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Chapter 20
Strategy and Control System Design
Answer to End of Chapter Exercises

Q 20.1. The systems are complementary. Diagnostic controls measure the critical
performance variables required for achievement of the intended strategies. Interactive
controls are different from diagnostic control system and focus on the identification of
the emerging threats and opportunities that could invalidate the assumptions upon which
the current business strategy is based.

Q 20.2. Diagnostic controls measure the critical performance variables required for
achievement of the intended strategies. The balanced scorecard may overcome some of
the weaknesses of a performance management system such as budgetary control. See
strengths of the balance scorecard discussed in the chapter.

Q 20.3. The balanced scorecard may help. Like any other planning and control system it
can also become a procedure to be followed and not a useful management tool.
-Consider the advantages of the balanced scorecard.
-Also note the potential limitations of the balanced scorecard discussed in the chapter.
In a small company or one with limited environmental change and simple control
requirements, it may not be necessary to have a very sophisticated performance
management system.
Simons (1995) argues that the balanced scorecard would be inadequate if taken in
isolation and that further control mechanisms of control are required i.e. interactive,
boundary and belief system.

Q 20.4. Different measured may be relevant if the organizations are following different
strategies and/or are at different stages of the business life cycle. With a build strategy
which might be relevant at the start of a life cycle, sales growth may be as important if
not more important than profitability or cost control. Profitability and cost control
measures may be more appropriate at later stages of the life cycle.

Q 20.5. It seems unlikely that a strategy based on product differentiation will be

appropriate given the nature of the product and the market segments in which it operates.
It is much more likely that the key value proposition for the farming industry is price and
therefore strict cost control is appropriate.
Shank (1989) argues that with a policy of cost leadership product costing techniques and
budgetary control may be important. Cooper (1996) argues that approaches such as
Kaizen costing are also relevant. It will be necessary to identify whether value
propositions other than cost are important to the key market segments.

Q20.6. The revenue has increased over the year, as has the profit. However the
Scorecard reveals some worrying trends. The number of clients has fallen; with the
number of new clients falling considerably as has the customer satisfaction rating.

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Internal business processes are also showing a level of deterioration with a falling success
rate with new tenders and only one new service being provided compared to five in the
previous year.

Underpinning these indicators is deterioration in learning and growth indicators. There is

a high turnover in experienced managers and signs of a significant fall in the skill level of
existing staff as well as a fall in employee satisfaction.

Q 20.7 Hilcrest plc

i) Financial measures. Earnings per share, share price, growth rate. Also profitability
measures common to the hotel industry such as gross profit to sales, average spend per
customer, ROI.

Customer measures
a) Outcome performance (lagging measures):-
Hotel occupancy percentage.
b) Performance drivers (leading measures)
Key product attributes should be identified.
Quality it will be necessary to identify how the customers view quality. Reliability,
comfort, courtesy and friendliness.
Measurement of performance driver might be achieved through a measure of customer
satisfaction.

Internal business processes

Adherence to good practice guidelines that will lead to customer satisfaction e.g. Guests
room cleaned to schedule, faults recorded and corrected to schedule times, hotel
improvement to best practice.
Learning and growth
Employees skills - %age trained employees, years service
Information systems capabilities expenditure on IT system development
Motivation and alignment Employee turnover
See for example
Denton, G.A., White, B. (2000) Implementing a Balanced-scorecard Approach to
Managing Hotel Operations: The Case of White Lodging Services Cornell Hotel and
Restaurant Administration Quarterly, 41(1): 94-107

ii) Interactive controls see figure 20.8.

Technological dependence is relatively low focus on changing customer needs.
(However increasing IT facilities might be required)
Ease of tactical response probably a short-term planning horizon.

Belief systems and boundary systems are likely to be important in a service environment.
Especially where a high quality service is required.

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Q 20.8.
Sieigmund Ltd
Given limited funds it seems likely that the company will need to allocate its resources
carefully. It may have to focus on upgrading a limited range of product lines initially, e.g.
those where it is currently achieving most customer satisfaction, also where the market
segment is most attractive for development. The company management needs to consider
how the company is to be differentiated in terms of price or product differentiation or
whether a confrontation strategy is to be expected. The strategy to be followed will
influence the performance measurement and management system.

A) Balance Scorecard
Financial measures. Refer to chapter 16 to the discussion of appropriate financial
measures for the stage of the life cycle and strategy employed.
At the moment Siegmund Ltd appears to be following a hold or harvest strategy.
Given this strategy customer and product line profitability appear to be viewed as
important along with cost reduction and asset utilisation measures such as return on
capital employed. It is likely that these measures will continue to be of importance.

If it appears that a growth strategy is to be implemented. Gaining market share may well
be more important than cash flow or profits.
-Revenue growth in total and by product line is likely to be relevant.
-Measures of productivity such as revenue per employee.
-Asset utilisation measures such as research and development as a percentage of sales.

Customer measures
a) Outcome performance (lagging measures)
Customer profitability, market share, customer satisfaction. If greater emphasis is given
to growth then market share and customer satisfaction measures of performance may be
more important than customer profitability.

b) Performance drivers (leading measures)

Key product attributes should be identified. Quality and price have been noted in the text.
On-time delivery is of importance to the wholesalers and retailers. Performance targets
need to be set for these.
Other performance drivers are customer relationship and image and reputation. The
former can be measured using customer satisfaction surveys. Seigmund Ltd does have a
brand image as a market leader, but this is likely to fade fast unless some action is taken
to rectify a decline in standards.

Internal business processes

The organisation needs to focus on the processes that will lead to the delivery of the
attributes that will lead to customer satisfaction. Students should demonstrate an
understanding of the need for a causal link to other measures. E.g. if they consider quality
is the key customer proposition, then quality measures should also be key measures of
internal performance.

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i) Innovation process. Given limited resources, Siegmund will be unable to

develop all product areas. However it may still choose key product lines on
which it can focus development efforts.
ii) The operations area seems a particular area where process improvements are
possible. Machine cycle efficiency and quality measures may be possible.
These should support improvements in the areas which are key drivers of
customer satisfaction.
iii) Post-sale service should also be monitored to identify customer complaints
and warranty costs. Improvement targets should be set. (This can be
reconsidered in chapter 22).

Learning and growth perspective

Kaplan and Norton have indicated three areas to monitor including employee capabilities,
information system capabilities and motivation, empowerment and alignment. Limited
information is available about Siegmund:
Employee capabilities - it is known that there are skill shortages and targets should be set
to overcome these.
Information systems capabilities these are limited at present. Whether it is appropriate
to implement a material requirements planning system is a matter of debate, but
improvement targets to the current systems should be developed.
Motivation and alignment - a number of key players appear to have left and this has led
to a break down in some of the team work that traditionally occurred. Targets might be
set for team performance e.g. percentage of team projects that achieve target,
performance improvement targets, number of suggestions per employee.

B) Simons - levers of control

The levers of control include diagnostic systems such as the Balance Scorecard; belief
systems; boundary systems; interactive systems.
The Balanced Scorecard has been discussed above. Students should also make reference
to the need for:
Boundary systems which identify the actions that are off-limits (consider need for ethical
guidance, corporate governance, and internal controls).
Belief systems, which senior managers should formally communicate, in order to provide
core values to the organisation.
Interactive controls are also important. These focus on the emerging threats. Reference to
figure 20.8 might indicate a need to focus on competitive threats and opportunities and on
changing customer needs.

Q 20.9 Sunshine Sites

Given the size of the business, it might be considered that a simple budgetary control
system would be adequate for the business. A description of key elements of such a
system could be described. See chapter 7 e.g. responsibility accounting, different types
of responsibility centre, design of the control reports. A more sophisticated performance
management system might not be required.

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However, some limited measurement of customer satisfaction might be considered

helpful in order to identify what the customers desire and whether the business is
providing the facilities required

2008 John Wiley & Sons Ltd.

www.wileyeurope.com/college/bowhill