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Management Control and Strategic Performance Measurement

Chapter 17: Management Control and Strategic Performance Measurement


The principal focus of management control systems is strategic performance measurement. The goal of top management in using strategic performance measurement is to motivate the managers to provide a high level of effort, to guide them to make decisions that are congruent with the goals of top management, and to provide a basis for determining fair compensation for the managers.

A large number of management control systems are used in practice, including both formal and informal systems and individual or team-based systems. The chapter focuses on one type of formal control system at the individual level, the strategic performance measurement system.

Strategic performance measurement systems are implemented in four different forms, depending on the nature of the manager's responsibilities: the revenue SBU, cost SBU, profit SBU, and investment SBU.

The four types of SBUs are employed in manufacturing firms as well as service firms, not-for-profit and governmental organizations. Common cost SBUs in manufacturing firms are production and production-support departments. Cost SBUs often are evaluated as either engineered-cost SBUs or discretionary-cost SBUs. Discretionary-cost SBUs focus on planning desired cost levels; the engineered-cost SBUs focus on evaluation of achieved cost levels.

The marketing department can be either a cost SBU or a revenue SBU, or both. As a revenue SBU, the marketing department has goals for sales growth, as a cost SBU, there are goals for managing order-getting and order-filling costs.

The profit SBU is used when coordination between the marketing and production areas is needed, for example, in handling special orders or rush orders. Evaluation on profit provides the incentive for the departments to work together. Profit SBUs are also used to set a desirable competitive tone. All departments have the profit incentive to compete with other providers of the product or service, inside or outside the firm. The contribution margin income statement is an effective method for evaluating profit SBUs because it identifies each profit SBU's direct costs.

The contribution income statement is used for profit SBUs. It has the benefit of not being affected by changes in finished goods inventory. In contrast, the conventional in-come statement based on full costing is affected by inventory changes.

A key issue in the effective use of strategic performance measurement systems is the integration of strategic considerations into the evaluation. This requires an identification of the firm's critical success factors, and use of appropriate measurement and reporting of these factors, commonly in the form of a balanced scorecard. In many cases, a substantial portion of these factors is nonfinancial, including operating and economic data from sources external to the firm.

The different types of strategic performance measurement are used in service firms, not-for-profit organizations, and governmental units.

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