based on common customers: Proctor & Gamble makes Pringles potato
chips, Ultra-Pampers, Dawn detergent, Crest toothpaste, all based on the fact that these products
are largely sold through super markets. In the past several years they also acquired Gillette
Razors for much the same reason.

A last SBU may be based on its service processes, such as an accounting firm ( Deloitte Touche )
or a consulting firm ( Accenture ) where its particular set of skills of its personnel have a clear
competitive advantage. A shipper/ warehouser such as UPS or Federal Express similarly fits this
definition.

There are three factors that determine the success of an SBU: 1. The degree of autonomy given
to each SBU manager 2. The degree to which an SBU shares functional programs and facilities
with other SBU's 3. The manner in which the corporation evaluates and rewards the performance
of its SBU managers

Companies today often use the word Segment or Division when referring to SBUs, or an
aggregation of SBUs that share such commonalities.

STRATEGIC OBJECTIVES

There is no one-size-fits-all answer for the effective design of control systems. When an SBU
manager's reward system is matched with the SBU's strategy, performance will match corporate
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strategy, and objectives will be enhanced. Failure to match strategy and reward will adversely
affect the manager's motivation and efforts. The strategy for an SBU is dependent on its mission
and the consideration of environmental opportunities, internal strengths, and the resources
available to accomplish its goals and objectives. (2)

Three approaches to control system design that foster goal congruence are: situation specific,
universalistic, and contingency. (3) The situation-specific model views each situation as unique,
so application of general rules is not possible. Universalists argue that an optimal control system
design will be effective in all settings. The contingency approach, which has become the
prominent paradigm, is positioned between these two extremes. It suggests that the
appropriateness of the control system depends on the business setting (like the situation-specific
approach), but generalization (universalistic approach) can be made across similar settings. If the
SBU mission or competitive strategy varies across divisions within the organization, the control
system must be modified to capture the relevant performance measures and motivate SBU
managers accordingly. (4) Strategic mission or business unit strategies are commonly grouped
into the following areas: build, hold, harvest, and divest. (5) Competitive strategies include: low
cost, differentiation, focus, defender, or prospector. (6)

A Strategic Business Unit (SBU) has been defined above in the strategic planning process. Each
of a firms Strategic Business Units (SBU) has six attributes:

1. A specific target market

2. Its own senior marketing executive

3. Control over its resources

4. Its own marketing strategy

5. Clear-cut competition

6. Distinct differential advantages

STRATEGIC MISSION

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The mission of an international SBU is related to lifecycle concepts. A build mission implies the
goal of increasing market share and typically applies to any SBU with low market share in a
high-growth industry. In order to build a competitive advantage, it may be necessary for the
manager to sacrifice short-term earnings and/or cash flow. Also, a build strategy implies an
increase in production, which results in additional use of the firm's resources. Performance
measures that focus mainly on profit or return would be in conflict with the overall mission of
the SBU. The manager, therefore, should be evaluated and rewarded primarily on achieving a
targeted increase in sales or market share, with profitability measures (with a great deal of slack)
a secondary objective.

The hold strategy applies to an SBU with a high market share in a high-growth industry. Though
profit-oriented accounting performance measures would be appropriate, nonfinancial measures
also should be incorporated, such as customer service, maintaining market share, and quality
measures.

The goal of a harvest SBU is to maximize short-term cash flows and earnings at the expense of
market share (high market share, low-growth industry). These earnings can then supplement
other business units that may be in build strategies. To align management decision making with
the harvest strategy, the control system should evaluate performance using one of the
conventional return measures, such as ROI, RI, or EVA. Measures of cash flow also may be
appropriate. Profit and return measures have a much tighter acceptable range and should be
adhered to strictly.

In a low-market-share, low-growth industry, the SBU's strategy may be to divest through a

process of slow withdrawal or outright sale. The appropriate control system at this stage is
unique to the particular situation. Presumably, the objective is to maximize cash flows. This
strategy represents the end of the life-cycle stages, however, and is a unique situation with a
limited ability to generalize. Therefore, we will skip the discussion of control models for the
divest strategy.

Certain objectives of SBUs

a. focus on market share and/or sales growth

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b. maintain market share
c. new products to market
d. quality and/or customer service measures
e. cost management/efficiency measures
f. return-based measures (e.g.,ROI,EVA)
g. tight budgetary controls
h. slack in budgetary controls
i. group-based rewards/evaluation
j. individual-based rewards
k. preference for evaluation relative to others
l. business-unit vs. company rewards
m. company-based vs. business-unit rewards
n. formula-based evaluation/rewards/bonuses
o. subjective evaluation/rewards/bonuses
p. pay for performance/contingent rewards
q. performance-based rewards less motivating
r. desire for incentive-based extrinsic rewards
s. intrinsic rewards likely to be valued
t. focus on short-term financial performance
u. past/present orientation
v. future orientation/long planning horizons
w. preference for immediate rewards
x. motivated by deferred compensation
y. acceptance/desire for stretch budgets
z. preference for interactive budget process

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MISSION AFFECT STRATEGIC PLANNING PROCESS

An SBU with a low-cost competitive strategy attempts to achieve lower costs relative to
competitors. Typical low-cost actions include taking advantage of economies of scale; learning-
curve effects; reducing customer service, research and development, advertising, and/or sales
force; and maintaining a stable product line. Strict adherence to cost standards through variance
analysis and other measures of operating efficiency, such as cycle time and inventory turnover,
would be appropriate measures to evaluate and control performance in this competitive
environment. Further, A. A. Thompson and A. J. Strickland, III, suggest that significant cost
advantages can emerge from an analysis of an entity's internal and external value chain. (7) Low-
cost participants must be careful, however, because the marketplace will still demand a minimum
level of product quality and functionality.

A differentiation strategy focuses the SBU manager's attention on brand loyalty, customer
service, product design, and technology. The goal is to create a product that customers view as
unique and exclusive. Product innovation is critical. To create uniqueness, the SBU is likely to
have a more diversified set of products or functionally superior products compared to a low-cost
competitor, and it must invest in research and product development, technology, marketing, and
customer service. Achieving a target ROI does not measure progress effectively within this
strategy. While traditional financial performance measures still play a role, nonfinancial
performance measures, such as quality, on-time deliveries, customer satisfaction, and number of
new products to market, must be emphasized.

An SBU with a focus strategy targets a narrow competitive market within an industry segment.
The specific objectives could be either low cost or differentiation. Design of the control system
must be tailored to the selected objective.

SBUs with a defender strategy engage in limited product/market research, have limited product
lines, and have a stable environment. Defenders compete through cost and quality control. This
strategy is consistent with the features of the hold and harvest missions. ROI, RI, and EVA may
be effective control measures if they are incorporated with variance analysis, operating efficiency
measures, and quality variables.
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Prospector SBUs, similar to differentiators, compete by focusing on market development, new
product development, and searching (prospecting) for market opportunities. These SBUs are
often in a build strategic mission. Profit-oriented performance measures would not capture
progress toward goals and objectives. The number of new products to market, customer
satisfaction, quality, sales from products developed in the last 24 months, and market share
would evaluate and control the manager more appropriately.

As we said, there is no single performance measure or control system applicable across different
business unit strategies that provides a basis for aligning management decision making with
corporate goals. The specific control system must be modified and aligned with the particular
strategy of the SBU. The preferences of the SBU manager in the design of the control system,
therefore, must not be ignored. For example, the preferences of international SBU managers for
autonomy, level of uncertainty, risk, participation, group versus individual rewards, and short-
versus long-term rewards may be influenced by their cultural identity. In turn, consideration of
cultural differences in the design of a control system can increase its effectiveness.

Also affects certain cultural factors

These days, more and more MNCs use local management talent to operate a foreign subsidiary
rather than relying on "imported" expatriates. Effectiveness of the management control system
depends on whether the local manager of the SBU perceives the control system as aligned with
the shared values maintained in the host country. Hofstede defined culture as "the collective
programming of the mind that distinguishes the members of one category of people from those
of another." In perhaps the most extensive and most frequently cited research conducted with
respect to cultural differences, Hofstede identified five underlying cultural dimensions--power
distance, uncertainty avoidance, individualism versus collectivism, masculinity versus
femininity, and Confucian dynamism--and assigned scores on them to more than 50 countries.

The business units (or products) on the basis of their relative market shares and growth rates.

Cash cows are units with high market share in a slow-growing industry. These units
typically generate cash in excess of the amount of cash needed to maintain the business.
They are regarded as staid and boring, in a "mature" market, and every corporation would
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 be thrilled to own as many as possible. They are to be "milked" continuously with as little
investment as possible, since such investment would be wasted in an industry with low
growth.
Dogs, or more charitably called pets, are units with low market share in a mature, slow-
growing industry. These units typically "break even", generating barely enough cash to
maintain the business's market share. Though owning a break-even unit provides the
social benefit of providing jobs and possible synergies that assist other business units,
from an accounting point of view such a unit is worthless, not generating cash for the
company. They depress a profitable company's return on assets ratio, used by many
investors to judge how well a company is being managed. Dogs, it is thought, should be
sold off.

Question marks (also known as problem child) are growing rapidly and thus consume
large amounts of cash, but because they have low market shares they do not generate
much cash. The result is a large net cash consumption. A question mark has the potential
to gain market share and become a star, and eventually a cash cow when the market
growth slows. If the question mark does not succeed in becoming the market leader, then
after perhaps years of cash consumption it will degenerate into a dog when the market
growth declines. Question marks must be analyzed carefully in order to determine
whether they are worth the investment required to grow market share.

Stars are units with a high market share in a fast-growing industry. The hope is that stars
become the next cash cows. Sustaining the business unit's market leadership may require
extra cash, but this is worthwhile if that's what it takes for the unit to remain a leader.
When growth slows, stars become cash cows if they have been able to maintain their
category leadership, or they move from brief stardom to dogdom.

Uncertainty avoidance refers to the society's preference for risk-free, unambiguous situations. A
culture with a high uncertainty-avoidance score (Greece, Guatemala, Japan, Chile, Argentina,
Spain) reflects a preference for control systems that adhere to clearly defined performance
measures with unambiguous links to performance evaluation and reward. A low uncertainty-
avoidance culture (Singapore, Hong Kong, Sweden, U.K., Malaysia), on the other hand, is more

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open to less structured control systems where rewards are either discretionary or include a bonus
scheme rather than fixed compensation. With a preference for uncertainty avoidance, security in
one's position is paramount and rigid, and specific rules that reduce uncertainty are generally
accepted. Ambiguity in the control system may be perceived as a continuous threat and result in
low morale, high turnover, and increased stress and anxiety.

In Hofstede's research, there appears to be an interaction of power distance and uncertainty

avoidance. Though the surveyed countries scatter across all four quadrants, there is a significant
grouping of countries in the low power distance, low uncertainty avoidance sector (Sweden,
U.K., U.S., Canada) and in the high power distance, high uncertainty avoidance quadrant (Spain,
Mexico, Argentina, Chile, Brazil). (12) The countries in the former group prefer participation in
the budget process, but they also would accept increased risk in the reward structure. Countries
in the latter group represent cultures that accept inequality in the power structure and a lack of
participative budgets, but they would demand certain fixed rewards.

Individualism versus collectivism represents the degree that members of a society perceive
themselves as individuals rather than as members of a group. Countries with a high score on this
dimension (U.S., U.K., Canada, New Zealand, Italy, Sweden) reflect a culture with preferences
for individual versus group rewards, independence, and recognition of personal achievement.
Tight budgetary controls can be perceived as stifling individual performance. In contrast, a
control system with slack budgetary controls and individual rewards imposed on a collectivist
culture (Guatemala, Singapore, Hong Kong, Malaysia, Mexico, Greece, Brazil, Chile) would be
perceived as contrary to societal norms. Such a system highlights individual differences and
promotes competition and interpersonal rivalries, contrary to a preference for group harmony and
equality.

Masculinity versus femininity indicates the extent that the "masculine" values of assertiveness,
ambition, independence, competitiveness, and male dominance are revered over the "feminine"
values of nurturing, interdependence, service motivation, quality of life, and equality between
sexes. In Hofstede's research, the higher a country scored on masculinity, the greater the gap
between the values of its men and women. In a high-masculinity country (Japan, Austria,
Mexico, Germany, U.K.), managers are more accepting of stretch budgets and would prefer a
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focus on individual achievement with performance evaluated relative to peers. In a high-
masculinity country such as Japan, the high Confucianism factor (discussed next) and relatively
low individualism score may mitigate the desire for individual recognition. In addition, anecdotal
evidence suggests that managers of SBUs in some high-masculinity countries may be open to
stretch budgets, but when they fail to deliver they still expect their fixed reward. In low-
masculinity countries (Sweden, Chile, Spain, Singapore, Brazil, Canada), a strong emphasis on
bottom-line profitability with little concern for members of the organization will be met with
resistance and is therefore counterproductive to achieving SBU goals. Quality-of-life values such
as a friendly work environment, cooperation, and intrinsic rewards are likely to be motivational
factors combined with a preference for group performance evaluation versus individual,
incentive-based rewards.

STRATEGIC PLANNING PROCESS AFFECTS BUDGETING PREPARATIONS

Budgets are an important tool for effective short term planning and control in organisatons, an
operating budger usually overs one year and states the revenues and expensed planned for that
year

The central function achieved by the Budget at the preparation stage is resource allocation. Not
the whole economy resources, but those commanded by the Government. The role of
Government is not only determination of budget appropriation, but also setting policies for their
determination. Bringing consistency in the picture at the Budget Preparation stage requires
planning, where a medium to long-range view of future is taken and all policies envisaged are
brought together.

They role is not only determination of budget appropriation, but also setting policies for their
determination. To bring consistency in the picture at the Budget Preparation stage requires
planning, where a medium to long-range view of future is taken and all policies envisaged are
brought together.

International experience shows that the integration of policy, planning and budgeting is an
essential factor contributing to good budget outcomes at the macroeconomic, strategic and

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operational levels. They ensure that expenditure programs are driven by policy priorities and
disciplined by budget realities.

Being compatible with international standards and practices

Reduce paperwork and streamline the budgeting processes

Being capable of producing extensively detailed and accurate budgets based on accurate
information past, current and future projections

Definition of budget structure and budgetary periods

Supporting program/performance budgeting

o Matching appropriations and budget execution to projects and performance

criteria

o Variance analysis and future development prognoses

Supporting multi-year budget planning

Allowing budget scenarios and "what-if" analysis

Allowing Top-Down and Bottom-Up budget preparation

Being capable of producing reports required locally and internationally on time and in
required format

Expenditure Management is used for realization of the Treasury clients (non-profit, contributory
or other public organizations) expenditure and revenue cycle (from planning to payment
realization). This application is in the role of intermediary between the Treasury, organization
distributing state budget resources, and individual non-profit organizations that are allowed to
spend relevant part of these resources.

Clients, whose virtual or real bank accounts are opened in the Treasury, use QBSW Expenditure
Management as a internet banking in order to define spending purposes and sending payments to
recipients for authorized purposes.
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The Treasury Single Account system allows to use such internet banking system also for
execution of extra-budgetary funds of clients.

Main functions

Revenues and expenditures at all levels of defined classifications

Recording and adjusting plans (parameters) of future expenditures and revenues

Approving plans according to funds availability

Recording and approving commitment entry requests according to funds availability and
presented documentary proof

Recording and approving requests for payment (payment orders) according to funds
availability and presented documentary proof

Access to predefined special operations

Execution of extra-budgetary funds

Providing communication with the Treasury short notices, free-format requests

Generating reports for all transactions supported by the system

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 QUESTION : 12 -II

Particulars Buy Inside Buy Outside

Total Purchase Cost - 10000,000

Total Outlay Cost 9500,000

Ans 500,000

The Company as a whole will not benefit.

Particulars Buy Inside Buy Outside

Total Purchase Cost - 10000,000

Total Outlay Cost 9500,000

Revenue from using Bs Facility 1450,000

Ans 9500,000 8550,000

The Company will be benefited if Division A purchases the components from Outside
Supplier.

Particulars Buy Inside Buy Outside

Total Purchase Cost - 9200,000

Total Outlay Cost 9500,000

Ans 300,000

The Company will be benefited if Division A purchases the components from Outside
Supplier.

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