Level
4.0 ADVANCED DIPLOMA IN
MARKETING MANAGEMENT
Module
15 STRATEGIC MARKETING MANAGEMENT:
PLANNING & CONTROL
Advanced Diploma in Marketing Management
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Advanced Diploma in Marketing Management
Contents
1 INTRODUCTION TO PLANNING AND CONTROL
3
Need for Marketing Planning
Establishing Strategic Business Units
Market Audit
Control Defined
Responsibility Centre
Approaches to Control
Variance Analysis
Taking Corrective Action
3
6
9
14
22
32
52
68
2 WHERE ARE WE NOW?
77
Control of Marketing Operations
Importance of Marketing Control
77
79
3 WHERE DO WE WANT TO BE?
87
Mission Statement
Environment Drivers
Techniques for Conducting an Internal Appraisal
Portfolio Analysis
87
89
94
96
4 HOW MIGHT WE GET THERE AND WHICH WAY IS BEST
100
Cost-Volume-Profit Analysis
100
5 HOW CAN WE ENSURE ARRIVAL
The Concept of Strategic Architecture and Control
Financial Control Style
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1 Introduction to Planning and Control
1 Introduction to Planning and Control
Need for Marketing Planning
The discussion leads us to the point that wherever you have to deal with future, which is quite
uncertain, and beyond visualiasation and prediction, the only way to success is to develop appropriate
plans. Alternative plans are to be conceived; they must be assessed and the best may be chosen. This
requires application of management principles in the marketing functional area also. Again, such
plans should be well integrated into other functions of the organization and there should be a
harmonious combination of all facts of an organization.
Marketing planning helps to appraise performance, capitalize on strengths, minimize weaknesses and
threats and finally open up new opportunities.
Planning generally means ‘looking into the future’. This is inevitable in marketing because of two
reasons: the incredible multiplication of products available and the multiplication of choices (and the
veto power of consumers too) open to consumers. This entails great chances of failure of products.
Planning is basically advocated to minimize this risk of failure.
Yet another feature of marketing planning is that is an unending process. This is because selling is a
continuous process, and not a single act. It is a process of building the foundation of confidence with
every prospect, and the future sales rest on that foundation. This foundation is created by:
 Understanding the basic needs satisfied by the products
 Identifying the prospects who have those needs
 Making the prospects recognize the needs
 Convincing the prospect that the product will satisfy his needs
 Giving an opportunity to the prospect to accept the product
What is Marketing Planning?
Marketing planning is given systematic attention today because marketing management calls for
careful coordination of corporate means and marketing ends. In fact, planning precedes marketing
action and covers all business tasks. Planning process is to be carried out in all details before a
programme is made operational. Henry Foyol stated: “Marketing planning refers to forecasting and
providing a means of examining the future and drawing up a plan of action”. Accordingly the purpose
of planning is to manipulate the present systematically in order to be prepared for the future. In short,
the essential aspect of planning is to develop creative and innovative policies to guide corporate
efforts in the market place.
Formal marketing planning is an integrative process, which blends objectives of the firm with its
policies and strategies. It is the means by which a company seeks to monitor and control the hundreds
of external and internal influences on its ability to achieve profitable sales, as well as providing an
understanding throughout the organization. The whole process of planning may be grouped as
follows:
 Conceptual and Analytical
 Assess areas of marketing opportunities, and
 Determining market goals
 Operational
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 Developing marketing action
 Coordinating marketing action, and
 Evaluation of marketing programme
As Ackoff has stated, “ planning is the design of a desired future and of effective ways of bringing it
about”. In a marketing context, a useful definition will be:
Marketing planning involves the setting of marketing objectives, choice of the marketing mix,
selection of markets and designing of marketing programmes for each product market for a specified
future period.
There are two more aspects one should take note of regarding marketing planning. The first is the
formulation of strategic marketing planning, which is concerned with the planning of the fundamental
means for achieving the company’s objectives through the markets entered and the marketing
programmes used to serve them.
The second is the operational marketing planning concerned with the implementation of the strategic
plan. It involves the planning of marketing programmes that are designed to effect the strategic
decided on.
The stages involved in strategic and operational marketing planning and the relationship of the two
are illustrated below:
The Marketing Planning Process
Figure 1
Strategic Marketing Planning
1
Assess competencies,
threats and
opportunities
2
Choose target
product markets
3
Set strategic objectives
4
Select strategies for
achieving objectives
Operational Marketing Planning
5
Set operations
performance standards
6
Plan marketing
programmes
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Plan implementation
8
Monitor results
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Marketing planning is necessarily practiced in all economies irrespective of the political philosophy
of different governments. But, the location and nature of the planning organizations may vary widely
from country to country.
It may be noted that both the earliest and the greatest among systematic marketing planning have
been done in the Soviet Union. It is, however, ironic that this is the country in which marketing did
not exist officially till recently.
Benefits of Marketing Planning
The experience of firms in which planning is done obviously indicates that if sound procedures are
used, formal planning of the marketing operation results in a number of benefits. Some of them are:
Makes the Company Basically Market/Consumer-Oriented
Encourages systematic thinking ahead by management. Informal planning, careful thought must be
given to objectives and how they can be realized. Further, both objectives and how they can be
realized. Further, both objectives and means of achieving them must be made explicit and
communicated to others, a process that discourages uninformed analysis and careless reasoning. This
would establish better communications an effective coordination between departments.
Helps to identify possible developments facing the company. Rapid changes have been the hallmark
of most of the world’s economies in the post-world War II period. A systematic look at these changes
can help identify the opportunities and the problems they may bring for the firm. Further, new
customer needs could be recognized with the help of greater communications. This will make the
firm to give more attention to market enlargement rather than market maintenance.
Planning, in fact, injects innovations into the organization on a systematic basis. For instance, a
careful assessment of marketing opportunity will often result in some form of product or process
innovation
Results in better preparations to meet changes when they occur. Through the process of planning,
management will have definiteness on what actions or counteractions it has to take when
opportunities arise and problems occur.
Considering these advantages, it is wrong to say that ‘planning is a luxury appendage of marketing’.
It is a managerial element that is indispensable for the survival, growth and profitable operations of
the firm.
Marketing Planning Process
As has been pointed out in the previous paragraphs decisions made can be classified by whether they
are strategic or operational in nature. Logically, the strategic marketing decisions need to be made
first, since they are to be implemented through the planned marketing operations. A cycle of
marketing planning can be tentatively put as follows:
Strategic Marketing Plans are Made
Operating plans are put into effect
The operational plans are put into effect
The outcomes are monitored, and
The results are fed back into both strategic and the operating marketing planning process for making
necessary modifications, if required
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Strategic Marketing Planning
From a marketing perspective, a strategic plan outlines what marketing actions a firm should
undertake, why these actions are necessary, who is responsible for carrying them out where they will
be accomplished, and how they will be completed. It also determines a firm’s current position, future
orientation and allocation of resources. In other words, strategy formulation essentially involves the
matching of competencies with threats and opportunities.
Figure 2: The strategic process consists of seven inter-related steps illustrated below.
Defining organizational goals
Developing marketing
strategies
Establishing strategic business units
(SBUs)
Implementing tactics
Setting marketing objectives
Monitoring results
Situation analysis
Defining organizational goals refers to a long-term commitment to a type of business and a place in
the market. Goals can be defined in terms of customer groups served, functions performed, and
technologies utilized. Organizational objectives are to be specified in the context when a new good or
service is introduced, an old good or service is deleted, a new customer group is abandoned, the
business is diversified through acquisition, or part the business is liquidated or sold.
Establishing Strategic Business Units (Sbus)
The second aspect is to establish business unit in the organization. Each SBU is a self-contained
division, product line or product department within an organization with a specific market focus and
a manager with complete responsibility for integrating all functions into a strategy. An SBU may
include all products with the same physical features or products that are bought for the same use of
customers, depending on the goals of the organization. Each SBU will normally have three attributes:
a specific goal, a precise target market, and a manager empowered to take decisions.
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Setting Marketing Objectives
Marketing objectives are not independent but are closely related to business goals. The objectives
should be formulated in quantitative or qualitative statements. These are prepared taking into account
the internal company situation through an interaction and evolution of other functional objectives.
For example, goals could be set as follows:
Quantitative goals – adding new products or increasing retail sales from 20% to 30%
Qualitative goals – Trading up/Trading down policies (Adding Quality versions – good or cheap
quality)
Broad-range goals – Covers all aspects of the firm – Reduction in manufacturing cost
Marketing objectives are, therefore, statements of the corporate mission as operationalised for
specific time period. They are made specific with regard to market segments and customer needs.
(Marketing objectives about marketing mix elements – the four P’s – which are only strategies with
which objectives should be achieved).
Strategic objectives should be stated clearly and in measurable terms. For this, a sales forecast is to be
prepared. The objectives should also be closer to realities.
Situation analysis. Setting marketing objectives can be done only with certain preparatory exercises.
“Situation analysis” is one of them. In this problem it faces. Situation analysis seeks answers to two
general questions: where is the firm now? Where it is proposed to go? These questions are answered
by studying the environment, searching for opportunities, assessing strengths and weaknesses relative
to competitors, and anticipating competitors’ responses to company strategies.
Appraisal of the company’s or products’ strengths and/or weaknesses in the market is often termed
‘Self-appraisal’ and takes three forms:
Appraisal of Industry and General Economic Trends
Company analysis: done using the following methods
Market share analysis defined as a ratio of company’s sales to the total industry sales either on actual
or potential basis. This analysis will give an idea about the leftover quantity in total demand.
Market factor analysis is an item or element, which exists in a market, which may be measured
quantitatively and which is related to demand for a product. For example, it could be calculated as to
how many tyres may be needed for replacement if the total number of vehicles on road is known.
Market potential analysis: is the expected combined sales volume for all sellers of that product during
a stated period of time in a stated market.
These analyses would help the firm to plan how much to produce, when to produce, where to sell,
etc. this forms the essential prerequisite for setting marketing objectives.
Competitive conditions – this a comparative assessment made in respect of competitive currently
adopted by other sellers. Detailed analysis is made on the differences in product features, promotional
and distribution strategies. This would help features, promotional and distribution strategies. This
would help in devising better plans to meet the competition effectively.
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Developing Marketing Strategies
A marketing strategy outlines the manner in which the marketing mix is used to attract and satisfy the
target market and accomplishes the organization’s objectives. Marketing mix decisions center on
product, distribution, promotion, and price plans. A separate strategy is necessary for each SBU and
the strategies must be well coordinated.
Often, firm must select a strategy from among two or more possible alternatives. For example, a
company that has the objective of achieving a market share of 40 per cent may accomplish the
objective in several ways. It can improve product image through extensive advertising increasing
sales personnel, introduce a new product, lower prices, or sell through more retail outlets. Another
option would be to combine these marketing elements in a well-coordinated way.
Several systematic approaches are available and these approaches involve portfolio analysis by which
an organization individually assesses and positions every SBU and/or product. Then, efforts and
resources are allocated to each SBU and separate marketing mixes are aimed at their chosen target
markets on the basis of these assessments.
The product/market opportunity matrix identifies four alternatives marketing strategies that may be
used to maintain and/or increase sales of business units and products as illustrated below:
Table 1:The product/market opportunity matrix
Market
Product
Present
New
Present
New
MARKET PENETRATION
PRODUCT DEVELOPMENT
MARKET DEVELOPMENT
DIVERSIFICATION
Market penetration – increasing the sales of existing products existing markets. This is done
through intensive distribution, aggressive promotion, and competitive pricing.
Market development – selling existing products in new markets. It is effective when market
segments are emerging due to changes in consumer life-styles and demographics. Tapping the highly
potential rural markets in India is an example.
Product development – developing new products for sale in existing markets. It emphasizes new
models; quality improvements and other minor innovations closely related to established products
and market them to customers who are loyal to the company and its brands. The entry of pond’s
Talcum powder manufacturer into toilet soap market is an example in the context.
Diversification – developing of new products for sale in new markets. A housing finance company
enters into leasing business or a company engaged in the production of beverages into fast food
business is examples for this strategy.
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Operational Marketing Planning
The strategic planning would help a firm to prepare and set a ‘long-term grand design’. The
operational marketing planning suggests the ways to be devised to achieve the ultimate aim
visualized. This part is more practical than theoretical. Further there are short-term plans extending
preferably for a period of one year. Operational plans are also termed as tactical plans. The specific
elements to be included in the tactical plans are:
 What is to be done? (A statement of the specific actions to be taken)
 Who is to do it? (Identification of the specific individuals or units responsible for each action)
 When it is to done? (A schedule of actions with a time frames as to their initiation and
implementation)
 How much will it cost? (A comprehensive budget that specifies the expected cost of each action)
 What are the results expected? (A statement of the anticipated outcome of each action)
Evaluating and Implementing the Marketing Plan
It has been suggested earlier in this chapter that a situation analysis is inevitable before planning
process is adopted marketing audit is the method commonly found to be used by many firms in this
context.
Marketing Audit
A marketing audit is a systematic critical review and appraisal of the environment and the company’s
marketing operations. It is a powerful tool in ascertaining whether a company is in its dynamic phase
and under rapidly changing marketing environment or not. Basically, marketing audit could reveal
how a business is related to its environment in which it operates. Hence, it may also be referred to as
‘situation audit’, in a broader perspective.
Usually corporate plans are envisaged for finding out appropriate answers for the following
questions:
1. Where are we today? (Present status)
2. Where do we want to go? (Future objectives)
3. How do we get there? (Strategies evolved)
4. How are we getting on now? (Monitoring and control)
A marketing audit included a careful appraisal of a company’s past performance as well as “a
systematic”, critical and impartial review and appraisal of the total marketing operation; of the basic
objectives and policies of the operation and the assumptions which underlie them as well as of the
methods, procedures, personnel and organization employed to implement the policies and achieve the
objectives.
Marketing auditing is, thus, a systematic and thorough examination of company’s marketing
position? Marketing activity of an organization is immensely complicated and dynamic as much as in
the case of financial conditions of the organization. Almost the same reasons that prompt a firm to
review its financial position and have its reports and procedures audited make it desirable for the
company to have its marketing position and have its marketing position examined.
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In some respects, a marketing audit probes deeper into the essence of a company’s operation than
does a financial audit.
Types of Marketing Audit
Richard D Crisp distinguishes two types of marketing audit: Horizontal and Vertical. The horizontal
audit examines all of the elements that go into the whole marketing whole. In other words, it is
marketing mix audit. Needless to say, in such an audit, elative importance of each element and their
inter-relationship are considered. On the other hand, vertical audit singles out certain functional
elements of the marketing operation and subject them to a thorough study and evaluation. For
example, if a company conducts an audit exclusively on its advertising or distribution functions, it is
vertical audit. If these two functions are combined with product management and marketing research
then such then such an audit it takes the form of Horizontal audit. The actual conduct of marketing
audit is beset with two kinds of variables. First, there are variables over which the company has
complete control. These may be referred to as environmental and market variables. Secondly, there
are variables over which the company has complete control. These are termed as operational
variables. Thus, besides the kinds of audit mentioned in the previous paragraphs an external and an
internal audit also have to be made. The external audit comprises examination of information on the
general economy and conditions for the healthy growth of markets. The purpose of internal audit is to
assess the organization resources as they relate to the environment and vis-à-vis the resources of the
competitors. The various factors examined are in the figure below:
Figure 3
Marketing audit
External
Business &
Economic
environment
Economic
Political
Social
Business
Legal
Technological
Internal
Market
Environment
Competitive
environment
By market
By segment
By channel
By products
By area
By customers
By buying power
Products
Technology
Sales/market
Pricing
Marketing skills
Marketing
Organization
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Total sales
Market share
Market factor
Market potential
Marketing effort
Profit margin
Marketing control
All marketing mix
Variables
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Thus, in a marketing audit process there are basically two phases:
Identification, measurement, collection and analysis of all relevant facts and opinions which impinge
on a firm’s problems, and
Application of judgement to areas, which are still remaining uncertain. Like an accounting or
financial audit, a marketing audit should be conducted regularly, because it’s primary purpose is to
identify weaknesses in ongoing marketing operations and to plan the necessary improvements to
correct these weaknesses. Marketing audit evaluates how effectively the marketing organization
performed its assigned functions.
A marketing audit may be specific and focus one or a few marketing activities, or it may be
comprehensive and encompass all marketing activities of a firm. An example given in the reference
may be referred.
Sales Forecast
One of the major planning premises in the typical business enterprise is the sales forecast. It underlies
various plans pertaining to new product, production, and marketing plans and also reflects condition
of the market place, which are external to the firm. A sales forecast is the key to internal planning.
The sales forecast is a prediction on expected sales, by product and price, for a specific period. In
other words, it is a basic tool for anticipating the nature marketing goals and strategies. It is required
to measure performance, compensate sales people, and control the marketing system.
Uses of Sales Forecast
Reduces selling costs. Second to the production cost, selling cost occupies a prominent place in the
price structure of a product. By accurately estimating the various costs on advertisement, distribution,
etc. wasteful expenditure could be avoided. This ultimately reduces the final price of the product.
Helps in the proper pricing of the product. The initial price fixed for a product has to be altered on
account of changing market conditions. Preparation of a sales budget helps in anticipating and
making necessary price changes at the appropriate time.
Stabilizes production. Production and sales are closely related. A proper forecast will help in
smoothing out production schedules. Variations in demand due to seasonal fluctuations could also be
met without strain
Sales forecasting in inevitable for budgeting and budgetary controls. Forecasting aims at coordinating
various functions of an organization. According to Henry Fayol, “The act of forecasting of ensuring
adaptability to changing circumstances. The collaboration of all concerned leads to unified front, an
understanding of the reasons for decisions; and a broadened outlook”.
The specific contributions of forecasting to the field to the field of marketing management may be
summed up as follows:
1.
2.
3.
4.
5.
6.
To decide whether to enter a new market or not,
To determine how much production capacity to be built up;
To help in the product mix decisions (to eliminate or to add a new product)
To prepare standards against which to measure performance
To prepare annual budgets based on estimated sales revenues; and
To assess the effects of a proposed marketing programme
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Methods of sales forecasting
There are five methods in vogue:
Jury of Executive opinion method. This is the historical and the simplest method of making sales
forecasts. Under this method the views and opinions expressed by the executives are combined. It
lays emphasis on the use of judgement, informed estimates, hunches and guesswork. In most cases,
the final estimate is the opinion of the top-level managers.
The method has ease and simplicity. Indirectly the person behind the preparation of the forecast
becomes responsible for its achievement also. The chief demerit is that the forecast is based on
opinion rather than on facts and analysis. Forecasts are not usually broken down into products, time
periods, or organizational units.
Sales composite method. This method tries to collect the details from the actual marketing field for
the preparation of expected sales. The usual technique is to ask sales people to forecast sales for their
area. Their view is combined with the views of sales managers to form a more realistic picture about
the future. This method is based on the belief that those closest to the sales function have the best
knowledge of the market.
But the sales people are poor forecasters because they work in and give weight only to present
conditions. Their knowledge would be helpful only for the preparation of short-term forecasts. In
spite of this, good results could be obtained if the composite method is supplemented by various other
methods.
Users expectation method. This would is adopted for industrial marketing. The advantage here is
that customers comprise only a small group. Clearly, if a company can obtain an adequate and
reliable information sample of what customers will buy, even though the actual orders are not in
hand, it will have a good basis upon which to develop a sales forecast.
As pointed out, this method cannot be adopted in consumer goods marketing, as customers are large
in number. Secondly, customer expectations cannot be predicted accurately.
Statistical methods. In recent years, various types of sales forecasting that utilize statistical techniques
have become popular. The different methods based on statistical enquiry are:
 Trend and cycle – believes that past trend will continue;
 Correlation methods – correlation between sales and other areas; and
 Mathematical formula – formulae are evolved to depict the relationship of a number of variables
to the company’s sales.
From the standpoint of reliability statistical methods are good for sales forecasting. But they require
elaborate research, which is costly. Further, it should be noted that here also the prediction has to be
based on past figures that do not reflect the future.
Combination method. It is a combination of two or more methods suggested above. For example, an
initial forecast will be made by the sales people and later improved upon by using statistical methods.
Limitations of Sales Forecast
The forecasts may become unrealistic on account of the following reasons:
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1.Changes in fashion
2.Non-availability of past history of a product,
3.Technological developments,
4.Government intervention, and
5.Changes in the patterns of consumer behaviour
Table 2:A specimen of a sales forecast is given below:
Annual sales forecast
For the year ending
UNITS:
Southern area:
Product A
Product B
Northern area
Product A
Product B
VALUE:
Southern area
Product A
Product B
Northern area
Product A
Product B
Last year
Total
-
I
Quarter
-
II
Quarter
-
III
Quarter
-
IV
Quarter
-
10,000
12,000
11,000
13,200
3,000
4,000
5,000
4,000
8,000
3,000
2,000
2,000
4,000
16,000
Rs
4,400
17,600
Rs
1,000
5,000
Rs
1,000
4,000
Rs
1,000
4,000
Rs
1,400
4,600
Rs
5,000
12,000
17,000
5,500
13,200
18,700
1,500
500
5,500
2,500
500
6,500
500
500
3,500
1,000
700
3,200
2,000
16,000
18,000
35,000
2,200
17,600
19,800
38,500
500
5,000
5,500
11,000
500
4,000
4,400
11,000
500
4,000
4,500
8,000
700
4,600
5,300
8,500
Note: in order to show responsibilities the forecasts are divided into sales area and product wise.
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Since control is a process whereby management ensures that the organization is achieving desired
ends, it can be defined as a set of organized (adaptive) actions directed towards achieving a specified
goal in the face of constraints.
To bring about particular future events it is necessary to influence the factors that lie behind those
events. It is the ability to bring about a desired future outcome at will that is the essence of control. In
this sense it can be seen that control itself is a process and not an event. Moreover, the idea of control
can be seen to be synonymous with such notions as adaptation, influence, manipulation and
regulation. But control is not synonymous with coercion in the sense in which the term is used in this
book. Nor does it have as its central feature (as so often seems to be thought) the detailed study of
past mistakes, but rather the focusing of attention on current and, more particularly, on future
activities to ensure that they are carried through in a way that leads to desired ends.
The existence of a control process enables management to know from time to time where the
organization stands in relation to a predetermined future position. This requires that progress can be
observed, measured, and redirected if there are discrepancies between the actual and the desired
positions.
Control and planning are complementary, so each should logically presuppose the existence of the
other. Planning presupposes objectives (ends), and objectives are of very limited value in the absence
of a facilitating plan (means) for their attainment. In the planning process management must
determine the organization’s future courses of action by reconciling corporate resources with
specified corporate objectives in the face of actual, and anticipated, environmental conditions. This
will usually involve a consideration of various alternative courses of action and the selection of the
one that is seen to be the best in the light of the objectives.
In seeking to exercise control it is important to recognize that the process is inevitably value laden.
The preferred future state that one is seeking to realize is unlikely to be the same for individual A as
for individual B, and that which applies to individuals also, within limits, applies to organizations.
In seeking to exercise control the major hindrances are uncertainty (since the relevant time horizon
for control is the future, which cannot be totally known in advance) and the inherent complexity of
socio-economic and socio-technical systems (such as business organizations). If one had an adequate
understanding of the ways in which complex organizations function, and if this facilitated reliable
predictions, then the information stemming from this predictive understanding would enable one to
control the organization’s behaviour. In this sense it can be seen that information and control have an
equivalence.
Behind the presumption, therefore, that we can control anything there is an implied assertion that we
know enough about the situation in question (e.g. what is being sought, how well things are going,
what is going wrong, how matters might be put right, etc).
Control Defined
There are as many different definitions of control, and of management control, as there are authors.
Maciariello (1984, p.5), for example, offers the following definitions of management control (MC)
and management control system (MCS):
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Management control is the process of ensuring that the human, physical, and technological resources
are allocated so as to achieve the overall purposes of an organization. An MCS attempts to bring
unity of purpose to the diverse efforts of a multitude of organizational subunits so as to steer the
overall organization and its managers toward its objectives and goals. An MCS consists of a structure
and a process.
A control system’s structure has relative permanence and focuses on what the system is (i.e. the
designated responsibility centers, delegated authority, performance measures, etc). Its process focuses
on the way in which decisions are made to establish goals, allocate resources, evaluate performance,
and revise strategies, etc, in a purposive manner.
Itami (1977) emphasized the fact that management control is control within an organizational
context, which implies that it is of a multi-person nature. This also evident in Tannenbaum’s (1964,
p.299) definition of control as being:
Any process in which a person (or a group of persons or organization of persons) determines or
intentionally affects what another person or group or organizations will do.
However, Hofstede broadened the idea of interpersonal influence? (1968, p.11) to embrace
impersonal control also:
Control within an organization system is the process by which one element (person, group, machine,
institution or norm) intentionally affects the action of another element.
The interpersonal nature of control within organizations needs to be recognized in order to relate to
motivation, goal congruence and the reward system. Within figure 4 there is not explicit recognition
of this requirement, whereas figure 5 allows for it via ‘nesting’.
Within the nested model the superior exercises control by influencing the subordinate’s behaviour –
largely through the assessing of the subordinate’s performance against agreed plans.
The behavioural aspect is highlighted by Merchant (1985, p4) who also refers to the strategic aspects
of control:
Control is seen as having one basic function: to help ensure the proper behaviour of the people in the
organization. These behaviours should be consistent with the organization’s strategy …
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Figure 4: The control process
Feedback
Controller
Instructions
Operating process
Performance
Environment
Feedback
Figure 5: A nested model of control systems
Superior
Subordinates
Feedback
Operating Process
Performance
Environment
The need for control arises because individuals within the organization are not always willing to act
in the organization’s best interests.
Whilst strategy may be seen as being related to control it is usually separable. Thus it is possible for
an enterprise having good strategies to fail because it has a poor control system, and vice versa. In
general, however, the better the formulation of a strategy the greater will be the number of feasible
control alternatives and the easier their implementation is likely to be.
Anthony also refers both to the links between control and strategic implementation on the one hand,
and the interaction among individual on the other:
Control is used in the sense of assuring implementation of strategies. The management control
function includes making the plans that are necessary to assure that strategies are implemented.
Management control is the process by which managers influence other members of the organization
to implement the organization’s strategies.
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Merchant has pointed out a number of problems that have inhibited a greater understanding of
control:
The lack of a comprehensive and generally accepted control framework with supporting terminology
control problems and solutions are discussed at different levels of analysis
The solutions that are proposed also differ in accordance with the orientation of their proposers
some authors argue that control should deal with facts whereas other argue that control should be
future-oriented
Basic Control Concepts
In this section, which draws on Wilson and Chua, we will distinguish between:
Open-loop control; and
Closed-loop control
We shall also distinguish between two main forms of closed-loop control:
Feedforward control:
Feedback control
Open-Loop Control
This form of control exists when an attempt is made by a system to achieve some desired goal, but
when no adjustments are made to its actions once the sequence of intended acts is under way. A very
simple example is that of a golfer hitting a golf ball: his aim is to get the ball into the hole, and with
this in mind he will take into account the distance, the hazards, and so forth, prior the hitting the ball.
Once the ball is in the air there is nothing that the golfer can do but hope that he did things right.
Two possible refinements to the basic open-loop model are:
To introduce a monitoring device for the continual scanning of both the environment and the
transformation process of the system. This will provide a basis for modifying either initial plans or
the transformation process itself if it appears that circumstances are likely to change before the plan
has run its course and the goal realized. This is feedforward control and is illustrated in the figure
below:
Figure 6: A feed forward control system
Input
Process
Output
Monitor
Predict
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Regulator
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To monitor the outputs achieved against desired outputs form time to time, and take whatever
corrective action is necessary if a deviation exists. This is feedback control and is illustrated in the
figure below:
Figure 7: A feedback control system
Input
Process
Output
Regulator
Standard
Both feedback and feedforward control entail linking outputs with other elements within the system,
and this explains why they are termed closed-loop control systems.
Closed-Loop Control
In an open-loop system errors cannot be corrected as it goes along, whereas likely errors can be
anticipated and steps taken to avoid them in a feedforward control system, and actual errors along the
way can be identified and subsequent behavior modified to achieve desired ends in a feedback control
system.
The inadequacy of open-loop systems as a basis for organizational control largely stems from our
limited knowledge of how organizational systems operate, which in turn reflects the complexity of
organizations and their environments, plus the uncertainty that clouds the likely outcome of future
events. If we possessed a full understanding of organizational processes and had a perfect ability to
predict the future them we would be able to rely on open-loop systems to achieve the ends we desire
since we would be able to plan with the secure knowledge that our plans would be attained due to our
perfect awareness of what was going to happen, and how, and when.
In our current state of awareness we must rely on closed-loop systems, whether feedforward or
feedback, in which control action is dependent upon the actual or anticipated state of the system.
It is helpful to think of four types of outcome in connection with the application of closed-loop
systems to the problem of organizational control. These are:
So = Initial ex ante performance (e.g. a budget based on a set of expectations which might include:
inflation at 5 per cent per annum; market growth of 10 per cent per annum; no labour disputes).
S1 = Revised ex ante performance (e.g. an updated budget that has taken into account the experience
of operating the system to date)
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S2 = Ex post performance (e.g. a revised budget based on what should have been achieved in the
circumstances that prevailed during the period in question, say: inflation at 7 per cent per annum;
market growth of 12 per cent per annum, and a strike lasting three weeks).
Ao = Observed performance (i.e. that which actually occurred).
Ao shows an organization’s forecasting ability – So and, more precisely, by Ao – S1. Ao – S2 gives
the extent to which the organization is not using its resources to maximum advantage.
A feedforward control system will function in a way that keeps revising So as events are proceedings
with a view to producing an eventual outcome in which Ao = S1. on the other hand, a feedback
control system will, from time to time, compare Ao – So and So will only be revised if a discrepancy
has been experienced.
It is apparent that feedforward control tends to be:
Ex ante,
Proactive
Continuous
And seeks to predict the outcomes of proposed courses of action, while feedback control tends to be:
Ex post
Reactive
Episodic
Let us look at each a little more closely.
Feedforward Control
A feedforward system can be defined as:
A measurement and prediction system, which assesses the system and predicts the output of the
system at some future date
This differs from a feedback system in that it seeks to anticipate, and thereby to avoid deviations
between actual and desired outcomes. According to Cushing, its components are:
1.An operating process (which converts inputs and outputs)
2.A characteristic of the process (which is the subject control)
3.A measurement system (which assesses the state of the process and its inputs, and attempts to
predict its outputs)
4.A set of standards or criteria (by which the predicted state of the process can be evaluated)
5.A regulator (which compares the predictions of process outputs to the standards, and which takes
corrective action where there is likely to be a deviation)
For a feedforward control system to be effective it must be on a reasonably predictable relationship
between inputs and outputs (i.e. there must be an adequate degree of understanding of the way which
the organization functions).
Guidelines for developing feedforward control systems are as follows:
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 Thorough planning and analysis are required (reflecting as much understanding as possible about
the links amongst inputs, process, and outputs)
 Careful discrimination must be applied in selecting those variables that are deemed to have a
significant impact on output;
 The feedforward system must be kept dynamic to allow for the inclusion of new influences on
outputs’
 A model of the system to be controlled should be developed and the most significant variables
(along with their effects on process and outputs) defined within it;
 Data on significant variables must be regularly gathered and evaluated in order to assess their
likely influence on future outcomes.
 Feedforward control requires action focused on the future (rather than on the correction of past
errors)
Feedback Control
Feedback control should ensure self-regulation in the face of changing circumstances once the control
system has been designed and installed. The essence of feedback control is to be found in the idea of
homeostasis, which defines the process, whereby key variables are maintained in a state of
equilibrium even when there are environmental disturbances
As a hypothetical illustration let us consider a company planning to sell 100 000 cassette players
during the next 12 months. By the end of the third month it finds that the pattern of demand has fallen
to an estimated 80 000 units due to the launch by another company of a competing product. After a
further three months the competitor puts up the price of its product while the original company holds
its own price steady, and this suggests that the level of demand may increase to 150 000 units.
Feedback signals would ensure that the company is made aware, e.g. levels). The launch of the
competitive cassette player would be identified as the reason why sales levels subsequently increased.
In response to deviations between actual and desired results an explanation needs to be found and
actions taken to correct matters. Amending production plans to manufacture fewer (or more) cassette
players, allowing inventory levels to fall (or rise) to meet the new pattern of demand, modifying
promotional plans to counter competitive activities and so forth, could all stem form a feedback
control system.
If deviations (or variances to give them their usual accounting name) are minor it is probable that the
process could absorb them without any modifications, and minor variations between expected and
actual levels of demand with buffer stocks being held for this purpose. But in the caser of extreme
variations – such as the pattern of demand shifting from 100 000 units to 80 000 and then to 150 000
– it will be necessary to amend the inputs n a very deliberate way once the causes of the variations
have been established. Inevitably there are costs associated with variances, and these will tend to be
proportional to the length of time it takes to identify and correct them.
Some principles for the proper functioning of a feedback control system can be suggested and might
include:
The benefits fro the system should be at least as great as the costs of developing, installing, and
operating it. This is the problem of ‘the cost of control’. It is often difficult to specify precisely either
the benefits or the costs relating to different system designs, but it should be possible to make
approximate assessments of both.
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Variances, once measure, should be reported quickly to facilitate prompt control action.
Feedback reports should be simple, easy to understand, and highlight the significant factors requiring
managerial attention.
Feedback control system should be integrated with the organizational structure of which they are a
part. The boundaries of each process subject to control should be within a given manager’s span of
control
The most significant features of feedforward control are shown in table 2
Feedback systems are typically cheaper and easier to implement than are feedforward system, and
they are more effective in restoring a system that has gone out of control. Their main disadvantage
however, is that they can allow variations to persist for as long as it takes to detect and correct them.
Feedforward control systems, as we have seen, depend critically for their effectiveness on the
forecasting ability of those who predict future process outputs. Both feedforward and feedback lend
themselves to self-regulation.
Table 3: Relative strengths
Characteristic
Low cost
Ease of implementation
Effectiveness
Minimal time delays
Self-regulation
Feedforward
Feedback
-
-
-
The most effective approach to control comes form using the two approaches as complements since
few processes could be expected to operate effectively and efficiently for any length of time if only
one type of control was in use. (for example, in controlling inventory, feedback data can be used in
connection with stock outs, rates of usage, etc., while feedforward data needs to be generated in
gauging the raw material requirements for predicted levels of demand and the ability of suppliers to
deliver on time).
Both types of control are fundamentally intertwined with the design of MCS. In a feedback control
system the functions that they system will out are:
 Standard setting
 Performance measurement
 Reporting of results
Within a feedforward control system the role of the MCS will encompass:
 Standard setting
 Monitoring process inputs
 Monitoring operations
 Predicting process outputs
The degree of overlap is modest relative to the degree of complementarity
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Responsibility Accounting
In analyzing organization with a view to securing control over them there are five key variables to
which one must pay attention. A change in any one of these will have consequences for one or more
of the others. These variables are:
 The task of the organization (i.e., the purpose to be served by the outputs form the organization)
 The technology of the organization (i.e., the means whereby the inputs are converted into
outputs);
 The structure of the organization (i.e. the roles, rules, etc)
 The people of the organization (including their expectations, career development, etc)
 The environment of the organization (i.e. those factors beyond the organization’s boundary).
In this section we will be concerned with aspects of 3 – the structure, as reflected through
individuals’ assigned responsibilities
If a company is organized in such a way that lines of authority are clearly defined, with the result that
each manager knows exactly what his or her responsibilities are and precisely what is expected of
him or her, then it is possible to plan and control costs, revenues, profits, etc, in order that the
performance of each individual may be evaluated and, one hopes, improved. In addition, a
meaningful basis can be given to the design of the reporting system if it is geared to areas of
responsibility.
That is the essence of responsibility accounting, which is a system of accounting that is tailored to an
organization so that costs, revenues, profits, etc, can be planned, accumulated, reported, and
controlled by levels of responsibility within that organization. Responsibility accounting requires that
costs be classified by:
Responsibility Centre
Their degree of controllability within their responsibility centre (on the premise that each responsible
individual in an organization should only be charged wit those costs for which he or she is
responsible and over which he or she has control)
Their nature
This approach to classification will facilitate:
 Self-appraisal by lower and middle management
 Subordinate appraisal by top management
 Activity Appraisal
However, it is essential to the success of any control system that an individual is only held
responsible for results when the following conditions prevail:
 That he knows what is expected to achieve
 That he knows what he is actually achieving
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 That it is within his power to influence what is happening
When all these conditions do not occur simultaneously it may be unjust and ineffective to hold an
individual responsible, and it will be impossible to achieve the desired level of organizational
performance.
From the above comments it will be apparent that targets or results should be compiled in a way that
reflects one individual’s ‘uncontaminated’ performance. Thus mangers A’s budget should contain a
clear set of items which are deemed to be controllable at his level of authority and a further set of
items that are either fixed by company policy or are otherwise beyond manager A’s influence. These
fixed by company policy or are otherwise beyond manager A’s influence. These later items are
uncontrollable from A’s viewpoint, and his performance should not be assessed in relation to costs,
etc, over which he has no control.
Costs (as well as revenues, profits, and so forth) can only be controlled if they are related to the
organizational framework: in other words, costs should be controlled in accordance with the concepts
of responsibility – a cost should be controlled at whatever level it is originated and initially approved
by the individual who did the initiating and approving. In this way it will be clear that certain costs
are the responsibility of, and can only be controlled by, the chief executive of a company whereas
others are controllable by responsible individuals at lower levels of the organizational hierarchy. It is
important to distinguish between costs that are controllable at a given level of managerial authority
within a given period of time and those that are not. This distinction is not the same as the one
between variable costs and fixed costs. For example, rates are fixed cost that are uncontrollable, for a
given time period, by any managerial level, whereas the annual road license fee for a particular
vehicle is a fixed cost that is controllable by the fleet manager who has the power to dispense with the
vehicle. In the same way the insurance premium payable on inventories is a variable cost that is not
controllable at the storekeeper level, but it is controllable at the level of the executive who determines
inventory policy.
Both managerial authority and the element of time affect controllability – a short-run fixed cost will
be a long-term variable cost. All costs are controllable to some extent over the longer term even if
this involves a change in the scale of operation or a relocation of the company.
The problem of distinguishing between controllable and uncontrollable costs is more difficult in
relation to indirect as opposed to direct costs. It is vitally important that costs be regulated at source,
and this means that for many indirect items the beneficiary of cost incurrence is very often not the
person to be charged with the cost. Obvious examples are central services – maintenance, the
personnel department, post room/switchboard facilities – from which all members of the company
derive benefits but for which cost responsibility is accorded to the respective supervisors and
managers of these service functions.
To sum up so far, the approach to control that is based on the concept of responsibility accounting
involves designing the control system to march the organizational structure in order that it reflects
realistically the responsibilities of departmental managers, supervisors, etc.
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In devising a control system for securing control that accords with the organizational structure it will
usually be found necessary to define more closely the duties of responsible individuals, and various
responsibilities will have to be reassigned in order to give a logical structure to an organization that
may have grown in a haphazard manner. All subsequent organizational changes that lead to changes
in individual responsibilities should be accompanied by suitable modifications to the control system.
Organizational charts are useful if properly detailed. Apart from showing the chain of command such
a chart should also include a schedule defining the duties of those individuals and any limitations to
their knowledge clearly communicated to all concerned. The figure below represents a possible
marketing organization structure, giving details of duties within each functional area.
Figure 8: Marketing Organizational structure
Marketing director
Function
A - Product planning
Responsibility centers
1. Product management
2. Packaging
3. Pricing
4. Service
B – Advertising and
1. Advertising
Promotion
2. Sales promotion
3. Merchandising/display
4. Public relations
Activities
product selection
styling
new product
development
Specify product mix
All aspects of advertising
promotion and public
relations with the exception
of corporate image
C – Sales operations
1. Domestic sales force
2. Export sales force
3. Sales office
Field selling, reporting
setting sales quotas, sales
analysis, sales and forecasting,
etc
D – Physical
Distribution
Management
1. Warehousing
2. Transport
3. Inventory management
Selection of distribution
channels stock control
all other activities
Necessary to gain
Required distribution.
E - Marketing
Information
And research
1. Library/information service
2. Marketing research
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all aspects of marketing
intelligence. Research
studies. Model building.
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The implications of fixing responsibilities and of implelementing control via responsibility centers
are:
 The organizational structure must be clearly defined and responsibility delegated so that each
person knows his or her role;
 The extent and limits of functional control must be determined;
 The responsible individuals should be fully involved in preparing plans if they are to be held
responsible for results;
 Responsible individuals must be serviced with regular performance reports;
 Means must be established to enable plans to be revised in line with actual performance such a
way that responsible individuals are involved;
 Every item should be the responsibility of some individual within the organization.
The ability to delegate is one sign of a good manner and responsibility accounting facilitates this. The
act of passing responsibility down the line to the lowest levels of supervision gives these advantages:
1. It helps to create an atmosphere of cost consciousness throughout the organization;
2. It tends to get control action quickly without delays resulting from the need for a senior executive
to receive a monthly report before decisions can be made;
3. It helps to give all levels of management a sense of team spirit with a common purpose.
A central notion in considering control is the evaluation of performance – whether an ex ante (as in
feedforward control) or ex post, (as in feedback control). This can be undertaken at several levels: at
the societal level, at the level of the enterprise as a whole, at the level of a division or other segment –
such as activities, or at the levels of the group or individual. In essence what is required is a
comparison of desired outcomes with expected or actual outcomes, an assessment of any divergences,
and proposals for future courses of action. Putting this in another way, three questions need to be
posed.
What has happened?
Why has it happened?
What is to be done about it?
The need to view performance evaluation within a control context is highlighted by our posing all
three questions, rather than just the first two.
The concept of performance measurement is simple one to comprehend but it can only be put into
practice if plans are carefully prepared before decisions are made. In the absence of a plan,
(expressed in terms of standards and budgeted levels of performance) there is no benchmark for
evaluating the performance of segments of an enterprise, individuals in responsible positions, or the
organization as a whole, and attempting to improve them. The existence of standards of performance
eliminates many of the opportunities and excuses for poor performance, and provides a reference
point for improvements.
Measuring the performance of the various types of responsibility center (i.e. cost, profit and
investment) will usually focus on financial aspects of an organization’s activity.
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This will not always be appropriate, although it tends to be the general case that managers are held
accountable in terms of quantifiable performance rather than performance that is qualitative (such as
employee morale or public relations). It is necessary to know from time to time how actual
performance compares with desired performance, and this chapter focuses on this issue.
This comparison answers the question about what is happening, and responsibility accounting ensures
that managers know who is to be accountable. Establishing why divergences occur is problematic, as
is the question of deciding how to apply corrective action in order that control may be effective.
Individuals learn through assessing their experience and organizational learn through their members.
However, the extent to which individuals – and thus organizations – can learn is constrained by the
rules of the organization (governing decision-making, delegation, membership and other restrictions).
Dery (1982) has pursued this question by focusing on the links between erring (e.g. when variances
arise) and learning. His argument is as follows:
i. The recognition of errors is a function of interpretation rather than simply an observation of events
– it requires that desired and actual outcome be compared and interpreted before one can assert that
an error exists;
ii. The interpretation of events is influenced by organizational rules, etc, which also serve to constrain
the extent to which learning can take place;
iii. It is insufficient to assume better learning at the organizational level can stem from the learning
ability of individual members since the latter is constrained by the rules of the former, hence an
additional factor is required that will change the organization’s rules.
The level of performance of a responsibility center fro ma control viewpoint can be evaluated by
obtaining answers to three pairs of questions;
Quantity
How much was accomplished?
How much should have been accomplished?
Quality
How good was that which was accomplished?
How good should it have been?
Cost
How much did the accomplishment cost?
How much should it have cost?
Performance measurement presupposes a standard of comparison. An obvious example comes form
the comparison of actual results with budgeted results – the latter being the predetermined standard of
performance. Standards can be compiled for almost every business activity, such as:
 Number of customer complaints
 Production costs
 Unit costs of handling and transporting products
 Market share
 Employee turnover
 Downtime
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 Unfilled orders
 Return on investment
 Percentage of late deliveries of orders
 A variety of cost/revenue ratios
Any standard can only be effective aid to control if it is to be equitable: those who are being judged
(i.e. The responsible individuals whose performance is being measured) must be consulted in the
setting of standards otherwise no attempt may be made to reach if they are considered to be either too
high or too low. This ruins any attempt to control.
Luck and Ferrell (1979) have portrayed the links among marketing strategy, plans and standards as
shown in the figure below.
Control reports should be suited to the various areas of individual responsibility and as one moves
further up the managerial hierarchy more items will be contained, albeit in summary form, in reports
prepared for each level since more items are controllable as the scope of managerial responsibility
enlarges. Top management will therefore receive a summary of all items of income and expenditure.
Figure 9: Standards in the marketing control processes
Variables used to judge
Profits
Standards
Operations
15% ROI
$5,000 average
sales per unit
Of analysis
(e.g. customer)
Marketing plan
Consumer service
Cost per unit
Of analysis
Complaints and
Warranty service
Per 100 units sold
Performance
Marketing
strategy
sales per unit
costs $1,000
Sales
Distribution costs
$1,250
Product costs $2,000
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Such summary reports can do little to rectify past mistakes but by indicating exceptions to plans they
can ensure that causes are investigated and appropriate corrective actions are taken to help preventing
future mistakes. The appropriate orientation should clearly be to the future rather than to the past.
A responsibility center is made up of the various cost and revenue items for which a given individual
is responsible. It is consequently a personalized concept that may be made up of one or more of the
following.
A cost center;
A profit center, or
An investment center
Let use look at each of these in turn.
A Cost (or Expense) Centre
This is the smallest segment of activity, or area of responsibility, for which costs are accumulated. In
some cases the cost center may correspond with a department, but in others a department may contain
several cost centers.
A cost center may be created by created for cost control purposes whenever management feels that
the usefulness of accumulating costs for the activity in question justifies the necessary efforts.
Only input costs are measured for this organizational unit: even though there is some output this is
not measured in revenue terms. Thus a production unit will product X units at a given total (or unit)
cost, with the output being expressed either as a quantity or in terms of input costs.
A Profit Centre
This is a segment, department or division of an enterprise that is responsible for both revenue and
expenditure. This is the major organizational device employed to facilitate decentralization (the
essence of which is the freedom to make decisions).
Among the arguments favouring decentralized profit responsibility are:
A divisional manager is only in a position to make satisfactory trade-offs between revenues and costs
when he has responsibility for the profit outcome of his decisions
a manager’s performance can be evaluated more precisely if he has complete operating responsibility
Managers’ motivation will be higher if they have greater autonomy
The contribution of each division to corporate profit can be seen via divisional profit reports
The advantages of profit centers are that they resemble miniature business and are a good training
ground for potential general managers.
When it comes to defining profit measures several alternatives are available. An example built up
from the data in the table below will help to illustrate some of them.
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Table 4: Decision A’s operating data for July
Sales revenue generated by Division A
£100,000
Direct costs of Division A:
Variable operating costs
Fixed operating costs under control of manager of Division A
Fixed costs not under the control of manager of Division A
£45,000
£25,000
£10,000
Indirect costs of Division A:
Apportioned central costs
£15,000
This data can be analyzed in ways such as those suggested in the table below. One can identify
strengths and weaknesses relating to each other alternative measure of profit. The contribution
margin is useful for short-run decision making since it is not clouded by the inclusion of costs that
don not respond to short-run volume changes. From a performance evaluation point of view,
however, it is unsatisfactory in that it excludes all non-variable costs.
Controllable profit is a much better measure of the divisional manager’s performance because it
includes all the costs – whether fixed or variable – that are within his control. When non-controllable
fixed costs are taken into account we have the direct profit of the division. This is more a measure of
0ther division’s performance that it is of the divisional manager’s performance, so one needs to
consider what it is that one is seeking to assess before one chooses a measure.
Table 5: Analysis of Division A’s operating data
Sales revenue
Division
A Division
A Division
A Division A
contribution margin controllable profit direct profit
net profit
£
£
£
£
100,000
100,000
100,000
100,000
Direct costs:
Variable
45,000
Contribution margin
£55,000
Fixed controllable
Controllable profit
Fixed non-controllable
Direct profit
Indirect costs
Net profit
Advanced Diploma in Marketing Management
45,000
45,000
45,000
25,000
£20,000
25,000
25,000
10,000
£20,000
10,000
15,000
£5,000
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Finally, net profit helps us in assessing a division’s performance in full cost terms, but this is not a
relevant means of gauging the divisional manager’s performance on account of the categories of cost
that he is unable to influence either directly or indirectly. It could be argued that divisional managers
benefit from seeing full cost of their division’s operations, but if the controllable elements are
dwarfed by the uncontrollable it may not be highly motivational!
From the above we can reasonably conclude that controllable profit is the best of the specified
measures for assessing a divisional manger’s performance – at least in principle. In practice it may be
found that the manager of a division acts in ways that improve his short-run profit position at the
expense of both the division’s long-run profit potential and the best interests of the organization as a
whole. Examples might include:
Eliminating training and management development activities;
Cutting back on advertising routine maintenances or R & D
Countering these ways of ‘playing the system’ must be devised by top management in the form of
policy guidelines, etc. but any measure of profit is inevitably sub-optimal as an index of divisional
performance for at least one for the following reasons:
It typically includes items that are not under the control of divisional managers;
It only tells part of the story – something needs to be said about the investment that is needed to
generate profit. The next sub-section picks up this point.
An Investment Centre
This is a segment, department or division of an enterprise that is not only responsible for profit, but
also has its success measured by the relationship of its profit to the capital invested within it. This is
most commonly measured by means of the rate of return on investment (ROI).
The logic behind this concept is that assets are used to generate profits, and the decentralizing of
profit responsibility usually requires the decentralization of relationship of profit to invested capital
within a division. Much of its appeal lies in the apparent ease with which one can compare a
division’s ROI with earnings opportunities elsewhere – inside or outside the company. However, ROI
is an imperfect measure and needs to be used with some scepticsm and in conjunction with other
performance measurements.
The value of the controllable/uncontrollable cost split is primarily found in fixing responsibility and
measuring efficiency. Time is an important ingredient in this context since all costs are controllable at
some organizational level if a sufficiently long time-span is taken. Controllable costs are those that
can be directly regulated by a given individual within a given time period.
The division of costs into controllable and uncontrollable categories is important in order that
performance levels may be evaluated and also for securing the cooperation of managers at all levels.
The manager who is involved in planning his performance level in the knowledge that those
controllable costs for which he is responsible will be monitored, accumulated, and reported, is likely
to be motivated towards attaining his predetermined level of performance. In this way, it can be seen
that the collecting of controllable costs by responsibility centers serves as a motivating force as well
as an appraisal mechanism.
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While the ideal procedure is for each responsibility center to be assignment those costs over which its
manager its manager has sole control and for which he or she is therefore responsible, in practical
terms this cannot usually be achieved. It is rare for an individual to have complete control over all the
factors that influence a given cost element.
Apart from those costs over which a responsible individual actually has control, his responsibility
center may be charged with costs that are beyond his direct control and influence but about which
management wishes him to be concerned. A good example is the cost of a company’s personnel
department’s costs on the grounds that either:
He will be careful about making unnecessary requests for the services of the personnel department if
he is made to feel somewhat responsible for its level of costs; or
He may try to influence the personnel manager to exercise firm control over his department’s costs
Allocating general overheads to responsibility centers is done by many companies that practice
responsibility accounting (and that therefore recognize that such costs are beyond the control of those
to whom they are allocated) on the grounds that each responsible individual will be able to see the
magnitude of the indirect costs incurred to support this unit. There is major disadvantage that should
be seriously considered: the manager of a small responsibility center incurring directly controllable
costs at his level in a given time period of, say, £10,000 may be allocated £45,000 of general
overhead costs. In relation to the overall level of overhead cost the manager may feel that those costs
for which he is responsible are so insignificant that he may give up truing to control them. The point
to note is that each cost must be made the responsibility of whoever can best influence its behavior,
and allocating costs beyond this achieves at best very little from a control viewpoint and may be
distinctly harmful to the cost control effort. (Since a specific example of uncontrollable costs has not
been given so far the general overheads of £45,000 referred to above can be used as a suitable
example. For control proposes the costs that are being considered are the costs that can be directly
influenced at a given level for a specified time-span).
While the head of a responsibility center may not have sole responsibility for a particular cost item
this item may reasonably be considered to be controllable at his level if he has a significant influence
on the amount of cost incurred, an in this case his responsibility center can properly be charged with
the cost. This is one aspect of the wider problem that arises because few (if any) cost items are the
sole responsibility of just one person. Guidelines that have been established for deciding which costs
can appropriately center are, in summary:
If an individual has authority over both the acquisition and the use of a cost incurring activity, then
his responsibility center should bear the cost of that activity.
If an individual does not have sole responsibility for a given cost item but is able to influence a
significant extent the amount of cost incurred through his own actions, them he may reasonably be
charged with the cost.
Even if an individual cannot significantly influence the amount of cost through his own direct action,
he may be charged with a portion of those elements of cost with which management wished him to be
concerned in order that he may help influence those who are more directly responsible.
That which applies to cost also, in essence, applies to revenues and assets.
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Approaches to Control
Anthony’s Approach to Control
The views of Robert Anthony of Harvard on management control have been very influential. They
are stated in Anthony 1965 and 1988.
When Anthony published his 1965 framework, the management control function was not generally
recognized as a discrete activity. This has changed.
Management control is one of three types of planning and control activities that occur within
organizations; the other categories are strategic planning and task control. Anthony’s definition of
management control, given earlier presumes that goals and strategies exist, but that these do not arise
automatically.
Strategic planning is the process of deciding on the goals of the organization and the strategies for
attaining these goals.
Authors often distinguish between
Planning (i.e., deciding what do); and
Control (i.e. ensuring that desired results are obtained)
Anthony argues that both planning and control are undertaken at direct organizational levels; hence it
is more helpful to look at the mix, as shown in the figure below.
Figure 10: the planning and control mix
20
80
50
80
20
Strategic planning
50
Management control
Task control
Strategies are the courses of action that an organization has adopted as a means of attaining its goals.
They include the assignment of overall responsibility for implementation. Strategies are big plans,
important plans. They state in a general way the direction in which the organization is supposed to be
headed. They do not have a time dimensions that is, they exist until they are changed.
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Control
1 Introduction to Planning and
The purpose of the MC process is to carry out the strategies arrived at in the SP process and thereby
to attain the organization’s goals. The 1988 approach links MC to the implementation of strategies in
a direct way rather than to the attainment of objectives, which is an indirect purpose of MC. The key
difference between MC and SP is that the latter is unsystematic: the need for strategic decision can
arise at any time – whether in response to a threat or an opportunity. Another difference is that top
management undertakes SP and it involves a great deal of judgement. In contrast, MC is systematic,
done at all levels, and involves considerable personal interaction but less judgement than SP. SP sets
the boundaries within which MC takes place. The third element in Anthony’s approach is task
control: Task control is the process of ensuring that specific tasks are carried out effectively and
efficiently. Anthony’s framework is shown in the figure below. While dealing with SP and TC,
Anthony’s 1988 book focuses primarily on MC, which can be described in terms of a process and the
environment within which it takes place. The environment is partly external and partly internal, with
the latter comprising:
The Organization’s Structure
A set of rules, procedures, etc
A culture
Figure 11: Anthony’s Framework
Planning and control activities
strategic planning
Management control
Environment
External
Organization
structure
Task control
Process
Rules
Management control
of operating
activities
Culture
Planning
Execution
Programming
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Management
Annual Planning
Evaluation
Management control
of projects
Planning
Scope
Execution
Time
Evaluation
Cost
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The external environment contains influences that affect the level of uncertainty faced by the
organization. At a highly uncertain extreme are:
 Newly developed products;
 Differentiated products;
 Aggressive competition;
 Uncertain political circumstances.
At a less uncertain extreme are:
 Mature products;
 Commodity products;
 Price competition;
 Secure sourcing of inputs;
 Political stability.
Within a highly uncertain setting an organization is likely to pay great attention to programming; to
make broad budget estimates; to revise budgets frequently; to set limits to discretionary costs, to
permit a good deal of management latitude; to insist on a rapid flow of information; to evaluate
performance subjectively in terms of results rather than process; and to have a high proportion of
bonus within the reward package.
The opposite characteristics are likely to apply in a relatively certain environment.
Merchants Approach to Control
An organization’s control system is comprised of a variety of mechanisms, including:
 Personal supervision
 Job descriptions
 Rules
 Standard operating procedures
 Performance appraisal
 Budgets
 Standard costing
 Incentive compensation schemes
However, it would be wrong to think of ‘controls’ – such as the above – as being the plural of
‘control’, and it would also be wrong to assume that more ‘controls’ would automatically give us
more ‘control’ since this would assume that they meant the same thing, which they do not.
‘Control’ has the same meaning as measurement, or information, whereas ‘control is concerned with
ends, and they deal respectively with facts. From this it will be appreciated that ‘controls’ tend to be
analytical and operational. A summary of key differences is shown in the figure below.
The increasing ability to develop ‘controls’ has not necessarily increased our ability to ‘control’
organizations. If controls are to lead to control they must encourage human actors to behave in a way
that facilitates adaptive behavior on the part of the organization as a whole.
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The complexity and uncertainty of the control problem are apparent when, for example, controls
reveal that ‘profits are falling’. But this does not indicate how one might respond – indeed, it would
not be possible even to identify the whole array of potential responses. What is needed, therefore, if
control is to be effective, is a basis for forming expectations about the future as well as understanding
about the past that will enable us to combine these in order that we might behave in an adaptive way
by either anticipating external changes and preparing to meet them, or by creating changes.
Figure 12: The different focus of control and controls
∑CONTROL ∑ CONTROL
∆CONTROLS ≠ ∆ CONTROL
Controls
Parts (simple)
Measurement
Control
wholes
(complex)
Information
*Measurable symptoms
*Means
*Present/past orientation
](Facts)
*Positive
(What was/is)
*Efficiency
*Hardware
(Machine, physical processes)
*Umeasurable causes
*Ends
*Future orientation
(expectations)
*Effectiveness
*Software
(through human actors)
From this arises the basic question – how do we control? In large part this is resolved by the answer
to another question – what do we measure in order to control? Care must be taken in measuring the
key elements in any situation rather than those elements that lend themselves to easy measurement.
Merchant offers some valuable advice on a range of controls but with a control perspective. He
classifies these controls under the headings given below:
Result Controls
Reward systems – in which an individual’s pay promotion prospects, etc., depend on his
performance – are a good example of results control. It is not unusual for desired results control. It is
not unusual for desired results to be expressed in quantitative terms – whether financial – which gives
a benchmark for exercising results control. At senior management levels this form of control
predominates since it is compatible with decentralized organizational structures. At middlemanagement levels, where financial goals may be less dominant, results control can be exercised
through MbO (Management by Objectives) systems.
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The effectiveness of results controls derives from the ability of this approach to address some key
control problems. In particular motivational problems are eased since individuals are influenced to
produce the results, which will enhance both the organization’s performance and their own rewards.
By focusing on future expectations the results approach to control can be useful in informing
managers as to what is expected of them. This emphasizes a feedforward orientation.
Three conditions need to be fulfilled before results control can be employed:
It is known what results are desirable
Those whose actions are being influenced can control the desired results to some extent
The controllable results can be measured
Action Controls
Action controls are used:
To ensure that individuals perform certain actins that are known to be beneficial to the organization.
Categories of action controls are:
Behavioral constraints (whether physical or administrative)
Preaction reviews;
Action accountability
Redundancy (in which more resources are allocated to a task than is strictly necessary which
increases the likelihood of its accomplishment).
Two conditions need to be fulfilled if action controls are to be effective.
Knowledge must exist as to which actions are desirable (or undesirable)
The ability must be present to ensure that the desirable actions occur (or that the undesirable ones do
not)
Personnel Controls
There are two categories of personnel control that can be usefully harnessed as part of the
management control endevour.
Individual self-control, which, as a naturally present force, motivates most people to want to do a
good job;
Social control, which is exerted by other members of a group on those individuals who deviate from
group norms and values.
If these two categories are insufficient they can be augmented by:
Selection and placements
Training
Cultural control
There are several advantages that personnel controls have over results controls and action controls.
Feasibility is not a serious constraint
There are fewer harmful side effects
Their cost is typically lower
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Financial Controls
Financial controls are a form of results control, which constitute the single most important types of
control, used in organizations of any size. The reasons favouring financial controls are fairly obvious.
Financial objectives are very important in commercial life,
Financial performance indicators are easy to derive
Since financial results can be achieved via various routes, the use of financial controls allows for
some managerial discretion
Using financial measures is relatively inexpensive since accounting systems exist within all
enterprises.
Inevitably there are negative effects, which can outweigh the advantages of using financial controls.
The most serious are:
Behavioural displacement – especially when the control system encourages managers to be overly
concerned with short-term profits rather than longer-term strategic ends, or when it causes excessive
risk aversion;
Gamesmanship
It has been argued that there is a tendency for financial measures to drive out non-financial measures
within MCS design which, given the partiality of financial measures, is unfortunate.
The Approach of Johnson and Scholes
Strategic marketing involves strategic change. Johnson and Scholes have argued that there are two
ways in which an organization can cope with strategic change.
Make use of control and regulatory systems to ensure that the tasks of implementation are clear, that
their execution is monitored, that individuals and groups have the capabilities to implement change,
and that they are rewarded for so doing.
Ensure that those charged with implementing change understand and work within the social, political
and cultural systems that regulate organizational behaviour, and which can give rise to a resistance to
strategic change.
Figure 13: The influence of organization systems on strategy implementation
Required changes in the behaviour/attitude/ Strategic plans
Job tasks of people
Information and control
Systems
Regulatory systems
Culture change
Political systems
Their approach to dealing with these issues is reflected in the figure above. If we take the information
and control systems first, it is widely recognized that quantitative measures are needed to see if
desired results are being achieved. Such measures will typically include:
Financial analysis
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Market Analysis
Sales and distribution analysis
Physical resource analysis
Human resource analysis
A set of guidelines for ensuring the effective design and operation of control systems would deal with
such aspects as:
Distinguishing between various levels of control, since different levels will require different
information;
Creating responsibility centers as a means of delegation and motivation, ensuring information is
provided in a suitable form for each responsible manager;
Identifying the critical success factors and supplying information relating t o these in a way that
highlights their interrelationships;
Avoiding misleading measurements by accepting that quantitative indicators of performance are not
available for every activity and it is not helpful to use a measurable index as a surrogate for an
unmeasurable characteristic;
Being wary of negative monitoring in which only poor performance is reported since this can lead to
risk adverse behavior or a tendency to ‘pass the buck’.
The next means for ensuring the implementation of strategic change is via regulatory systems. These
might range from training to the management style of an organization.
Training and development to ensure staff are capable of implementing change, which involves both
new skills and attitudes;
Incentive and reward systems to encourage compliance with required change, whether in the form of
pay increases or non-monetary rewards
Organizational routines by which tasks are carried out may exhibit inertia so deliberate steps need to
be taken to redesign them in order to facilitate change;
Management style, which embodies the organization’s culture, its circumstances, and the
characteristics of its managers, needs to be appropriate to the tasks of strategic implementation.
Moving on from regulatory systems brings us to culture change. At its most basic focuses on the need
for change to be recognized within the organization in a way that ensures those responsible for
bringing change about believe in what they are doing. This can be in two stages, both which are
concerned with cognitive change:
The beliefs and assumptions underlying the way in which the organization’s members make sense of
heir organizational world need breaking down;
A reformulated set of beliefs needs to be put in their place to reoreintate the clutter from the past to
the future. For cultural change to be meaningful it must impact upon the day-to-day experiences of
individuals within the organization.
Finally there is the political system to consider. The overlaps among control systems, regulatory
systems, culture and political systems is largely self-apparent, but it is important to emphasize that
planning and control are inherently political rather than neutral.
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The Approach of Luck and Ferrel
Once the plan/strategy has been determined and steps taken to put this into effect, the control process
exists to ensure that the plan will be achieved.
Control can operate at different levels. For example, the figure below shows tactical control, which
focuses on the implementation of plans on the firth, and strategic control, which focuses on the
possible revision of strategy on the left. This is developed further in figure 16.
Figure 14: A basic control model for marketing
Buyers
Strategic
control
Offering
Tactical
control
Market feedback Actions
Plans
Strategy
Marketing mix
Decision
Internal
Markets
Inputs
Objectives
Segments
Policies
Targets
Organization Demands
Resources
Potential
Economy
Environmental
Competition
Technology
Social forces
Government
Marketing variables
Product
Promotion
Price
Distribution
Control, which focuses on the possible revision of strategy on the left. This is developed further in the
figure below.
Tactical control typically relates to adjustments in the execution of an established marketing plan –
such as fine turning on pricing or advertising schedules.
Strategic control deals with the reformulation of the plans themselves. For example, actual buyer
behavior patterns may indicate that a plan has been based on false premises. Strategic rethinking will
thus be necessary in developing a new marketing plan.
The role of the information system needed to facilitate tactical and strategic control is indicated in the
figure below.
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Figure 15: Strategic and tactical marketing control
Buyers
Transactions
Offering
Strategic
control
Current
planning
gap
Tactical
control
Diagnosis Prognosis FutureStrategy
search
mix planning gap
Controllable marketing
Forecasts
Alternatives
Environmental
changes
Strategy
Marketing
selection
Plans
approval
variables
Figure 16: The role of information marketing control
Marketing strategy
Marketing plan
Monitoring
Performance
Taking
corrective
action
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Information system
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Module 15 Strategic Marketing Management
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Management Control
Introduction
Having considered the nature of control and control systems, along with a range of approaches to
control, this chapter looks in more detail at the operation of some of the more widely used control
systems. It then goes on to consider how corrective action might be taken if outcomes are not in
accordance with plans.
Controls
In large organizations there are a number of insidious and unobstructive controls to be found. These
are all the more dangerous and powerful because they are so deceptive. Their deceptiveness is shown
in their not causing participants to feel their presence – there is no feeling of being oppressed by a
despot. Instead there is perhaps just the experience of conforming to the logic of a situation, or of
performing in accordance with some internalized standard.
Beyond this source of ‘control’ there are other sources. To the extent that the behaviour of members
of organizations is controlled such regularity may derive from the norms and definitions of
subcultural groups within the organization rather than from official rules and prescriptions. The idea
that organizational rules constitute the blueprint for all behaviour within organization is not a
teneable one.
Nevertheless, the most significant form of power within organizations is the power to limit, guide and
restrict the decision making of organizational personnel such that even when they are allowed to use
their own judgement they do not deviate from official expectations. In part this is due to the
organization’s structure, which can be seen as a series of limitations and controls over members’
decision making, and which results from powerful, senior organizational personnel choosing what the
structure should be.
It is something of a paradox that the modern individual is freer form coercion through the power of
command of superiors than most people have ever been, yet individuals in positions of power today
probably exercise more control than any tyrant ever did. This is largely due to contemporary forms of
power exercised within organizations and by organizations in society. There is a distinct trend that
places less reliance on control through a fixed chain of pursue this in greater detail.
Forms of control have changed with the passage of time, and these forms have had impacts not only
within organizations but also through them, on contemporary society.
Organizations have taken advantage of a variety of control mechanism from time to time, ranging
from ones that are obviously bureaucratic in nature.
We can consider the following range of control mechanisms
The prototype is the authority exercised through a chain of command in which superiors give
subordinates instructions which must be obeyed. This coercive form of control has strong military
overtones, and an essential element is rigorous discipline that must be enforced through coercive
sanctions. Such discipline is not usually a characteristic of contemporary industrial life.
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The establishing of explicit regulations and procedures to govern decisions and operations gives a
programmed form of control. Discipline is involved in this mechanism also, and close links can be
seen between the idea of a set of rules that must be followed and the idea of following orders via a
chain of command. However, explicit rules do restrict the arbitrary exercise of power by superiors
because they apply to rulers as well as to the ruled.
In specifying rules of how to behave in particular circumstances it is unlikely that all possible
situations will be catered for. It follows that rules should ideally decisions – thus specifying criteria
for decision-making will be less restrictive than the stipulating of how specific decisions should be
made.
Incentive systems constitute a further control mechanism. Salaries and career advancement clearly
make individuals dependent to a large extent on the organization that employs them, thereby
constraining them to submit to the authority exercised within that organization.
Incentives are often tied directly to performance, piece of work rates and sales commissions being the
most obvious examples. However, performance measures can be developed for most organizational
roles, and adjustments in salary levels and promoting decisions will depend at least to some extent on
measured achievements.
Technology provides a control mechanism in two forms:
Production technology constrains employees’ performance, thereby enabling managers to control
operations.
The technical knowledge possessed by an organization’s ‘technocrats’ gives them the ability to
understand and perform complex tasks and thereby maintain control of a situation. Management is
thus able to control operations, albeit indirectly, by hiring staff with appropriate
professional/technical skills to carry out the required responsibilities
This reduces the need to use alternative mechanisms, such as detailed rules or close supervision
through a chain of command.
Expert knowledge is a vital requirement in managing organizations. It follows that recruiting suitable
technocrats is a key mechanism for controlling the organization. If technically – qualified individuals
are selectively recruited and if they have the professional ability to perform assigned tasks on their
own, then if the organization gives such individuals the appropriate discretion to do what needs to be
done within the broad framework of basic policies and administrative guidelines, it should be
possible for control to be effective.
The allocation of resources is the ultimate mechanism of organizational control since these facilities
certain actions and inhibits others.
Within organizations one will find several of these mechanism of control in operation, yet there
seems to be a trend towards a decreasing reliance on control through a chain of command and an
increasing reliance on indirect forms of control, e.g. via recruitment policies. Incentive systems and
machine technologies are perhaps the most prevalent mechanisms of contemporary organizational
control: control via recruitment and resource allocation is indicative of the likely future pattern.
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Controls may be informal as well as formal. The former are unwritten mechanisms that can influence
either individual or group behavior patterns within organizations in profound ways. A distinction can
be made among different types informal control by means of the level of aggregation chosen. Three
categories are:
Self-control in which individuals establish their own personal objectives and attempt to achieve those
objectives by monitoring their own performance and adapting their behavior whenever this necessary.
This can lead to high levels of job satisfaction but it may fail to achieve the outcomes sought by top
management. In order to motivate individuals to act in accordance with top management’s wishes a
system of incentives will be needed.
Social control is applied within small group setting by members of the group. It is typically found
that groups set their own informal standards of behavior and performance with which group members
are expected to conform. These standards represent values and mutual commitments towards some
common goal. Whenever a member of the group behaves in a deviant way by violating a group norm
the other members of the group will attempt to use subtle pressures – such as humour or hints – to
correct the deviance. If this fails and violations are repeated the group’s reaction is likely to be to
ostracize the deviant individual. In a marketing context there may be group norms for, say, expenses
and sales volumes within a sales team.
Cultural control applies at a corporate level and stems form the accumulation of rituals, legends and
norms of social interaction within the organization. Once an individual has internalized the cultural
norms he/she can be expected to behave in accordance with those norms. This gives reason to see
cultural control as being the dominant control mechanism for senior management positions involving
non-routine decision making: the judgement factor will reflect the manger’s cultural conditioning.
In contrast to informal controls – written management-initiated mechanisms that influence the
probability that individuals, or groups, will act in a manner that is supportive of marketing objectives.
Three categories of formal controls can be identified, with timing being the distinguishing factor.
Input controls consist of measurable actions that are taken prior to the implementation of plans, such
as specifying selection criteria for recruiting staff, establishing recruitment and training programmes,
and various forms of resource allocation. The mix of these inputs can be manipulated in an attempt to
secure control.
Process control relates to management’s attempts to influence the means of achieving desired ends,
with the emphasis being on behavior and/or activities rather than on the end results – such as
requiring individuals to follow establishing procedures. There is no clear agreement in the literature
as to whether the organization’s structure represents a control mechanism or not. Not unreasonable to
think of structure as being part of process control.
Output controls apply when results are compared with performance standards, as in feedback control.
In considering control in marketing one might emphasize the control of marketing activities in a
relatively detached and impersonal way, as is done by strategy formulation and variance analysis.
Alternatively, on e might emphasize the control of marketing personnel the best way forward would
seem to be a balanced combination of both approaches: in other words, feedforward and feedback
need to be combined with marketing activities by those who devise and execute marketing activities.
The ultimate test of any control system is the extent to which it brings about organizational
effectiveness and it is fair to say that there is little rigorously formulated evidence to demonstrate
clear linkages between any approach to control organizational effectiveness.
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Audits
One approach towards assessing marking effectiveness is the marketing audit.
The marketing audit exists to help correct difficulties and to improve conditions that may already be
good. While these aims may be achieved by a total programme of evaluation studies. The former
approach is termed a ‘vertical audit’ as it is only concerned with one element of the marketing mix at
any one time. In contrast, the latter approach, the ‘horizontal audit’, is concerned with optimizing the
use of resources, thereby maximizing the total effectiveness of marketing efforts and outlays. As
such, it is by far the more difficult of the two, and hence rarely attempted.
No matter which form of marketing audit is selected, top management should ensure that no area of
marketing activity goes unevaluated and that every aspect is evaluated in accordance with standards
that are compatible with the total success of the marketing organization and of the firm as a whole.
This, of course, requires that all activities be related to the established hierarchy of objectives.
The Distribution Audit
In the planning and control of costs and effectiveness in distribution activities the management audit
can be of considerable value. Not surprisingly, however, it entails a complex set of procedures right
across the function if it is to be carried out thoroughly. The major components are the channel audit,
the PDM audit, the competitive audit, and the customer service audit. Each of these will be
considered briefly in turn.
The Channel Audit
Channels are made up of the intermediaries (such as wholesalers, factors, retailers) through which
goods pass on their route from manufacture to consumption. The key channel decisions include
Choosing intermediaries;
Determining the implications (from a PD point of view) of alternative channel structures
Assessing the available margins
It follows from the nature of these decisions that the main focus of a channel audit will be on
structural factors on cost/margin factors on the other.
The PDM Audit
There are three primary elements within this audit: that of company profile (which includes the
handling cost characteristics of the product range and the service level that is needed in the light
market conditions); PDM developments (both of a technological and contextual nature); and the
current system’s capability.
Cost aspects exist in each of these elements, but operating costs loom largest in the last since it is
predominantly concerned with costs and capacity.
The Competitive Audit
Through this phase it should be possible to ascertain the quality of competitor’s distribution policies,
and especially the level of service that competitors are able to offer (and maintain). Within the
competitive audit regard should also be heard to channel structures, pricing and discount policies and
market shares.
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The Customer Service Audit
Given that the level of service is at the center of physical distribution management it is essential to
monitor regularly its cost and quality characteristics.
A very through approach to the distribution audit is that develop at the Cranifeild school of
management by Christopher and his colleagues.
Kotler has offered the view that auditing is the ultimate control measure, although it can be seen as a
means of linking the notions of efficiency and effectiveness. It achieves their latter purpose by not
only evaluating performance in terms of inputs used and outputs generated but also by evaluating the
assumptions underlying marketing strategies. The fact that audits are expensive and time consuming
– especially when undertaken in a comprehensive, horizontal manner – may appear to contradict the
striving for efficiency. However, by focusing on doing the right thing they should help in ensuring
effectiveness, which is of greater importance.
Kling has addressed selecting the right person to carry out the audit. He observed that a balance of
experience and objectivity is needed which tends to favour outside auditors who have a broader range
of experience than insiders and who can stand back in a reasonably impartial way form policies and
procedures that they were not involved in either formulating or implementing. The range of possible
auditors includes:
Self-audit;
Audit from across
Audit form above
Company auditing office;
Company task-force audit
Outside auditors
It may be better to have a combination of 6 with one of 2-5, thereby bringing together an external
view with the perspective of insiders in a joint endevour. There is little evidence of support for 1,
although it exists as a possibility in he absence of any alternative.
In carrying out a marketing audit it will be evident that the enterprise needs to exhibit adaptive
behavior if its is to remain goal striving in a dynamic environment. Effectiveness is concerned with
this ability to achieve goals in an ever-changing context.
Budgeting
Budgeting (or profile planning) is perhaps the widest-ranging control technique in that it covers the
entire organization rather than merely selections of it.
A budget is a quantitative plan of action that aids in the co-ordination and control of the acquisition,
allocation and utilization of resources over a given period of time. The building of the budget may be
looked upon as the integration of the varied interests that constitute the organization into a
programme that all have agreed in workable in attempting to attain objectives.
Budgeting involves more than just forecasting since it involves the planned manipulation of all the
variables that determine the company’s performance in an effort to arrive at some preferred position
in the future.
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The agreed plan must be developed in a co-ordinated manner if the requirements of each sub-system
are to be balanced in line with company objectives. Each manger must consider the others and to the
company as a whole in the budgetary planning phase. This trends to reduce departmental bias and
empire building, as well as isolating weaknesses in the organizational structure and highlighting
problems of communication. Furthermore, it encourages the delegation of authority by a reliance on
the principle of management by exception.
Having determined the plan, this provides the frame of reference for judging subsequent
performance. There can be no doubt that budgeted performance is a better bench-mark that past
performance on account of the inefficiencies that are usually hidden in the latter and the effect of
constantly changing conditions.
There are essentially two types of budget – the long-term and the short-term. Time obviously
distinguishes one from the other, and this raises the point that users of budgets should not be unduly
influenced by conventional accounting periods: the budget period that is most meaningful to the
company should be adopted. For example, the life cycle of a product form its development right
calendar units because it links marketing production, and financial planning on a unified basis. The
actual choice of a budget period will tend to depend very much on the company’s ability to forecast
accurately.
Typically, however, budgets tend to be compiled on an annual basis, with this time-span being
broken down into lesser time intervals for reporting, scheduling and control reasons.
Within this framework of one year the operating budget is prepared. This is composed of tow parts,
with each part looking the same things in a slightly different way, but both arriving at the same net
profit and return on investment.
The progrmme (or activity) budget that specifies the operations that will be performed during the
forthcoming period. The most logical way to present this budget is to show, for each product, the
expected revenues and their associated costs. The result is an impersonal portrayed of the expected
future that is useful in ensuring that a balance exists among the various activities, profits margins, and
volumes – in other words, this is the plan
The responsibility budget that specifies the annual plan in terms of individual responsibilities. This is
primarily a control device that indicates the target level of performance, but the personalized costs
and revenues in this budget must be controllable at the level at which they are planned and reported.
The significance of these tow ways of dealing with the operating budgets is of importance as the
programme budget is the outcome of the planning phase former need not correspond to the
organizational structure but the latter must. Consequently, the plan must be translated into the control
prior to the time of doubt as to precisely what is expected of him or her.
Given these two complementary aspects of the operating budget there are two basic ways in which
the budget may be prepared:
Periodic budgeting in which a plan is prepared for the next financial year with a minimum of revision
as the year goes by. Generally the total expected annual expenditure will be spread over the year on a
monthly basis on the strength of the behavior of the elemental costs.
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Thus, ‘salaries’ will be spread over the months simply as one-twelfth of the expected annual cost per
month, but seasonal variations in sales will require a little more attention to be paid to marketing and
production costs and their behavior over time.
Continuous (or rolling) budgeting in which a tentative annual plan is prepared with, say, the first
quarter by month in great detail, the second and third quarters by month in great detail, the second
and third quarters in lesser detail, and the fourth quarter in outline only. Every month (or quarter) in
such a way that a plan still extends one year ahead. Such a budgeting procedure attempts to
accommodate changing conditions and uncertainty, and is highly desirable in that it forces
management constantly to think in concrete terms about the forthcoming year regardless of where
one happens to be in the present financial year.
Period budgeting will often be satisfactory for companies in stable industries that are able to make
relatively accurate forecasts covering the planning period. Conversely, rolling budgeting is of greater
value in the more usual cases of somewhat irregular cyclical activity amid the uncertainties of
consumer demand.
Whether the concern is with long-term or short-term budgeting or with continuous or period
budgeting, there are certain fundamental requirements that must be met if budgeting is to be of
maximum value. Briefly, these requirements are:
Establish objectives;
Top management sponsorship and support;
A knowledge of cost behaviour;
Flexibility;
A specified time period;
Adequate systems support;
An effective organizational structure;
A sufficient level of education in budgetary practice.
If these prerequisites exist, them budgeting should enable the company to improve its effectiveness
by planning for the future and controlling the execution of the plan by comparing actual results with
the desired level of performance.
Deviations between actual and budgeted results will be of managerial concern for such reasons as the
following:
To indicate the need for budget revision;
To pinpoint those activities requiring remedial attention.
To highlight errors in budgeting procedures;
The principles of management by exception should be applied to this process of comparison with the
focusing of attention on significant variations. However, if the budgeted level of activity differs from
the actual level of activity it will be apparent that variances of an artificial nature arise – such
variances are based purely on volume rather than efficiency. This emphasizes the need for flexibility
within the budgeting system: it should be able to allow for varying circumstances by recognizing and
adapting to significant changes in the fundamental operating conditions of the firm. Such adaptability
can be achieved by a flexible budget.
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In a flexible budgeting system the budgeted cost is adjusted in accordance with the level of activity
experienced in the budget period. For example, a budget that is based on sales of 10 000 units during
a particular period is of little value for control purposes if 12 000 units (or 8000 units) are actually
sold. The sales of commission, order processing/invoicing, freight, and similar cost-incurring
activities will tend to depend on the actual level of activity which requires that the budget be adjusted
in order to show the efficient budgeted for 5 percent, 10 percent, 15 percent above and below this
level.
The major advantage of the flexible budget is its ability to specifying the budgeted level of costs,
revenues and profits without revision when sales and production progrmames are changed. It
achieves this by distinguishing between those costs that vary with changes in the level of activity and
those that do not. In other words, it is based on a through knowledge of cost behavior patterns.
A static budget can result in misleading actions. An example should make this carrier. The table
below shows the comparison of a budgeted level of 10 000 units with an actual sales level of 11 000
units. It appears that profit has improved by £300 but not all costs vary in the same way, so a flexible
budget analysis is called for. This is shown in table 6 and indicates clearly that the comparison should
be between the actual level of activity and the budgeted costs, revenue, and profit for that level.
While profit was higher than the budgeted figure, the difference was only £20 rather than £300.
Table 6: Fixed budget analysis
Sales (units)
Sales revenue
Expenditure
Direct
Indirect
Profit
Budget
10,000
£15,000
10,000
4,200
£1 000
Actual
11,000
£16000
11,000
4,200
£1300
Variance
+1,000
+£1,500
+1,000
+200
+£300
Flexible actual
10,000
£15000
10,000
1,500
2,000
500
£1,000
Actual
11,000
16,000
11,000
1,500
2,200
520
£1,300
Variance
-50
+40
-10
+20
Table 7: Flexible budget analysis
Fixed budget
Sales (units)
Sales revenue
Expenditure
Direct
Fixed indirect
Variable indirect
Mixed indirect
Profit
The need to distinguish fixed costs (which remain constant in total during a period) from variable
costs (which remain constant per unit of output) is of paramount importance, and any costs that are
neither one nor the other (i.e. semi-fixed or semi-variable expenses) can usefully be classified as
mixed costs. Apart from showing the cost breakdown in some detail, in the figure above shows the
target level of activity (i.e. the fixed budget) as well as the efficiency with which the actual level of
activity was attained. This information is vital to effective control.
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It is important to appreciate what budgeting cannot take the place of management but rather forms a
vital aid to management. Indeed, budgets are based on estimates, and judgment must be applied to
determine how valid the estimates are and, consequently, how significant deviations are form those
estimates. The adequacy of managerial judgment.
In the light of the need for judgment it is clear that budgeting should not introduce unnecessary
rigidity into the management process. A budget should be a flexible framework that is capable of
accommodating changing circumstances, but care must be exercised lest the budgetary targets come
to supersede the objectives of the company. The budget is a means to an end, not an end in itself.
In its traditional application budgeting has a major weakness in planning and another in control: in
the planning phase there is usually considerations of too few alternative courses of action form which
the best is to be selected, and in the control phase it is difficult to adjust operating budgets to reflect
rapidly changing conditions – they are at best flexible with respect to changing sales or production
levels.
Nevertheless, these weaknesses should not outweigh the general role of budgeting in drawing
attention to problem areas, encouraging forward thinking and developing company-wide cooperation.
Other Approaches to Budgeting: ZBB And PPBS
In order to accommodate the particular needs of non-profit organizations (such as government
agencies) as well as providing a focus for more rigorous thinking in relation to programmed or
discretionary costs (i.e. those which are determined purely by managerial discretion – such as R & D,
training, and many marketing outlays), a number of recent developments in budgeting techniques are
worthy of mention. In particular, zero-base budgeting (ZBB) and output budgeting (which is also
known as a planning-programming-budgeting system, hence the initials (PPBS) have generated
considerable interest, so we will take note of them at this point.
Zero-Base Budgeting (ZBB)
Among other failings it is generally agreed that traditional budgeting (or incremental budgeting as it
is often known due to the tendency to add on a bit more – an increment – to last year’s budget level in
order to arrive at a figure for next year) is number-oriented, fails to identify priorities, and starts with
the existing level of activity or expenditure.
It will be appreciated from this last point that in taking as given the current level of expenditure, and
the activities that this represents, the traditional approach to budgeting, by looking only at desired
increases or, occasionally, decreases, is ignoring the majority of the organization’s expenditure. This
is rather myopic.
The zero-base budgeting alternative is to evaluate simultaneously existing and new ways of achieving
specified ends in order to establish priorities among them which could mean that there are trade-offs
between existing and new activities. For example, a new project A that is considered to be more
desirable essence the approach is carried out in two stages:
Decision packages are identified within each decision unit. These decision units are essentially
discrete activities that can be described in away that packages cover both existing and projected
incremental, and the organizational units responsible for carrying them out are much akin to the
responsibility centers that were discussed earlier in the chapter.
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The object is to define for each decision unit the basic requirements that are needed if excess of this
basic level are deemed increment. (It will be seen, therefore, that the title ‘zero base’ is something of
a misnomer since the base is certainly greater than zero!). in considering what is needed in order to
fulfill a particular purpose, over and above the base level, it is probable that alternative ways of
achieving the same end will be identified, and these should be described and evaluated as they arise:
these are the decision packages.
Once the manage of a decision unit has submitted his statement of evaluated decision packages to his
superior it is the latter’s job to assign priorities to the various submissions from all his subordinates,
and to select limit. There are a number of ways in which priorities can be determined in order that
competing packages may be ranked.
This approach is logical and has much to commend it in relation to discretionary outlays.
Output Budgeting
In the traditional approach to budgeting there trends to be an overall emphasis on the functional areas
of an organization. Thus one has the budget for the marketing function, and that for the data
processing department. However, no organization was ever established in order that it might have
these functions as a definition of what it exists to achieve, so it is helpful to look at the situation from
anther angle.
In a typical business organization there will be functions such as those shown in the figure, but the
organization really exists in order to achieve various purposes, which have been simplified in the
‘missions’ of figure 21. in developing a business plan the major concern is with the ‘missions’ subject
to the resource limitations within the functions, etc, whereas the development of controls will usually
be via the responsibility centers that are contained within the functions.
Figure 17: Functional activities
Research and
development
Manufacturing
Engineering
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If we now superimpose the (horizontal) missions over the (vertical) functions we have crux of the
output budgeting approach. What this does is to focus attention on the purposes to be served by the
organization, as shown by the missions, and the contribution that each function must make to each
mission if the missions are to be successful. Figure 22 suggests this in the most simplified manner.
Figure 18: Missions
Reformulation and
relaunch of product X
Continued market success
with product Y
The successful development
and launch of product z
Figure 19: A simplified output budgeting format
Research and
development
Manufacturing
Engineering
Marketing
Distribution
Administration
Reformulation and
relaunch of product
Continued market
success with product
Y
The successful
development and
launch of product Z
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Variance Analysis
When actual selling price differ from standard selling prices a sales price variance can be computed.
Standard selling prices will be used in compiling budgets, but it may be necessary to adapt to
changing market conditions by raising or lowering prices, so it becomes desirable to segregate
variances due to price changes from variances due to change in quantity and product mix.
Quantity and mix are the two components of sales volume variances, and variations in profit can be
explained to some extent by analyzing sales quantity and sales mix.
The formulae for computing sales variances are:
Sales price variance = actual units sold X (actual price – standard price);
Sales volume variance = sales quantity variance + sales mix variance;
Sales quantity variance=budgeted profit on budgeted sales-expected profit on actual sales;
Sales mix variance=expected profit on actual sales-standard profit on actual sales
‘Expected profit on actual sales’ is calculated as though profit increases or decreases proportionality
with changes in the level of sales. ‘Standard profit on actual sales’ is the sum of the standard profit
for all units sold. (for a single product range, the standard profit on actual sales is equal to the
expected profit on actual sales, and the sales mix variance will necessarily be nil.)
Let us clarify the methodology with an example. Assume budgeted sales of a company’s tow
products for a forthcoming period were as follows:
Product A 500 units at £2.00 per unit
Product B 700 units at £1.50 per unit
and their costs were:
Product A £1.75 per unit
Product B £1.30 per unit
Actual sales for the period were:
Product A 560 units at £1.95 per unit
Product B 710 at £1.40 per unit
Budgeted sales revenue = £[(500 X 2.00) + (700 X 1.50)] = £2,500
Actual sales revenue = £[(560 X 1.95) + (710 X 1.40)] = £2,086
Budgeted profit
= £[(500 x 0.25) + (700 X 0.20)] =
£265
Actual profit = £[(560 X 0.20) + (710 X 0.10)] =
£ 183
Total profit
Sales price variance
-£82
= £[560 X (1.95 – 2.00)] +
= [(710 X (1.40 – 1.50)]
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Sales volume variance:
Quantity variance
= £265 – [2,086/2,050 X 265]
=
Mix variance
= £269 – [(560 x 0.25) + (710 x 0.20)] =
Sales volume variance
Total sales variance
+£4
+£13
+£17
-£82
Standard can be developed for repetitive activities, and it is possible to determine the standards in a
marketing context for the following illustrative activities:
cost per unit of sales;
Cost per sales transaction;
Cost per order received;
Cost per customer account;
Cost per mile traveled;
Cost per sales call made
The degree of detail can be varied to suit the particular requirements. Thus ‘cost per unit of sales’
may be ‘advertising cost per £ of sales revenue for product X’ and so on.
It is clearly more difficult to establish precise standards for most marketing activities than is the case
in the manufacturing or distribution functions. Physical and mechanical factors are less influential;
psychological factors are more prominent; objective measurement is less conspicuous; tolerance
limits must be broader; and the range of segments for which marketing standards can be developed is
much greater. But the discipline of seeking to establish standards can generate insights into
relationships between effort and results that are likely to outweigh any lack of precision.
It is possible for an organization to develop marketing standards by participating in an interfirm
comparison scheme. As Westwick has shown, integrated sets of ratios and standards can be devised
to allow for detailed monitoring of performance.
When budget levels and standards are being developed it is vitally important to note the assumptions
on which they have been based since it is inevitable that circumstances will change and a variety of
unanticipated events will occur once the budget is implemented. Bearing this in mind let us work
through an example. Table below illustrates an extract from a marketing plan for product X (column
2) with actual results (column 3) and variances (column 4) being shown for a particular operating
period.
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Table 8: Operating results for product X
Item (1)
Revenues:
Sales (units)
Price per unit (£)
Total revenue (£)
Market:
Total market size (units)
Share of market (%)
Costs:
Variable cost per unit (£)
Contribution
Per unit (£)
Total contribution (£)
Plan (2)
Actual (3)
Variance (4)
10,000,000
1.00
10,000,000
11,000,000
0.95
10,450,000
1,000,000
0.05
450,000
25,000,000
40.0
30,000,000
36.7
5,000,000
(3.3)
0.60
0.60
-
0.40
4,000,000
0.35
3,850,000
0.05
(150,000)
The unfavourable contribution variance of £150,000 shown at the foot of column 4 is due to two
principal causes:
A variance relating to contribution per unit; and
A variance relating to sales volume
In turn, a variance relating to sales volume can be attributed to differences between:
Actual and anticipated total market size; and
Actual and anticipated market share.
Therefore a variation between planned and actual contribution may be due to variations in price per
unit, variable cost per unit, total market size and market penetration.
In the case of product X we have:
Profit variance:
(Ca – Qp) X Qa = £(0.35 – 0.40) X 11,000,000
= (£550,000)
Volume variance
(Qa – Qp) X Cp = (11,000,000 – 10,000,000) X £0.40
= £400,000
Net variance
Profit variance
Volume variance
(550,000)
400,000
£(150,000)
Where: Ca = Actual contribution per unit;
Cp = Planned contribution per unit;
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Qa = Actual quantity sold in units
Qp = Planned quantity of sales in units
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The figure below illustrates the relations.
Figure 20: Marketing variances, 1
Budgeted volume
Actual volume
Actual volume
At budget margin
at budgeted margin at actual margin
Cp X Qp = £0.40 X 10m
Cp X Qa = £0.40 X 11m
Ca X Qa = £0.35 X 11m
= £4,000,000
= £4,400,00
= £3,850,000
Volume variance
Profit variance
£400,000 F
£550,000 U
Total variance
£150,000 U
However, 2 can be analyzed further to take into account the impact of market size and penetration
variations.
Market size variance:
(Sa –Sp) X Sp X Cp = (30,000,000 – 25,000,000) X 0.4 X 0.4
= £800,000
Market share variance:
(Sa – Sp) X Ma X Cp = (0.367 – 0.40) X 30,000,000 X 0.4
= £(400,000)
Volume variance:
Market size variance
Market share variance
800,000
(400,000)
£400,000
Where: Ma = actual total market in units
Mp = planned total market in units
Sa = actual market share
Sp = planned market share
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See figure 23, which illustrates these relationship.
In summary, the position now appears thus:
£
£
Planned profit contribution
Volume variance:
Market size variance
800,000
Market share variance (400,000)
Profit variance
(550,000)
Actual profit contribution
£3,850,000
4,000,000
400,000
Figure 21: Marketing variances, 2
Volume
variance (F)
40.0
Market share variance (U)
36.7
Market
Share (%)
Planned
0
25
Actual
30
Planned
Actual
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But this is not the end of the analysis! Variances arise because of unsatisfactory performance and
unsatisfactory plans. It is desirable, therefore, to distinguish variances due to the poor execution of
plans from those due to the poor establishing of plans. In the latter category are likely to be found
forecasting errors reflecting faulty assumptions, and the estimates of total market size may constitute
poor bench-marks for gauging subsequent managerial performance.
It is difficult to determine categorically whether market share variances are primarily the
responsibility of forecasters or of those who execute the plans based on forecasts. On the face of it the
primary responsibility is likely to be attached to the latter group.
In interpreting the variances for product X it can be seen that the favourable volume variance of
£400,000 resulted form tow variances relating to market size and market share. Both of these are
undesirable since they led to a lower contribution that intended. Had the forecasting group correctly
anticipated the larger total market it should have been possible to devise a better plan to achieve the
desired share and profit contribution. The actual outcome suggests that competitive position has been
lost due to a loss of market share in a rapidly growing market. This is a serious pointer.
Lower prices resulted in a lower level of contribution per unit, and hence a lower overall profit
contribution. The reasons for this need to be established and future plans modified as necessary.
As an approach to improved learning about the links between effort and results – especially in the
face of active competitive behaviour – it is helpful to take the above analysis further and to evaluate
performance by considering what should have happened in the circumstances.
At the end of the operating period to which table 7 refers it may become known that a large company
with substantial resources made an aggressive entry into the market-place using lots of promotions
and low prices. Furthermore, an unforeseen export demand for product X may have arisen due to a
prolonged strike in the USA’s main manufacture. On the basis of these details it becomes possible to
carry out an ex-post performance analysis in which the original plans are revised to take account of
what has since become known.
A clear distinction can be made via ex-post performance analysis along these lines since a distinction
can be made between:
Planning variances due to environmental events that were:
Foreseeable
Unforeseeable
Performance variances that are due to problems in executing the plans.
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Figure 22: Ex-post performance analysis
Total variance
QaCa - QpCp
Performance
Planning
(QaCp – QrCr) + (QrCr – QpCr
Performance
Profit
PP
Planning
Volume
Profit
Volume
Qa(Ca – Cr) + Cr (Qa – Qr) + Qr (Cr –Cp) + Cp (Qr – Qp)
Legend
Subscripts
Performance
a = actual
p = planned
Profit r = revised
Market size
Variables
Planning
Q = Quantity
C = Contribution
S = Share
Share
Profit
Market size
M = Market
Share
has–focused
on a (Sa
single
product
line,– but
will(Sr
typically
Qa (Ca –This
Cr) example
+ CrSr (Ma
Mr) + CrMa
– Sr)
+ Qr (Cr
Cp) multiproduct
+ CpSp (Mr –companies
Mp) + CpMr
– Sp) have
product lines with differing cost structures, prices and hence profit characteristics. It will
be apparent; therefore, the mix of products sold will have an impact on the overall profit outcome.
For example, an enterprise may offer three product lines with budgeted characteristics relating to the
next operating period as given in the table below.
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Table 9: Budgeted operating results by product line
Budget sales (units)
Budgeted unit selling price
Budgeted unit variable cost
Budgeted unit contribution
Budgeted contribution
Budgeted contribution
Product A
100,000
£12.00
£6.00
£6.00
50%
£600,000
Product B
200,000
£10.00
£4.50
£5.50
55%
£1,100,000
Product C
50,000
£20.00
£8.00
£12.00
60%
£600,000
Total
£2,300,000
Each product line has a different contribution per unit, so the total contribution form all lines is
dependent upon the particular mix of sales across all products lines. If the actual outcomes for the
period in question were as shown in the table below we can explain the total variance of £275,000 U.
Table 10: Actual operating results by product line
Actual sales (units)
Actual unit selling price
Actual unit variable cost
Actual unit contribution
Actual contribution
Actual contribution
In summary we have:
£
Volume variance
Mix variance
Profit variance
Total variance
Product A
90,000
£12.00
£6.00
£6.00
50%
£540,000
Product B
220,000
£9.00
£4.50
£4.50
50%
£990,000
Product C
45,000
£20.00
£9.00
£11.00
55%
£495,000
Total
£2,050,000
32,863 F
42,863 U
265,000 U
£275,000 U
In other words the total variance was partly due to overall volume being higher than budgeted, which
gives a favorable variance of £32,863 made up of favourable volume variances for each individual
product line; the actual mix of sales differed from budget in a way that produced and unfavourable
variance of £42,863 made up of unfavourable variances for products A and C which were partly
offset by a favourable variance for product line B; and the actual margins were less than budgeted for
product lines B and C giving an unfavourable profit variance of £265,000.
The volume variance can be analyzed further along the lines suggested in the previous example, but
the main point is to note from this example is the impact that variations in the mix of products sold
can have on the profit outcome. If all product lines had the same percentage margin there would be
no mix variance, but this situations is not normal, so we need to be aware of the impact of mix
changes.
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Variance Analysis for Distribution Cost Control
As with production costing the analysis of cost variances in distribution costing is the first step
towards the goal of identifying the factors that caused the difference between the standard and the
actual costs so that any inefficiency can be eliminated. To do this each enterprise will have to decide
what specific variance analyses it may want to use. Often companies only compute a net variance for
their distribution costs and do not attempt to break the variance down into casual factors. This
practice is not to be encouraged, however, since it tends to hide inefficiencies. If the analysis is to be
meaningful the variance must be further explained in terms of price and efficiency components. Such
price and quantity of efficiency variances can be computed for distribution activities. The price
variance is given by:
(Standard price – actual price) X actual work units;
And the quantity (or efficiency) variance is given by:
(Budgeted work units – actual work units) X standard price.
A Variance Reporting Example
Territories analyze the distribution costs of the Hill Company: data for the southern territory. The
warehousing and handling function’s standards are:
Variable costs:
Receiving
Pricing, tagging and marking
Sorting
Handling returns
Taking physical inventory
Clerical handling of shipping orders
Total standard for direct and indirect costs (£)
21 per shipment
6 per unit handled
5 per order
10 per return
0.50 per unit warehouse unit
2 per item
Fixed costs:
Rent
Depression
600 per month per territory
450 per month per territory
The following units of variability were budgeted and recorded for the month of January, 1998:
Budgeted
Shipments
Units handled
Orders
Returns
Warehouse unit
Item
Actual
400
200
110
70
1,600
750
420
223
108
71
1,630
780
Southern territory actual direct costs for the month of January 1998, were as follows:
Receiving
Pricing, tagging and marking
Sorting
£6,400
1,115
565
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Handling returns
Taking physical inventory
Clerical handling orders
Rent
Depreciation
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680
880
500
650
445
The company allocates the following indirect costs to its southern and northern territories:
Receiving (allocated on actual shipments: southern 420, northern 80)
Clerical handling of shipping orders (allocated on actual items
Southern 780, northern 120) 1,223
£2,500
Efficiency Variance
A shipment received is the unit of variability chosen for the receiving function. There were a total of
420 shipments made, while only 400 shipments were budgeted. This results in an unfavourable
efficiency variance because actual shipments exceeded those budgets. The efficiency variance in this
case is unfavourable because 20 more shipments were made than planned. Hence, orders of larger
quantities should be encouraged to save costs in receiving.
Price Variance
The actual cost of £20.238 for each shipment received is less than the standard price of £21.00 which
results in a favourable price variance. This difference in price is multiplied by the actual shipments to
give a total favourable price variance of £320. It is not necessary to compute the actual cost per unit
since the price variance can be determined by comparing total actual to he actual units.
Efficiency and price variance are computed for variable costs only. Only a net variance is computed
for the two fixed expenses. This measures the difference between budgeted costs and actual costs
(actual units at actual price).
Other Models
A useful model for assessing product line performance has been proposed (and tested) by
Diamantopolous and Mathews (1990). The model is based on the need to evaluate product
performance in a multiproduct setting using readily-available product information and widely-used
performance indicators in a systematic way. Not least of all it was deemed essential that the model be
clearly understood by its intended users otherwise, for an implementation point of view, it would not
have been worthwhile.
Gross profit is used as the primary performance indicator since this measure is easily provided
without additional analysis. If the gross profit being generated is below par this may be due to:
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Figure 23: A model for product performance analysis
Start
Yes
Stop
Yes
Is total gross
Profit acceptable?
Cost problem
No
No
is product ‘new’?
Can price be increased
No
No
Is unit gross profit
Is gross
Acceptable? Profit margin
Acceptable?
Price
problem
Yes
Volume
problem
Insufficient sales volume
High unit cost;
Prices that are too low.
Investigation should reveal which of these possible causes applies. If the unit gross profit is
satisfactory, for example, but the product line’s overall gross profit is unsatisfactory, the remedy may
be to increase volume by revising the marketing may be to increase volume by revising the marketing
that are not amendable to corrective action. In this case their continued role in the range needs to be
questioned.
Areas in which the model is particularly useful are:
Pricing (especially the effectiveness of existing pricing policies in terms of profit and volume
results);
New product introductions (by using previous introduction (by using previous introductions to set
realistic bench-mark expectations for new products);
Product deletions (using warning signals as the stimulus to further investigations).
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Despite the need to specify target values for each element of the model (i.e., total gross profit, unit
gross profit, newness for product, gross profit margin, and price) this does not take away the
importance of managerial judgment in arriving at an overall assessment of each product’s
performance. Indeed, judgment is needed in specifying the quantitified target values themselves as
well as in interpreting any performance is considered satisfactory it is not self-evident that it should
be ignored: in order to ensure sustained satisfactory performance it may be necessary to take action in
anticipation of future environmental changes (i.e., feedforward control).
Figure 24: analysis sales deviations
Unfavorable sales deviation identified
Is deviation due to uncontrollable
factors?
Marketing strategy is inadequate or
sales objectives are too optimistic
Are programme objectives being
achieved.
Productivity of programme in
generating sales has been
overestimated
Programme design or budget in
inadequate to achieve programme
objectives
Is planned level of programme effort
being achieved?
Programme execution is faulty or
behind schedule
A variation on the product line model that deals with sales deviations from plan is shown in the figure
above.
This protocol follows a series of logical steps. Having identified a variance that is deemed to be
significant (i.e., is unlikely to have arisen by chance) the question is raised as to whether this may be
due to controllable or uncontrollable factors.
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(‘Uncontrollable’ is used here in the sense of being beyond the influence of managers in the given
enterprise, or beyond the forecasting ability of relevant personnel, which might cover changing
market conditions leading to a decline in industry sales, or unanticipated competitive action).
If the explanation for the variance is not found at this stage the next stage raises the question of the
performance of marketing programmes. This can be addressed at two levels.
The degree to which programme objectives are being achieved;
The degree to which planned programme effort is being achieved
If the degree of effort (as represented by actual sales levels, or advertising coverage) is not as planned
it is unlikely that either prograrmme objectives or sales objectives are being achieved. On the other
hand, if the planned input of effort is being achieved but programme objectives (such as brand
awareness levels or the number of new accounts) are not, it is probable that either the budget is
inadequate or the design of the programme (e.g. sales appeal, pricing level, advertising copy) is
ineffective.
It may be found that the sales variance is not attributable to faulty programmes or lack of effort but it
is due to the sales productivity of the programme being over stimulated, or the implementation of the
programme being behind schedule.
Insofar as sales variance reflect revenue generation there is a corresponding need to examine the
variances among the costs incurred and budget figures to secure control over the profit consequences
of sales activities.
The Variance Investigation Decision
A major inhibiting factor in seeking to control via feedforward system is our limited ability to make
reliable estimates of the outcomes of future events. (This reflects our modest understanding of causal
relationships both within the subsystems of the enterprise and between the enterprise and its
environment.) All planning is based on estimates (e.g. of prices, costs, volumes) and actual outcomes
will rarely be precisely in line with these estimates: some variation is inevitable. Should we expect a
managers to investigate every variance that might be reported when we know that some deviation
between actual outcomes and budgeted outcomes is bound to occur? On the other hand, if no
variances are investigated the control potential of this form of managerial control system is being
ignored. An appropriate course of action lies somewhere between these two extremes.
Causes of variances (or ‘deviations’) can be categorized in the following broad way (after Demski
with particular variances often being due to one or more deviations:
Implementation deviation results form a human or mechanical failure to achieve an attainable
outcome, e.g., if the mileage rate payable to employees using their own vehicles for business trips is
35p per mile, but due to clerical error this is being paid at only 25p per mile, the required corrective
action is easy t specify. The cost of correction will be exceeded by the benefits.
Prediction deviation results from errors is specifying the parameter values in a decision model, e.g.,
in determining overhead absorption rates ex-ante predictions must be made of , inter alia, the future
level of activity. If the predictions are wrong then the overhead absorption rate will be wrong and
variance will result.
Measurement deviation arises as a result of error in measuring the actual outcome – such as
incorrectly adding up the number of calls made in Region X, or the number of units sold of product P.
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Model deviation arises as a result of an erroneous formulation in a decision model. For example, in
formulating a linear programme the constraints relating to the availability of input factors may be
incorrectly specified.
Random deviations due to chance fluctuations of a parameter for which no cause can be assigned.
These deviations do not call for corrective action, but in order to identify the causes of variances it is
helpful to separate random deviations from deviations 1-4 above, in order that the significance of the
latter might be established.
While these five categories of deviation appear to be mutually exclusive their interdependencies
should not be underestimated. The traditional view is to assume that variances are due to
implementation deviations but this is patently simplistic. It is also potentially inequitable since it may
deem individual managers to be responsible for variances that arise for reasons beyond their control
(such as 3 and 5 above).
In setting up bench-marks (e.g., budget targets or standard costs) it is important to recognize that a
range of possible outcomes in the vicinity of the benchmark will usually be acceptable. In other
words, random variations around the benchmark are to be expected, and searching for causes of
variances within the acceptable range of outcomes will incur costs without generating benefits. Only
when variances fall outside the acceptable range will further investigation be desirable.
This prompts the operational question of how one actually determines whether a variance should be
investigated. As the figure below suggests, if it was known in advance that a variance arose on a
random basis it would not be necessary to investigate it since there will be no assignable cause. On
the other hand, if a variance is of a non-random nature it would not pay to ignore it if it was
significant.
Figure 25: the variance investigation decision
Variance
Random
Non-random
Do not investigate
Investigate
Do not investigate
How can significance be determined? This boils down to a statistical question, and the technique that
is of proven help is that developed for use in quality control situations to which we will turn very
shortly.
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A more conventional approach to evaluating the significance of variances is either to:
Look at the absolute size of the variance (i.e. actual – standards) such that all variances greater than,
say, £1,000 are investigated, or
Compute the proportionate size of the variance (i.e., variance/standard) and investigate all those
exceeding, say, 10 per cent.
Both 1 and 2 must depend upon the manger’s intuition or some arbitrary decision rule when it comes
to deciding whether or not to investigate a given variance.
The advantages of 1 and 2 are simplicity and ease of implementation, but both fail to deal adequately
with the issues of significance (in statistical terms) and balancing the costs and benefits of
investigation. We can resolve these issues with the help of the approach adopted in statistical quality
control.
Statistical quality control is based upon the established fact that the observed quality of an item is
always subject to chance variability. Some variability beyond the boundaries due to chance cause.
The major task of SQC is to distinguish between assignable and chance causes may be identified,
their causes discovered and eliminated, and acceptable quality standards maintained.
The standard of performance that is expected is that advertising expense will be 8 per cent fo sales
revenue, but random causes can make this figure vary from 6 per cent to 10 per cent of sales revenue.
If the range of 6-10 per cent represents three standard deviations on either side of a mean of 8 per
cent, then observations would be expected to fall within the range in 998 out of 1000 cases.
However, when an observation false outside these limits two opposing hypothesis can be put forward
to explain the situation.
The observation is the freak one out of 1000 that exceeds the control limits by pure chance, and the
company still has the situation under control.
The company has lost control over the situation due to some assignable cause such as a new
competitor entering the market.
If hypothesis 1 is accepted it is unnecessary to investigate – with the risk that something has actually
happened to cause the situation to fall out of control. On the other hand, if hypothesis 2 is accepted
and investigations are begun into assignable causes there is always the risk – albeit very small – of
the first hypothesis being correct and hence investigation being unnecessary.
Investigations to identify the causes of variances – even when the latter are deemed to be significant –
involve costs, so we must again reflect on the cost – benefit issue: if the likely penalty from not
identifying and correcting the cause of the variance is less than the likely cost of the investigation it
hardly seems worth the trouble.
Consider a hypothetical case in which the cost of investigating a reported variance is estimated at
£200 while the penalty for not identifying a correctable cause is likely to be £600. if an investigation
is undertaken and no cause is discovered, the enterprise will be £200 worse off, whereas it will be
£400 better off if a cause is ascertained and corrected.
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Taking Corrective Action
Having implemented plans, monitored performance, and analyzed significant variances, the next step
is to decide on the corrective action that is needed. In this section we will concentrate on responding
to environmental changes – especially those of a competitive nature.
How should an enterprise responds to environmental changes? There are many ways, and Barrette
has pointed out two opposing possibilities. On the one hand there is the deterministic approach in
which it is felt that the enterprise’s environment determines its actions, hence strategies and even its
structure. This takes the idea of adaptation to environmental change to an extreme: changes in the
environment – whether in the form of opportunities or threats – will result in changes in competitive
strategy and the implementation of these changes may well bring about changes in organizational
structure.
In contrast, there is the strategic approach in which the environment is seen as constraining the
enterprise’s freedom of action rather than determining it. This concentrates more on the enterprise’s
strengths and its ability to influence its environment rather than simply being influenced by it. One
example is the strategy of raising barriers to entry, which modifies the environment against the
interests of potential competitors.
Marketing intelligence has a role to play in both these approaches by identifying environmental
change as a basis for reactive or proactive responses.
Various responses stages are highlighted, with any given one being triggered when the intelligence
signals pass thresholds. Thus, of example, a strong signal indicating a significant change in the
environment will cross a number of thresholds and activate appropriate high-level responses. Barrette
sets his model within a framework of power relationships – especially those involved in the allocation
of resources via the budgeting process. This leads to the building in of ‘slack’ in certain parts of the
enterprise in accordance with the distribution of power.
How should an enterprise respond to environmental changes that manifest themselves either through
the gathering of environmental data or environmental scanning – see Sanderson and Luffman or via
analysis? Help is available from the technique of competitor profiling. The steps in this technique,
developed by SRI international, are:
Identify the industry’s four key competitive strengths. It is implicitly assumed that both current and
future success in the industry is a function of a competitor’s ability to:
Meet customers’ needs and communicate products’ attributes
Understand and control relevant technology;
Make superior products in a cost effective way;
Manage the co-ordination of human, financial, and technological resources.
Select single specific measure of success for each of the four keys competitive strengths identified in
step 1 above.
define linkages between adjacent pairs of competitive strengths to demonstrate their interdependent
technology; quality to link technology and manufacturing integration to link manufacturing and
management, and growth to link management and marketing .
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Figure 26: Key competitive strengths
Marketing
Technology
Management
Manufacturing
Figure 27: Measures of success
Marketing
Technology
Sales R & D investment
ROI
Capacity utilization
Management Manufacturing
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Figure 28: Linkages between competitive strengths
Marketing
Price
technology
Sales
Investment
Growth
R&D
Quality
Capacity
ROI utilization
Management
Integration
Manufacturing
Determine average performance scores for the measures specified in step 2 and the linkages defined
in step 3. This has the effect of setting up an ‘average competitor’ relative positions. In average
performance for any competitor would be plotted outside the circle and below average performance
on any aspect would be plotted inside the circle. Scoring can be done by using a scale of 1 (=
excellent) to 5 (= inadequate) to assess a competitor’s standing on each dimension, then plotting these
scores and joining them up.
Generate competitors’ profile in order to identify relative strengths and weaknesses as a basis for
taking action.
In monitoring competitors’ activities the categories of activity most relevant in relation to the
strategic needs of the user must be determined. Once the categories are established, frequency of
monitoring must be set. Prescott and Smith reported on a study they undertook in the USA to identify
categories and frequencies.
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Figure 29: Average competitor
Price
Sales
R&D
Investment
Growth
Growth
ROI
Capacity
utilization
integration
Table 11: Competitive information categories and their monitoring
Continuous
General industry trends
Marketing and sales
Financial
Technological development
Periodic
Organizational
goals
assumptions
Customers
Acquisition/divestment
programmes
Service provided
Operations
Ad hoc
and Public and international affairs
Human resources
General administrative structure
Supplier
practices
and
procurement
Channels of distribution
A further aspect of the study was the extent to which different categories of information were
subjected to analysis. Three levels of analysis and little/no analysis – with the extent to which
implications were drawn from the analysis being limited to the first two levels.
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Table 12: Extent of analysis of categories of information
Extensive analysis undertaken
and implications derived
General industry trends
Potential competitors
Marketing and sales
Financial
Organizational
goals
assumption
Basic analysis with some
implications
Technological developments
Acquisition/divestment
programmes
Customers
Services provided
and
Little or no analysis and no
implications
Distribution channels
Human resources
General administrative structure
Public and international affairs
Supplier practices
Figure 30: The strategic triangle
Customers
Value
Value
Value
Needs seeking benefits at acceptable prices
Assets and utilization
Cost differentials
Assets and utilization
The focal points of the triangle were initially customers, competitors, and the company in question,
but Brock has emphasized the cost difference between one’s own company and competitors as a
potential source of competitive advantage. Cost differentials stem from the asset bases of competing
companies coupled with the way in which assets are utilized. The importance of being cost effective
is evident when one considers the need to deliver value to customers at prices that are competitive
while generating an adequate rate of reward to prices that are competitive while generating an
adequate rate of reward to shareholders. As an example let us take a comparison with the latter using
scrap steel an electric furnace technology. A detailed examination of annual reports, public
statements of Mini’s chief executive, and general trade literature gave sufficient information to allow
the comparative profile shown in the figure below.
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Figure 31: Cost advantages and disadvantages
Maxi Mini
Price per ton £500
£425
Gross margin
70
75
Supplies energy
Advantage
24
Mini’s price
8
175
Wages and salaries
184
Gross margin
17
Supplies
43
Energy
Material (hot metal)
Wages and
Salaries
214
Material (scrap)
58
132
It is evident that Mini’s manufacturing costs are only 59 per cent of those relating to Maxi per ton of
hot rolled steel ready for finishing. With a price set at £425 Mini not only has a clear price advantage
of £75 per ton but also a gross margin advantage of £175 versus £70, which will allow for even more
aggressive pricing. Maxi can see from this type of analysis that its position is being eroded, and
appropriate decisions need to be made to avoid a forced decline.
Without this type of information Maxi would not be able to see how the strong strategic position it
has held hitherto is being undermined by Mini. Detailed guidance on carrying out this type of cost
analysis can be found in Jones.
Bench-Marking
This is an analytical process through which an enterprise’s performance can be compared with that of
its competitors. It is used by organizations such as Xerox and Ford in order to:
Identify key performance measures for each business function
Measure one’s own performance as well as that of competitors
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Identify areas of competitive advantage (and disadvantage) by comparing performance;
Design and implement plans to improve one’s own performance on key issues relative to
competitors
Furey offers a number of US case studies showing benchmarking in use. One of these concerns a
company (company Y) that is a major vendor of telecommunications equipment in which the senior
management was curious about the cost and productivity of its sales force. The comparisons shows
on the table below were developed through a benchmarking exercise using the largest direct
competitor and the best-in-class vendor of data processing equipment.
Table 13: Sales force bench-marking
Cost bench-marks
Average
total
sales
rep.
Compensation
% Compensation earned for
commission
Revenue per sales rep.
Compensation as % of revenue
Performance bench-marks
Average number of calls per week
per rep.
Revenue quotas
New account quotas
Company Y
Direct competitor
Best-in-class
competitor
$38,00
$44,000
$55,000
10%
15%
30%
$835,000
4.6%
$900,000
4.9%
$1,200,000
4.6%
16 – 18
13 – 16
20+
Yes
Informal
Yes
No
No
Yes
The cost of sales representative was found to be very competitive in Company Y, but low
commission paid by productivity. Moreover, the direct competitor’s sales force was generating more
revenue with fewer calls in the absence of new account quotas than was the case in Company Y. The
best-in-class competitor was paying high rate of commission to its sales force and aggressively
pursuing new customers via numerous sales calls and quotas for new accounts.
Company Y’s response to this situation was to restructure the sales team’s compensation and split the
team into two. By raising the rate of commission substantially, and by having one part of the sales
force dealing with existing accounts, Company Y’s relative market share improved within six
months.
Benchmarking is applicable in other functional areas and has the potential, when properly
communicated throughout the enterprise, to help change the corporate culture. In the case of benchmarking products or services offered by customers but not by itself, an enterprise’s senor managers
can gain insights to guide its decision: by keeping abreast of new developments in this way it will be
easier to assess how to respond.
In considering how to take corrective action it is important to make some assessment to the probable
response of competitors to any action that might be taken.
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This is a vital aspect of strategic behavior. It is assumed that the identities of the enterprise’s
competitors – both actual and potential – are known, although this should not be taken for granted.
Once the competitor’s identities are known, although they can be profiled and possible responses can
be explored, taking into account conjectures regarding the beliefs that competitors have of one’s own
enterprise.
Let us look further at this, drawing on the approach of Amit, et al. in a simple situation involving an
Enterprise X and its sole competitor, Y, there are four possible price policies available. In table 13
these possibilities for X are likely reactions. The figures in the cells represent the changes in X’s
profit that are expected to result for the various interactive outcomes contained in the matrix. Thus if
X reduces its price by 10 per cent and Y responds by reducing its price by 20 per cent, then X’s
profits will fall by 25 per cent. If the data in the figure is valid, the optimal course of action for X will
depend on the likelihood of Y responding in a particular way. For example, if it is felt to be most
likely that Y will react to a price reduction on the part of X by reducing price by as much as X, then
the optimal choice for X is to reduce its price by 10 per cent, giving an increase in profits of 15 per
cent. It will be apparent that additional information is needed on Y’s likely reaction. This can be
provided via conjectural variations, which are reactions to actions taken by one’s views of one’s own
enterprise and of their likely reactions to actions taken by one’s own enterprise.
Table 14: Reaction function
Enterprise Xs price policy (% Competitor Y’s reaction (% change in price)
change in price)
0%
-5%
-10%
0%
0
-10
-15
-5%
+7
-5
-12
-10%
+30
+15
-8
-20%
+12
+5
+5
-20%
-20
-22
-25
-30
In order to gauge a competitor’s likely reactions it is necessary to have information on:
The structural characteristics of the industry and the technical ability plus desire of competitors to
respond;
Competitors’ conjecture about one’s own behavior
The figure below illustrates a hypothetical situation involving different conjectural possibilities
relating to a price reduction of 10 per. The deviation of conjectural variations is explored in detail
elsewhere but we need to note here that it ranges from zero.
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Figure 32: Conjectures and a price reduction policies
Firm considers price reduction at 10%
Competitor’s conjectural variation near zero
Rival believes firm is passive
Rival will probably meet price reduction
Price reduction not recommended
Competitor’s conjectural variation near
one.
Rival believes firm is aggressive
Rival will probably not meet price reduction
Price reduction recommended
From the figure above it can be seen that when the competitor’s conjectural variation is near to unity
it believes the enterprise in question will respond aggressively to a shift in pricing policy. The
obvious consequences of this will be price wars of the competitor were to match a reduction in price.
As a result of this belief the competitor is unlikely to match the price reduction for fear of the
consequences. The opposing situation is likely to have the opposite result.
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2: Where are we Now?
Control of Marketing Operations
Whenever we want to do anything, we have certain objectives before us and we plan all our efforts
beforehand to achieve those objectives throughout the course of activity, we observe the progress of
work to compare the actual results with the desired results of standards. If the difference between the
actual result and the desired result is too much, then certain steps are to be taken to lessen this
difference. All measures by which an effort is made to bring the actual results and desired results
together are known as control. Thus, the main aim of control is to see that actual results are as close
to the desired standards as possible. In management, different authors have defined the term control
in different ways. According to Koontz and O’ Donnel, it is “the measurement and correction of the
performance of subordinates”. Phelps and Westing define control as an “ exercise directing, guiding
or restraining power over people or other events. In the words of Lipson and Darling it is “continuing
direction and redirection of marketing operations. Philip Kotler defines control as “the process of
taking steps to bring actual results and desired results closer together”.
In simple words, control or marketing operations may be defined as the “managerial function of
monitoring and feedback of actual marketing performance and its measurement and evaluation
against the preplanned performance standards with a view to identify deviations, correct the
deviations and provide inputs for plan reformulation”.
Control involves the following:
Observation of activity by the management –actual results
Some of the actual results which are not according to the desired standards are not acceptable to the
management
The management has certain devices by which the difference between the actual results and the
standards desired can be controlled
Need for Control
The need for control increases as the enterprise grows. In a one-man enterprise of a self-employed
craftsman, there are no control problems. The owner-operator brings material, transforms them into
products and sells them in the market. He has no subordinates to control. His only problem of control
may be the quality of raw material and the finished products which should be according to a predetermined standard.
As the enterprise grows or becomes large, the owner employs more persons-the production increases,
sales increases, the number of employees increases and all the activities and operations of the
enterprise increase, which necessitate more and more control over the increasing activities to achieve
the desired objectives.
The second reason of increasing need of control is the changing marketing environment and the
increasing competition. There is a change in government influence, price, taxes, customers’ habits
and preferences. There is a regular flow of new products, new brands, new competitive techniques
and new techniques in management. Due to this dynamic environment, marketing planning becomes
difficult and the management has to rely more on control of marketing operations.
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Phase of Control
Every control system has the following four phases:
Determination of standards
Measurement of performance
Analysis of deviation, and
Corrective action
Determination of Standards
Every marketing activity must have a certain predetermined standard, goal or objective. The standard
may consist of a specific amount of work to be completed within a stipulated time. For example, sales
quotas are fixed for various sales managers and sales representatives. Sales expenditure standards are
also determined under which sales managers and representatives are expected to achieve their sales
quotas. These quotas and the sales expense budget serve as standards against which periodic results
are checked.
Measurement of Performance
The most important part of a control system is the measurement of the performance of marketing
activities. There should be a marketing information system which should send regular reports to the
management about the actual performance of marketing activities. For example, after determining
sales quotas and sales expense quotas at the beginning of the year, the management would like to
know periodically the actual performance results to ascertain the degree to which their standards are
being achieved. Some of the important methods of performance measurement are ratio-analysis and
statistical control charts. Among the ratios used in marketing control are expenses to sales ratios.
Profit to sales ratios, etc. with the help of a statistical control chart, different levels of performance
can be measured in comparison with the standards. The statistical control chart can be used to
observe a succession of ratio or other values over time and determine whether significant trends are
forming. A statistical control chart gives sales expense and sales ration.
Analysis of Deviation
Whenever the actual performance of any marketing activity is not according to the desired standards,
it becomes important to find out the factors responsible for such deviation. With the help of variance
analysis, we can find out the reasons unsatisfactory performance. Variance analysis is a special
accounting technique to determine relative contribution of different factors in leading to a
performance deviation.
Corrective Action
The final phase of the control process is the corrective action which is taken when the actual
performance deviates too much from the desired standards. Supposing the sales profits of a company
decline mush below the standards set. Some of the corrective measures that the company may take
may be price reduction, higher discounts, reduction of expenses, improving the quality of the product
or packaging etc.
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Importance of Marketing Control
Some of the important benefit of marketing control may be as under:
Matching of Marketing Effort with Environmental Changes
Regular monitoring of performance and other environmental changes helps the company in updating
its marketing effort in time with environmental changes. It becomes all more important in the context
of rapid changes in technological, social and political fields and in consumer’s preferences and public
policy postures.
Detection of Deviation in Performance
A marketing control system helps the management in identifying deviations from the planned
programme. It finds out the faults and lacunae in performance and takes corrective action at the
proper time.
Identifying Responsibility for Failure
An appraisal of performance helps the management in identifying the responsibility for weak
performances. The person responsible for performances below specific standards gets an opportunity
for self-assessment and others are relieved of an unwarranted and misplaced blanket charge of
inefficiency and ineffectiveness/
Organizational Complexity
The vertical marketing system has more or less come to stay as a phenomenon of modern marketing.
The size of the organization and its growth makes control more complex and yet essential. The span
of control enlarges with the size of the enterprises and creates problems of control. Therefore, a
realistic, effective and yet simple marketing control system is a prerequisite of effective marketing
management.
Assisting Plan Reformation
The feedback provided by the marketing control system helps in reappraising performance standards,
marketing policies and programmes. Such reappraisal helps in the realistic reformulation of the
marketing plan.
Characteristics of an effective marketing control system
Important characteristics of an effective control system are as under:
Control should be objective – appraisal of the performance of a subordinate should not be a matter
of subjective determination. In other words, controls should be definite and objective. Employees will
respond favorably to objective standards and impartial appraisal of their work performance.
Control system should give immediate feedback – feedback is the process of adjusting future
actions based upon information about past performance. An essential requirement of an ideal control
system is immediate feedback of information about deviations in performance.
It should be flexible – the control mechanism should be flexible in the sense that it should respond
favourably to the conditions. In consequence of unforeseen circumstances, when plans are changed,
control should reflect corresponding changes to remain operative under the new conditions. The basic
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idea s that control should remain workable under dynamic business conditions including the failure of
the control system itself.
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Organizational suitability – control is exercised through managerial positions and as such it should
be according to the organizational structure. Each managerial position should be provided with
adequate authority to exercise self-control and take corrective measures.
control should be economical – a control system should be economical in the sense that
control should be economical – a control system should be economical in the sense that the cost of its
installation and maintenance should be justified by its benefits. Simply stated, control must be worth
its cost. Thus, a small company can hardly afford the extensive system of control practiced by large
companies.
It should be simple to understand – it is essential that those who administer the control should
understand it. Control specialists very often recommend sophisticated and advanced techniques of
control on the pretext of proving their expertise and tend to overlook the question of their being
understood by the marketing executives of the company.
Control system should suggest corrective action – an important characteristic of the effective
control system is that it should indicate deviations and suggest corrective actions promptly and in
time. Merely recording of deviations and errors and fixing responsibility for their occurrence is not
sufficient if it is not followed by suitable actions to prevent recurrence.
Techniques of controlling marketing operations
Some of the important techniques used to control the marketing operations are:
Sales analysis
Cost and profit analysis
Distribution cost accounting
Sales analysis
Sales is regarded as the most important indicator of the marketing performance. The actual sales
figures of a company are not very meaningful unless they are examined in relation to the expected
sales of a given period. For example, a 20 per cent increase in sales in a year is not satisfactory if the
expected increase in sales during the period was 50 per cent. An individual sales representative
recording per cent of the total company sales in his territory may not be considered t have performed
satisfactorily if his territory should have yielded 8 per cent of the total company sales
The sales of a company may be analyzed according t the following approaches
Time-wise sales analysis
Territory-wise sales analysis
Product-wise sales analysis, and
Customer-wise sales analysis
If the sales performance of a company during a particular month or year is not according to standard,
the factors responsible for it may have to be found out. Similarly, if the sales in a territory is not
satisfactory or sales or a particular product are not up to the desired targets or sales to a particular
segment of customers are not as expected, the management will have to find the factors responsible
for it and steps will have to be taken to improve the performance.
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Market share analysis – another approach used in sales analysis is sales performance of a company in
relation to competitor’s sales and not simply the absolute sales performance of a company.
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A company’s sales in a year may have increased by 10 per cent, but the total sales in the market share
analysis, in this case, will show that total sales increased by 50 per cent while the company sales
increased by only 10 per cent. Therefore, the company’s sales performance, although apparently
shoeing an increase in sales, is not satisfactory. Thus, market share analysis is a useful tool of
marketing control.
Cost Analysis
A marketing programme will not be very effective if it takes into account only the sales or the
company’s market share in the total sales. In such cases, the marketing executives are interested only
in increasing the sales volume and do not think in terms of dropping the weaker products or
customers or any such measure which may reduce the sales of the company. In such sales oriented
marketing programmes, the marketing manager never thinks in terms of a check over costs. His
primary objective is to see that the amount of sales is high, even though it may be at a high cost.
Therefore, along with ales analysis and control, cost analysis and control should also form part of a
marketing control programme because of the following reasons:
Cost analysis may reveal opportunities for allocation from the limited resources at the disposal of the
company in better sales generating uses.
Cost analysis can help in the detection of weak products, customers and territories and a correct
decision can be taken early by the company executives, and
Accurate cost information helps the marketing managers in arriving at correct pricing decisions. If,
due to wrong cost information, a higher price is fixed, it may adversely effect the sales of the product.
The costs which are incurred to manufacture the products i.e. raw material, factory wages, factory
rent, electricity and water, etc may be called production costs. The costs, which are incurred to
promote the sales ie advertising, personal selling other sales promotion schemes, may be called
promotional costs. The cost, which are incurred in the actual physical distribution of products from
the place of manufacture to the place where the customers buy it i.e. transportation, storage, handling
costs, constitute marketing costs.
For proper cost analysis, it is essential costs in different heads, so that mangers of different areas can
be held responsible if the cost under the area of their administration is increasing. But in actual
practice it becomes difficult to identity costs under different heads, e.g. the salaries of top or middle
level management production cost or marketing cost? Is the packaging cost production cost or sales
promotion cost?
Due to the following factors it is more difficult to measure and control marketing costs than
production costs:
Many criteria – there are many criteria of allocating marketing costs, such as:
Products
Customers
Territories
Size of order
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Channels of distribution, and
Salesmen
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But production costs can be assigned only on the basis of products or processes.
Arbitrary allocations – in marketing costs, the allocation is arbitrary because it is difficult to identify
the cost in a particular sale order, whereas in the case of production costs, material and labour costs
can be easily assigned to tangible products.
Difficult to estimate the results of cost inputs – it is easier to estimate the effect of producing another
ten or hundred units of an article the effect of increasing advertising expenditures.
Because of the above reasons, marketing or distribution cost accounting is assuming more
importance. In distribution cost accounting, the emphasis is not on setting of standards but on finding
the cost of different marketing activities.
Distribution Cost Accounting and Analysis
Distribution cost analysis is concerned with the analysis of the costs of conducting different
marketing and distribution activities. It is a tool, which helps the marketing manager in arriving at
correct marketing decisions. With the help of distribution cost analysis, the marketing manager can
easily and correctly decide as to which marketing activities should be eliminated, added or modified.
The marketing manager, after finding the costs of various marketing activities, compares them with
the value of these activities and then takes a decision about the levels of these activities to be
undertaken during a specific period of time.
In distribution cost accounting we start with the company’s profit and loss account. In a simple profit
and loss account, deducting the cost of goods sold arrives at the profits and other expenses fro he
sales during a specific period. The marketing manager’s objective is to develop profit statements
according functional marketing breakdowns such as profit earned by the company from different
products, profit earned by company from different territories. To make this, the customary expense
designations such as salaries, rent, materials, etc would have to be reclassified into marketing expense
designations. We will explain this with the help of the following example:
The marketing manger of Bhilwara Cotton Mills Ltd., manufacturers of a variety of cotton and
Terylene clothe, wishes do determine the costs and profits for selling through three different types of
retail channels-wholesalers, retailers, and departmental stores. The profit and loss account of
Bhilwara Cotton Mills Ltd., is shown below:
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Table 15: profit and loss account
Profit and Loss Account
Particulars
Sales
Cost of goods sold
Gross profit
Expenses:
Rent
Materials
Salaries
Rs
50,000
30,000
Rs
20,000
8,000
3,000
3,000
14,000
6,000
Step 1- identifying the functional expenses
Now let us assume that the expenses incurred by M/s. Bhilwara Cotton Mills Ltd., as given in table
above are incurred to carry out the following marketing activities: (i) Selling (ii) advertising (iii)
packaging, and (iv) office expenses. The first step is to find out how much of each natural expense
was incurred in each of these activities.
Suppose e.g., the total salary expense of Rs.8,00 can be distributed according to the marketing
activities as follows: (i) salaries to salesmen- Rs.4,000 (ii) salary to advertising manager –Rs 2,000
(iii) salary to packaging staff – Rs1,000 (v) salary to office staff – Rs1,000. the allocation of total
salary expense into the four marketing activities has been shown in the table below.
Similarly, total rent expense of Rs.3,000 can also be allocated to the four marketing activities: (i)
selling- Nil (ii) Advertising – 400 (iii) packaging – 1,500, and (iv) office – 1,100. no rent has been
allocated to selling activity, because most of the salesmen work away from the office. Most of the
floor space for which rent is paid is divided between packaging activities, office staff and advertising
manager’s office. Rent expense allocation into different marketing activities is also shown in table
below:
Lastly, the total expense on materials – Rs 3,000-can be allocated to different marketing activities as
follows:
Materials used for sales promotion – 400
Advertising material – 1,200
Packaging material – 1,200
Office material and stationery – 400
As a result of this breakdown, the total expenses of Rs 14,000 have been reclassified form natural or
customary basis to marketing activity basis.
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Table 16
Reclassifying expenses form natural to marketing activity basis
Natural Head
Expenses according to marketing activities
Total expenses
Selling
Advertising
Rs
Rs
Rs
Salaries
8,000
4,000
2,000
Rent
3,000
400
Materials
3,000
400
1,000
Total
14,000
3,400
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Packaging
Rs
1,000
1,500
1,200
3,700
Materials
Rs
1,000
1,100
400
2,500
Step II – Assigning functional (Marketing activity) expenses to different marketing channels
The next step in distribution cost analysis is to determine how much expense of each activity has
gone into serving each type of channel. For example, take selling activity first. The selling effort
devoted in the service of each channel of distribution can be approximated by the number of sales
hours or sales called spent with each with each channel. Supposing 220 sales calls were made during
the period, the total selling expense amounted to Rs 4,400, then the selling expense per call averaged
Rs200. the advertising expense can be allocated on the basis of the number of advertisements
addressed to the different channels of distribution. Since there were 100 advertisements and the total
advertising expense was Rs3,400 the per unit advertising cost would be Rs 34. the basis of allocation
of packaging expense may be the number of orders placed by each channel of distribution. Similarly,
material expenses can be also allocated on the basis of the number of orders placed by each channel
of distribution.
Table 16
Allocation of functional expenses to different market channels
(Functional Activities)
Channels
of Selling (No Advertising (No Packaging (No. of Materials (No. of
distribution
of sales calls) of advts)
orders)
orders)
Wholesalers
20
20
20
20
Retailers
150
40
40
40
Departmental stores
50
40
40
40
220
100
100
100
Functional expense
4,400
3,400
3,700
2,500
Number of units
220
100
100
100
Per unit cost
20
34
37
25
Step III-preparing the profit and loss statement of each channel of distribution
Now it becomes possible to prepare a profit and loss statement for each channel of distribution. The
wholesalers accounted for half of total sales (25,000 out of 50,000) of Bhilwara cotton mills Ltd. This
channel of distribution is charged with half the price of goods sold (Rs 15000 out of Rs 30,000). This
leaves a gross profit of Rs 10,000 for wholesalers. From this gross profit, the functional expenses
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spent on this channel o distribution is to be charged Rs 400 as selling expenses. Twenty
advertisement, were made by the company for wholesalers. At the rate of Rs 34 per advertisement,
the wholesaler’s channel of distribution is to be charged with Rs 680 of the advertising activity.
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Similarly, this channel was responsible for 20 orders at the rate of Rs 37 per order for packaging
expenses and Rs 25 per order for expenses on materials, which comes to Rs 740 and 500 respectively.
The result is that the wholesalers give rise to Rs 2,320 through the wholesale channel of distribution
is Rs 7,680.
Table 17
Profit & Loss Statements for Different Channels of Distribution
Particulars
Wholesalers Retailers
Departmental stores
Rs
Rs
Rs
Sales
25,000
15,000
10,000
Cost of goods sold
15,000
9,000
6,000
Gross profit
10,000
4,000
4,000
Expenses: selling (Rs 20 400
1,000
1,000
per sales call)
Advertising (Rs 34 per 680
1,360
1,360
advertisement)
Packaging (Rs 37 per 740
1,480
1,480
order)
Materials (Rs 25 per 500
1,000
1,000
order)
Total expenses
2,320
6,840
4,840
Net profit (orders)
7,680
840
840
Whole company
Rs
50,000
30,000
20,000
4,400
3,400
3,700
2,500
14,000
6,000
The cost of activities of other channels may be analyzed in the same manner. From such an analysis
in case of Bhilwara cotton mills Ltd., we find that the company in incurring a loss in selling though
retailers and departmental stores to the extent of Rs 840 each during the period under study.
With the help of such distribution cost analysis, the management of the company is able to get a very
important finding. Although total marketing operation of the company are profitable, the company’s
selling operation through retail and departmental store channels are running at a loss. The cost of
selling through these channels is more than their value. The distribution cost analysis, therefore,
provides a rupee measure of the profit differences in selling through different channels of
distribution.
Distribution cost analysis can be conducted to determine the profitability of other marketing activities
also, such as:
Different product sold by the company
Different territories of the company’s total market, and
Different size of orders received by the company.
The marketing manager can make such distribution cost analysis productive-wise or territory or
according to the size of orders received. Distribution cost analysis is more costly and difficult to
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prepare than sales analysis. A detailed record of information is to be kept for such analysis and many
times special facts have to be gathered.
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Limitations of distribution cost analysis
Distribution Cost Analysis is Costly and Difficult to Prepare
Allocation of functional expenses to marketing activities is arbitrary. In the example given above, the
selling expenses were determined on the basis of number of sales made, whereas a better method of
allocation could be the number of hours spent with each channel
There is an element of judgment in the determination of distribution costs. The judgement of the
marketing manager may not sometimes be correct. For example, whether to allocate ‘full costs’, or
‘direct and traceable costs’. In the example given above, we have avoided this issue, but in actual
analysis of distribution costs, it has to be taken into consideration.
Direct costs – there are costs that can be assigned directly to the marketing activities. Some of the
examples of direct costs are as follows:
In territorywise distribution cost analysis, sales commissions are a direct cost.
In productwise distribution cost analysis, advertising, advertising expense in relation to a product is a
direct cost.
Traceable common costs – there are costs that can be assigned only indirectly to the marketing
activities. In the example given above, rent was analyzed in this way. The company’s building is used
for different marketing activities and it is possible to estimate how much floor space was used for
each activity.
Non-traceable common costs – there are costs which cannot be allocated to different marketing
activities on a definite basis and are, therefore, allocated arbitrary. Some examples of such costs are
management salary, taxes, interests and other overheads.
Direct costs can be easily allocated to different marketing activities. With some difficulty and
controversy, traceable common costs can be allocated to different marketing activities. But it is
extremely difficult to allocate non-traceable costs to different marketing activities. The advocates of
‘full cost approach suggest that all costs must be included to determine true profitability. But in actual
practice, cost control becomes difficult because of arbitrary allocation of non-traceable costs.
It may be noted here that a corrective action decisions to modify or change some marketing activity
can be taken simply on the basis of distribution cost analysis. In the example given above, the
marketing manager of M/s Bhilwara cotton mills Ltd., should not decide to sell the product only
through wholesalers, because information supplied by distribution cost analysis shows that cost of
selling through retailers and departmental stores is not profitable. The results of distribution cost
analysis do not constitute an adequate information basis for deciding on corrective actions. The cost
analysis represents a very important initial information input, but not the only one, in the evaluation
of marketing activities.
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3: Where do we Want to be?
Mission Statement
A mission statement is concerned with the reason the organization exists. It tells the stakeholders
what it is doing and why. It must be capable of determining the organization’s strategic intent.
These days most organizations, both commercial and public, have a mission statement. Mission
statements normally include the following:
i.
ii.
iii.
iv.
v.
 A visionary statement, which represents a general long-term plan. For example, for a National
football team to win the world cup.
 A statement of the organization’s main reason for existing. For example, “in order to provide the
best possible banking services for its customers” would be a suitable statement on behalf of a
bank.
 The organization’s main activities and its overall aim, such as Tesco’s intention “to be the UK’s
number one food retailer.
 The organization’s key values – these are its corporate objectives in Tesco’s case these are:
Offering customers best value and most competitive prices;
Providing progressive returns for shareholders;
Developing its employees and rewarding them fairly. With equal opportunities for all;
Working with suppliers to achieve a long-term business relationship based on strict quality and
price criteria;
Supporting the local community and protecting the environment
 The organization must be capable of the necessary action to fulfill its strategic intent.
Goals, Objectives and Strategies
Goals are a general statement of the way the organization is moving, which is in line with its mission
statement, and are qualitative in nature. For example, “to increase profit”.
Corporate objectives are quantitative in nature. For example, “to increase profit before tax by 12% in
the next financial year”.
Strategies are objective statements which lay down a set of actions in order to achieve or maintain a
particular position.
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Managers responsible for the success of an organization are concerned about the effect that factors in
the external environment have upon it.
They cannot control the external but they to identify, evaluate and react to those forces outside the
organization which may affect them.
The way in which managers attempt to achieve this is by means of a qualititatitve assessment of
signals they receive which are relative to outside influences. There is therefore a need to carry out an
analysis of these forces by means of the kind of methods we have just explored. In other words, to
use external environmental analysis.
There a number of models available for carrying out external environmental analysis and we shall
explore some of these in detail later.
Types of Environment
To decide on the focus which environmental analysis should take it is important to consider the
nature of an organization’s environment in terms of its uncertainty.
A simple/static environment is the easiest to analyze. In this case, a detailed, systematic, historical
analysis is probably sufficient in order to understand it.
In a dynamic environment, all aspects of the environment are subjects to change. When changes are
rapid and/or sudden, such environments are referred to as turbulent. Frequently, change in one
element of the environment leads to changes in other elements; thus change feeds upon itself.
In these conditions managers must look to the future, not just to the past. A useful model for
achieving this is known as scenario building’, in which an attempt is made to construct a view of the
future based not just on hunches but by building consistent views of possible developments around
key factors.
Complex environments are becoming more and more common in modern times.
Technology, markets, politics, etc. are becoming more intricate and more involved. The globalization
of organizations in the form of multinational firms and multinational political structures, such as the
European Union, have greatly increased environmental complexity leading to conditions of the
greatest uncertainty. Analysis of such environments is often focused on helping to sensitize managers
to signals in their environment, and encouraging them to be flexible and intuitive in their responses to
such signals. Both dynamism and complexity serve to increase uncertainty. As a consequence,
uncertainty sets limits on the ability to predict accurately the future state of the environment.
Tom Peters argues that organizations must cope with this increasing uncertainty in their environment
and he emphasizes the need for flexibility as organizations set out to cope with their environments.
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Environmental Drivers
Certain forces in the environment act as long-term drivers of change. These forces include rapid
changes in technology, leading in turn to shorter life spans of such technology and need for increased
efficiency, often achieved by economies of scale.
In addition, globalization of markets has led to world-wide searches by companies to obtain skilled
labour, raw materials, total markets share, etc.
Nestle, for example, the world’s biggest food company, has improved sales growth by over 5% in the
first half of 2001.
The way in which this has been achieved is by means of what they term their “Globe” project. This is
aimed at increasing business efficiency, and by increased spending in launching new products, ie by
putting more money into the market.
They also have plans to acquire other companies in the food sector. In particular, they are targeting
mineral water and nutrition businesses.
Auditing and Forecasting the Environment
We have already mentioned in unit 1 the use of audits in corporate planning and their relationship to
the opportunities and threats present in the environment.
Such audits must consider the needs of the whole organization, as only then will they enable
functional strategies to be determined.
An audit produces a wealth of information which will help management to decide on both short – and
mid-term planning
Action may be required in the short term in order to have a firm base from which to move forward. It
is essential that a corporate identity is established and for both internal and external audiences to
agree on what it is.
Mid-term planning can only be successful if it is based on a firm foundation and the audit process is
designed to give management the information it requires to enable such a foundation to be identified
and/or established.
Forecasting trends and developments is the act of giving advance warning in time for beneficial
action to be taken.
Competitor Environmental Analysis
In order to establish where an organization is placed in its environment with respect to its competitive
position, it is necessary to examine the relative strengths and weaknesses of its competitors. To
achieve this comparison the organization needs to scan the environment continuously and to monitor
key indicators.
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It is also important to consider the strategies used by competitors. Are they, for instance, committed
to offering products at budget prices, as with companies like Superdrug, or do they rely on a
reputation for high quality, as with Boots?
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This type of knowledge is useful when looking at how competitors have dealt with the forces within
their environment in the past. It also gives an indication of how they are likely to act in the
competitive environment in the future.
Analysis of Competitive Structure
In any market there is a huge number of competing companies and they cover a large range of
geographical locations.
In addition, many companies who formerly enjoyed some form of protection form competition
through the operation of monopolies now have to compete openly for their business.
The government for free competition between suppliers of gas and electricity encourages an example
of this in the UK.
Trade barriers in many areas are also less stringently applied than they used to be, particularly, within
the European Community. All of this results in the need for companies to better understand their own
position by examining it against its competitors, whether this means competitors in the marketplace
or, as in the public sector, competitors for resources.
This is the basis for what Porter calls “competitor analysis”, which broadly means looking at who the
competition is, and how they perform, i.e., what strategies they use and how successful they are in
doing so. It also needs to include an assessment of potential competitors as well as existing ones.
When considering who the competition is it is necessary to take a very broad view. For example, a
company offering package holidays abroad is not only in competition with other companies offering
similar holidays but also with holiday offers in this country as well. In other words package holidays
abroad, i.e., competition is with all these companies who are offering the same or similar customer
benefits.
Porter has extended the idea of competitor analysis to include the analysis of the competitive industry
structure, as we shall see later when we consider Porter’s Five Model and strategic group analysis.
How Do We Carry Our Competitor Analysis
Having decided who our competitors are we then need to consider how they operate, ie what their
strategies are.
For this we need know:

What are their objectives?
- Are they seeking growth and, if so, is it profit growth, revenue growth or market
share growth?
- Are they competing in terms of price, quality, customers services or some other
factor?
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 Which marketing targets are their strategies aimed at?
 How successful are our competitors:
- Financial analysis of performance trends will be helpful here
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 What are our competitors’ strength and weaknesses?
 What is the current strategy of our competitors?
- How are they likely to change in the future?
- Do they show a consistent approach to strategy development, for example, by a
tendency towards differentiation, or product development
Discovering the answers to questions of this kind assist a company to understand the strategies,
which their competitors currently pursue, and how they are likely to deal with them in the future.
How may competitors analysis be used?
By discovering the strengths and weaknesses of its competitors a company can compare these to its
own strengths and weaknesses, enabling them to make a relative assessment. Based on such an
assessment they can develop strategies in order to achieve a competitive advantage.
An important point to make here is that the comparison of strength and weaknesses between a
company and its competitors yields a relative assessment. For example, a company’s particular
strength may be the ability to be very cost-effective in terms of production. However, in order to be
an advantage in the marketplace, it must be better than its competitors, i.e., it is no use being good at
something if your competitors are even better.
Having carried out the strengths and weakness comparison with competitors the results can be used to
decide future strategy in order to achieve company objective. Analysis of the competitive industry
structure provides information on which strategic decisions can be made suitable markets and
customer groups for targeting. This then contributes to the company finding a suitable position to
take up vis-à-vis its competitors. Competitor analysis helps to identify those strategies which are
likely to result in achieving a superior competitive performance. It also enables a company to
consider its relative performance over time in an objective rather than subjective way.
The foregoing has shown how important competitor analysis is to a company in terms of its strategic
planning.
Systematic procedures for comparing the relative strengths and weaknesses of the competition can
produce a vital input to a company’s strategic planning.
Competitor-based Strategies
There is a large number of factors, both external and internal, which can have an influence on
strategy formulation.
These include the following:
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External factors
 The nature of the competition and the products which are available in the marketplace
 Political, economic, social and technological pressures
 What it is that buyers need
 The environment in which the organization operates, whether it is stable or turbulent
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Internal factors
 Corporate objectives
 The size and power of the organization
 The resources available
 The way the organization is operated, i.e., its procedures and practices
 Stakeholders’ expectations
 The organization’s position in the marketplace
 Whether the organization is a leader or follower
 Whether the management is aggressive or not
Any aspect of the internal or external environment can have an influence on the organization’s
strategy.
An organization can be classified as any one of the following:
A leader – one which is innovative in nature and is regularly the first to bring new products into the
marketplace.
This type of company is likely to be a powerful one with a large share in the market and having high
resources. It will gain a competitive advantage from being first into the market as, for example, was
Thermos with the first vacuum flask, but has to invest heavily in product development and has to
accept a subsequent high level of risk.
Leaders have to have the necessary strategies to:
 Protect their current market share;
 Encourage existing customers to increase their demand;
 Attract and retain new customers;
 Update the product design/service for its customers;
 Introduce new products to new markets
In order to carry out these strategies, the company needs to adapt a policy of:
 Innovation – by always being ahead of its competitors
 Fortification – by pursuing activities which are aimed at keeping the competition down;
 Confrontation – by using such tactics as price wars in order to reduce competitors’ profits, and by
aggressive promotional campaigns to increase sales;
 Harassment – through maintaining a high level of pressure on distributors and criticizing the
competition.
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A follower – one, which tends to copy what leaders do. These companies do no invest heavily in
research and development themselves but try to take advantage of the work done by others. They will
never get the initial major market share but they do not spend money on development, nor in creating
an awareness of a new product, as the leaders will already have done this. They can take advantage of
any errors, which leaders may make.
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For example, if technical problems is found in new product followers may be able to put this right
before launching their own version. Or they may be able to take advantage of a leader creating a
greater demand for their new product than they can themselves satisfy, leaving scope for a following
full the gap.
In either of these situations it is possible for followers to find buyers turning from the leader’s
product to their own, with the leader losing its market share.
Followers can amend a leader’s product by changing its price, quality, etc, and since amendment is
cheaper than development, will enjoy lower costs.
Because they do not create original ideas but cling to the tails of leaders, followers are often referred
to as “me-too” marketers.
A challenger – one which, as with followers, tries to overtake the market leaders. The methods
adopted by the companies include price-cutting incentives offered to distributors, improved levels of
service to customers, sharing costs with others, etc. currently, much of the competition between
supermarkets is based on who can provide the most reliable service of home delivery based on
ordering via the internet.
A niche marketer – an organization which offers some kind of specialized product or service, often
referred to as a ‘unique service proposition’.
Market leaders do not usually bother too much about niche marketers, since they are likely to be
catering from only a small market segment. Despite this low market share, niche markets can be very
profitable to those who operate in them.
Over time, of course, both the circumstances of an organization and the environment in which it is
operating change, so the stance adopted by the organization will also change. This may lead to a
given organization attacking a market leader or defending itself against a predicating follower. These
changes may be based upon organization looking for extra growth or profits, or even trying to
survive. They may also be due to change of top management, leading to a change in the
organization’s culture.
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Techniques For Conducting an Internal Appraisal
Value chain analysis
A value chain may be defined as:
An organization’s co-ordinate set of activities to satisfy customer needs, starting with relationships
with supplier and procurement, through production, selling and marketing, and delivery to the
customer. Each stage of the chain is linked with the next stage and looks forward to the customer’s
needs and backwards from the customer as well. Each link in the value chain must seek competitive
advantage, either by being cheaper than the corresponding link in competitor’s chains, or by means of
added value through superior quality or differentiated features.
The value chain concept was developed by Michael Porter with particular reference to working teams
functioning as service units. He uses the term ‘value activities’ to describe the different identifiable
activities of which any business is a collection, e.g., marketing, production, etc.
He suggests it is at this level that the unit achieves a competitive advantage, rather than at company
level.
Porter classified these activities as being either primary ro secondary.
Primary activities are:
 In bound logistics – receiving, storing and distributing inputs
 Operators – which turn these inputs into the final product or services
 Outbound logistics – storage and distribution to consumers;
 Marketing and sales – which make consumers aware of the products or services available;
 Service – installation and after-sales servicing
Secondary activities provide the infrastructure which enables the primary activities to take place and
are:
 Infrastructure – systems vital to the organization’s strategic capability, which usually support the
whole chain, e.g., planning, finance, quality, management;
 Human resources management – recruitment, training, development, etc
 Procurement – acquisition of the necessary resource inputs to the primary activities
Value chain relationships consist of:
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i. The company’s ability to transfer skills and/or expertise between similar chains; and
ii. The ability of different units to share activities
In (i) the skills considered must be of advanced level to assist the company to develop a competitive
edge. For example, the expertise of an advertising executive, who could use the skills of marketing
developed in one section of a company to improve sales in another section.
In (ii) units might share a common distribution system in order to take advantage of lower fuel costs
by producing economies of scale, or of reducing capital investment by sharing warehouse storage
facilities.
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Steps in the process are value enhanced:
1.if the organization can procure the right resources at the right price at the right time
2.by total quality management and continuous quality improvement techniques
3.by the proper transportation and distribution of goods and services
4.when customers are informed of goods and/or services which are available and when they are
assisted to make wise choices in their purchases
5.when high quality after-sales service is provided
The value chain of the organization links to:
The value chains of its suppliers, who will have value chains of their own;
The value chains of its customers, when customer choice is assisted by customer education, e.g.
Leaflets, informative labeling, helpful store layout, etc. for example, B and Q, the do-it-yourself
store, provide information leaflets within their stores which show customers how to carry out
activities such as wall tiling, etc. and many garden centres supply information leaflets on the care of
plants.
In these ways any given organization is part of the wider value system which creates a product or a
service.
Using the nine activities identified by Porter, a strategic planner can analyze each in turn in order to
discover which of them gives rise to actual or potential customer value, and where the company is
strategically distinct from its competitors. Thus it can be established where a competitive advantage
can be achieved.
For example, in the primary activity of service to customers, Dell computers set out to provide a
faster, more efficient technical service to their users than their competitors could provide and this
yielded them a competitive advantage, particularly in the business rather than the personal computer
segment. The advantage arose despite the price of their packages being greater than that of
competitors, because they identified that more important consideration for a company user was that
their system was very rapidly put right again if it went down.
The company had used the idea of value chain analysis by examining its own key strengths and
weaknesses and comparing them to customers needs and to their competitors’ resource profiles in
order to develop a competitive advantage.
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This example, is a simple one as it illustrates only one aspect of the complex analysis of the value
chain.
In practice, competitive advantage is often derived from the links between activities in the chain,
since these are more difficult for competitors to copy.
In addition, the analysis should go beyond the value chain of the company itself and consider the
value chains of both suppliers to the company and to its distributors.
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Also, the needs and expectations of customers have to be taken into account, since a competitive
advantage is only to be gained if it meets these. For example, if a company can only offer through its
value chain activities a better quality product which its customers do not particularly want, and at a
higher price which they are not prepared to pay, then it will not create a competitive advantage. Value
chain analysis provides a valuable means of carrying out a resource audit for a company through a
systematic analysis of its value activities with a view to create a competitive advantage over its
competitors.
Portfolio Analysis
Investors try to maintain a balanced portfolio so that if one company or sector is doing badly others
can offset it, which are doing well at the same time.
Similarly, companies try to achieve a balanced portfolio in which the activities of the company are
complementary, rather than trying to pursue a single product or a single market.
One of the first methods for classifying business units in terms of market growth rate compared with
market share was proposed by the Boston Consulting Group.
The BCG growth-share matrix has developed into one that allows a comparison to be made on a
relative market share basis.
The model must thus be used with care. However, it is computer-friendly and can be dynamic. It
provides the basis for more sophisticated techniques of portfolio analysis and is a comfortable route
into modern techniques.
Using the BCG model enables planners to classify their products/strategic units into four categories
according to their position on the matrix.
This matrix may be used as a guide to product strategy. The names are:
 Stars, where high market share but high market growth forces the supplier to reinvest profits into
promotion to maintain market share. These are often products in the growth stage of the life cycle
and are not particularly profitable.
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 Cash cows, where high market share and low market growth minimizes promotional expenditure.
They are often products in the maturity, saturation or decline stage of the life cycle. High market
share guarantees good profitability.
 Question marks, where low market share but high market growth forces the supplier to invest
heavily in promotion without earning enough profit from sales to cover expenditure. They are
often products in the growth stage of the life cycle but the low market share makes them highly
unprofitable.
 Dogs may be products that have failed to establish themselves in a matures, saturated or declining
market, in which case they are likely to be unprofitable. Alternatively, they may be products,
which have established a particular niche in the market. Such products can command a premium
price and can be highly profitable. An example would be Morgan sports cars, which have a low
market share of the total car market but earn a very satisfactory profit.
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The Boston group suggested that investment should principally be channeled into stars and those,
which could be promoted to star status. Investment in cash cows should be at the level necessary to
maintain market share. The profitability of dogs should be carefully monitored and the organization
should withdraw from unprofitable dogs. It should also withdraw from question marks, which are
without star potential.
The company has only one cash cow so it is vulnerable. A loss in market share could mean trouble,
even more so if there is no star to come in and take its place. In this situation the company would
have to pump in finance to support its cash cow, instead of supporting other categories. If it supported
other categories instead of its cash cow, this would eventually become a dog.
The company has three question marks. Planners may decide to concentrate all its efforts on one of
them in order to make it successful, and leave the others just ticking along until they have secured the
position of the most favorable. The product which is producing a greater proportion or revenue may
be chosen for extra effort as it obviously has a good earning potential.
The company also has two dogs. Given that they consume cash, they are often dropped by companies
but it is not always wise to do so immediately as they may still be making money. The competition
must be considered, as well as the effect on customers. Dropping a product form a range can upset
buyers who then look for one suppliers.
If you have developed a preference for a particular food product, say a salad dressing, originally
stocked by your usual supermarket, and they cease to stock it for some reason, you look to other
stores instead. Having found your dressing in a rival supermarket, the chances are you will buy other
things there as well, and might even transfer all your food shopping to the new store.
Growth-gain Matrix
In order to measure how well each strategic business unit is keeping pace with market growth, market
growth rate can be plotted against product growth rate and used, together with the growth-share
matrix. This matrix shown, shows share losers as those, which appear above the diagonal broken line,
and share gainers below the line.
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Figure 33
Maximum
sustainable
growth rate
Market growth
rate
Product growth rate
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In this matrix the maximum sustainable growth rate is plotted as a solid vertical line and the weighted
average growth rate of the products within the portfolio cannot be greater than this maximum.
Where the weighted average growth rate, sometimes referred to as the ‘centre of gravity’, lies to the
left of the line, there is scope for further growth. The significance fo this is that it shows that changes
of strategy may be necessary in order that resources are directed to this area so that this potential
growth is realized.
Multifactor portfolio Matrix
Because they were aware of the limitations of the BCG matrix, general electric and McKinsey
combined together to develop a more sophisticated model called the multifactor matrix.
This uses nine cells and makes a serious attempt at quantifying the situation.
Criteria that may be used to establish market attractiveness and competitive position are unique to
each organization and they must be established with considerable care over a period of time. A
weighting figure is assigned to each factor and the total weighted score determines the position on the
matrix.
The following criteria are used:
 To measure market attractiveness
- Market size
- The size of key segments of the market
- Growth rate
- Diversity
- Seasonal demand
- Price sensitivity
- Marketing opportunities
- Competitive structure
- Entry and exit barriers
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-
Technology
Availability of necessary workforce
Environmental issues
Political and legal issues, etc.
 For competitive position
- Market share
- Organization growth rate
- Sales force effectiveness
- Depth of product line
- Distribution
- Financial resources
- Marketing effectiveness
- Price
- Experience curve
- Quality/reliability
- Investments
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Experience Curves
It is often said that, whilst one person may have ten years’ work experience, another may have just
one years’ experience repeated ten times over.
Considerable research has been carried out to determine the effect of experience rather than time in
carrying out manufacturing tasks. The Boston Consulting Group have established that important
relationships exist between the cumulative experience gained by an organization and its unit costs,
which is referred to as the experience curve, i.e., they found that experience is a key source of cost
advantage.
Over a period of time the costs of production will decrease in relation to the number of units
produced as experience increases in terms of processes, material purchasing and so on.
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Cost-Volume-Profit Analysis
In deciding on future courses of action management pays a great deal of attention to the alternatives
that are available. However, in the case of alternatives that involve changes in the level of business
activity with no changes in scale itself it is generally found that profit does not vary in direct
proportion to changes in the level of activity. This is due to the interactions of costs, volume, and
profits.
For short-run decision-making purposes, costs can be classified as fixed, variable, and mixed. In a
marketing context the costs, which are typically fixed in relation to the level of activity, are:
Salaries
Sales administration costs:
Advertising appropriations:
Market research allocations:
Establishment costs of premises.
Many costs depend very much on the level of activity and are often computed on a per unit basis.
Such variable costs include:
Commissions which may vary with sales revenue
Delivery costs which may vary weight shipped;
After-sales service costs which may vary with units sold;
Cost of credit which may vary with debtors’ balances;
Order processing/invoicing costs which may vary with number of orders received.
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Mixed costs are those that are neither constant over a period nor directly variable on a per unit basis.
An example could be the cost of additional sales staff: outlets, but a rise in business of, say, 10 per
cent that involves new outlets will probably require additional sales staff.
Figure 34:The patterns that emerge are shown below:
Advertising
Appropriation £
Level of activity (scale revenue)
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(a) Fixed costs Level of activity (sales revenue)
(b) Variable costs
Level of activity (scale revenue)
© Mixed costs
Sales revenue is an increasing function of the level of activity and therefore has the behavioural
characteristics of the variable cost curve. Profit is a residual that depends on the interaction of sales
volume, selling prices and costs. The non-uniform response of certain costs to changes in the level of
activity can have a serious impact on profit in companies having a high proportion of fixed costs with
the result that a seemingly insignificant decline in sales volume from the expected level may be
accompanied by a major drop in expected profit.
On account of the difficulties involved in many industries in accurately predicting the volume of
business that may be expected during a forthcoming planning period it is a wise policy to consider the
cost-volume-profit picture for each likely level of activity. This can be done by means of a
profitgraph that illustrates the profit emerging from different cost/revenue combinations.
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Figure 35
Total revenue curve
Break-even point
Total costs and total
Revenue (£)
Total cost curve
Profit area
Loss area
Volume (units)
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The simple profitgraph in the figure above is compiled by combining the cost and revenue curves.
The total revenue curve is simply the expected unit sales multiplied by price for each level of activity,
whereas the total cost curve is made up by splitting fixed cost curve on to the variable cost curve as
shown in the figure below:
It is characteristic of this modeling technique that significant simplifying assumptions underlie its
application. For example:
It is assumed that fixed costs are constant and that variable costs vary at a constant rate;
It is assumed that all costs can be broken into either fixed or variable categories;
It is assumed that only one selling price applies.
Figure 36:Total cost curve
Total cost curve
Costs (£)
Variable cost curve
Fixed
costs
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0
Volume (units)
Any of these assumptions underlying cost-volume-profit analysis can be modified in order in order to
produce a more realistic model that is better suited to specific circumstances.
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Figure 37:Profit-volume chart
Profit curve
Profit (£)
Break-even point
0
sales revenue (£)
Fixed costs are shown at the intersection with the vertical axis
Loss (£)
The reason why the total cost curve of the figures above does not pass through the origin is the same
as the reason why the profit curve of the profit-volume chart cuts the vertical axis below the point of
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zero profit: even when there are no sales the fixed costs must still be paid, and consequently the area
below the break-even sales volume represents one of loss, being at its greatest at zero sales.
When constructed, the profitgraph represents in essence a wide range of profit statements for various
levels of activity. As such, it can be used as a benchmark for judging the adequacy of actual
performance, or it can be used in the planning phase to portray alternative courses of action. The
graphical analysis described above is a simple means of illustrating cost-volume-profit
interrelationships, but the managerial applications can also be facilitated by algebraic analysis.
The basic equation is simple once mixed costs have been split into their fixed and variable elements
and shown as such:
Sales revenue = variable costs + fixed costs + profit.
The break-even (BE) equation is even simpler since at the break-even point there is no profit:
BE sales revenue = variable costs + fixed costs
In physical volume terms the break-even point can be calculated as follows:
BE volume =
fixed costs
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(Sales revenue – variable costs) / (units sold)
Thus if a firm has fixed costs of £10,000 variable costs of £15,000 and 5000 units for £30,000 the
break-even volume is:
10000
= 3333 units
(30,000 – 15,000)/5000
In monetary terms the break-even volume can be derived by applying the formula:
Fixed costs fixed costs
=
1 – (15000/30,000) contribution margin ratio
Using the data referred to above the break-even volume is equal to:
10000 10 000
=
= £20,000
1 – (15000/30000)
0.5
The proof is simple: unit price is £6.00 and the unit variable cost is £3.00. The unit contribution
towards fixed costs and profit is therefore £6.00-£3.00 and sufficient units must be sold to cover the
fixed costs of £10,000. The solution is thus 3333 units, and at a unit price of £6.00 the break-even
revenue is £20,000.
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Reference was made in the above example to the contribution margin ratio. This is an important
concept that expresses the percentage of a volume change that is composed of variable costs. In the
example the revenue from an additional sale is £6.00 and the additional variable cost is £3.00. the
contribution margin ratio is therefore 1 – 3/6 = 0.5 or 50 per cent. In other words, half the revenue
from a change in volume is sufficient to cover the variable costs and the other half contributes to
fixed costs and profits.
Table18: profit-volume variations
Sales
Variable costs
Fixed costs
Total costs
profits
Original volume
£
30,000
15,000
10,000
25,000
5,000
Increase in volume
£
+10,000
+5,000
unchanged
+5,000
+5000
Decrease in volume
£
-10,000
-5,000
Unchanged
-5,000
-5000
The application of this ratio is based on the assumption that other factors remain constant and it
should be evident that this is a somewhat unrealistic assumption.
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Nevertheless, to continue the above example, if a change in sales of £10,000 takes place the change
in profits will be shown on the table above.
The table above shows that with a contribution margin ratio of 50 per cent the profit variation for an
upward move is the same as that for a downward move, with the former being positive and the latter
negative, and with both being equal to one half of the change in sales revenue.
A further equation can be devised to measure the excess of actual sales over the break-even volume.
This is known as the margin of safety and is given by the equation:
(Actual sales – sales at break-even point)/actual sales
Again taking data from the earlier example, in monetary terms the margin of safety is:
(£30,000 - £20,000)/£30,000 = 1/3 or 33 1/3%
in physical terms it is:
(5,000 – 3,333)/5,00 = 1/3 or 33 1/3%
This ratio means that sales can fall by one-third before operations cease being profitable – assuming
that the other relationships are accurately measured and remain constant.
The combination of cost-volume-profit analysis with budgeting enables alternative budget figures to
serve as the basis for profitgraphs. If a particular budget is shown to be unsatisfactory then the
parameters can be recast until a more suitable budget results. It is not surprising that cost-volumeprofit analysis has been compared to flexible budgeting in being able to show what the cost and profit
picture should be at different levels of sales, but flexible budgets are essentially concerned with cost
control whereas cost-volume-profit analysis is more concerned with the predictions of profit.
As with other techniques, cost-volume-profit analysis has its strengths and weaknesses. In its favour
is its value as a background information device for important decisions – such as selecting
distribution channels, make or buy, and pricing decisions. In this role it offers an overall view of
costs and sales in relation to profit requirements.
If simplicity is a virtue, then cost-volume-profit analysis has this virtue since it is easily understood.
However, this very simplicity points the way to the weaknesses and limitations of cost-volume-profit
analysis. As suggested earlier in this section, the major weakness is in the the underlying
assumptions: profit varies not only in relation to changes in volume, but also with changes in
production unable to allow for these possibilities, and at best indicates the profit that may be expected
under a single set of assumed conditions regarding external factors as well as managerial policies.
Thus it is a static representation of the situation it purports to illustrate: a different set of
circumstances would obviously result in a different series of cost-volume-profit relationships.
Furthermore, cost-volume-profit analysis can only accommodate objectives that relate to profits,
costs and sales levels/revenues, and it tends to treat costs, volume, and profit as if they were
independent of each other.
These limitations do not outweigh the value of cost-volume-profit analysis provided that the user is
aware of the assumptions and limitations.
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It is necessary of course, to supplement the assistance given by any technique with managerial
judgement, and cost-volume-profit analysis is no exception to this principle.
The roles of budgeting and cost-volume-profit analysis are illustrated below in another example.
ABC Ltd
This is a single-product company with a profit objective that is expressed as 10 per cent of net sales
revenue.
For the next planning period the total market potential is estimated to be 500 units. The table below
indicates the costs and profit outlook at each level of sales that ABC Ltd can expect to achieve.
Table 19: manufacturing costs and revenues
Forecast percentage share of market
Unit sales
Average net price per unit
Forecast net sales revenue
Variable manufacturing costs at
£300 per unit
Contribution
Fixed manufacturing costs
Gross profit
10%
50
£1,500
£75,000
£15,000
12%
60
£1,500
£90,000
£18,000
14%
70
£1,450
£101,500
£21,000
16%
80
£1,400
£112,000
£24,000
£60,000
£20,000
£40,000
£72,000
£20,000
£52,000
£80,500
£20,000
£60,500
£88,000
£20,000
£68,000
The behavior of marketing costs is shown on the table two tables below for fixed and variable costs
respectively.
The unit costs can be extended to show the variable marketing costs of each anticipated sales level:
Market share 10%
Variable marketing cost
Table 20: fixed costs
£
Fixed costs
Sales force
Sales administration
Advertising appropriation
Establishment costs
Marketing research costs
Office services
Totals
12%
£5,000
14%
£6,000
10%
£6,000
£10,000
£5,000
£10,000
£2,000
£3,000
£36,000
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£7,000
12%
£6,000
£10,000
£5,500
£10,000
£2,000
£3,100
£36,600
£8,000
14%
£9,000
£12,000
£8,000
£12,000
£2,000
£3,200
£46,200
16%
£9,000
£12,000
£12,000
£12,000
£2,000
£3,300
£50,300
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Table 21: variable cost per unit
Delivery
Order processing/invoicing
Commission
Average cost of credit
After-sales service
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£10
£2
£10
£30
£48
£100
Table 22: net profits
Net profit statement
Gross margin
Marketing costs
Net profit (loss)
Net profit as percentage
sales revenue
10%
£40,000
£41,000
£(1,000)
-1.33%
12%
£52,000
£42,600
£9,400
10.44%
14%
£60,500
£53,200
£7,300
7.19%
16%
£68,000
£58,300
£9,700
8.6%
The profit objective of 10 per cent of net sales revenue is only achieved if ABC Ltd secures a 12 per
cent market share, but control effort must be rigorously applied because the margin for error is very
small.
For the selected course of action, the total cost make-up is:
Variable manufacturing costs
Variable marketing costs
Fixed manufacturing costs
Fixed marketing costs
£18,000
£6,000
£24,000
£20,000
£36,600
Total costs
£56,600
£80, 600
The break-even point is computed by applying the formula given earlier in this section:
£56,000
= 51 units
(£90.000 - £24,000)/60
This gives a margin of safety of only 15 per cent calculated thus:
(60 – 51)/60 = 15%]
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A clear and concise summary is given in this way of one particular course of action that provides a
standard for management purposes. Separate charts, and analyses can easily be drawn up for other
alternative courses of action prior to making a choice.
Cost – volume analysis can be used to aid the decision maker faced with such choices as:
Leasing or buying premises;
Leasing or owning vehicles;
Using agents or setting up branch offices;
In the case of warehousing the figure below summarizes the situation, showing the storage space at
which ownership costs are identical with leasing charges (B). at greater volume requirements
ownership is cheaper, and at lesser volumes leasing is to be preferred.,
Figure 38: break-even chart for warehousing
Total cost of leasing
Costs (£)
Total cost of ownership
Fixed cost of ownership
Leasing more profitable
B
Owning more profitable
Product Line
The product mix is a major part of the overall marketing plan, and the relationship between the mix
and the level of profit can be seen to be one of the basic areas against which alternatives can be
reviewed in developing the marketing plan. Not only does it involve the consideration fo the roles of
single products and product groups but it also involves considerations of the related effects of
decisions bearing on, for example, the choice and emphasis of alternative sales areas.
However, very few companies appear to be aware of the actual gross profit contributions of either
individual products or product groups.
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Furthermore, large variations would probably be found in gross contributions in most cases, and this
could suggest different courses of marketing action if only the gross contributions in most cases, and
this could suggest different courses of marketing action if only the gross margins were properly
computed.
When management adopts direct product costing and distribution cost analysis it can compute the
gross contribution of each item in the product range so that the tactical significance of the mix in
relation to profit objectives becomes apparent. This can reveal cases of under-recovery of direct costs
that could possibly be corrected by modifications in price or cost reduction if it is decided that the
product should be retained to fill out the product line.
Direct costing requires the separation of fixed and variable costs, with the latter being treated as
‘period costs’. An example should make the picture clear. LMN Ltd markets four products, the most
recent financial data for which are shown in the table below. For each £1 of sales of the existing
product mix, therefore, 24.8p is profit contribution. If the fixed costs of LMN Ltd amount to £50,000
and total sales are £250,000, then profit is equal to:
(Sales X 24.8/100) – fixed costs
P = £62,000 - £50,000 = £12,000
Table 23
Product
Selling
(SP)
A
B
C
D
£5
£6
£8
£10
price Variable cost %
(VC)
Contribution
(SP-VC)/SP X
100
£4
20%
£5
16.6%
£6
25%
£7
30%
% of
sales
10%
20%
30%
40%
100%
total Contribution
as % of total
sales
2.0%
3.3%
7.5%
12.0%
24.8%
If it is decided to vary this mix it will be necessary to forecast the costs and sales for the modified
mix. For instance, product E may be launched to replace product B, having the following
characteristics:
Selling price per unit £7
Variable cost per unit £5.6
Percentage contribution
£20%
Increase in fixed costs £1,000
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Table 24:The effects on the product mix are, for a new total sales level of £275,000:
Product
A
C
D
E
Former % of sales
10%
30%
40%
-
Forecast % of sales
25%
30%
30%
15%
100%
The total contribution picture then becomes:
A:
C:
D:
E:
20 X 25/100 = 5%
25 X 30/100 = 7.5%
30 X 30/100 = 9%
20 X 15/100 = 3%
24.5%
P = (275,000 X 24.5/100) – (50,000 + 1,000)
P = £67,375 - £51,000 = £16,375
The profit improvement is thus £4,357 on additional sales of £25,000 and this gives ROS of 17.6 per
cent.
Future planning and control are both aided by studying the progress of each product over its life cycle
since no product can hold its market position indefinitely in the face of changing conditions. Rates of
technological change, market acceptance, and ease of competitive entry will collectively determine
the lifespan of the product. However, it may be possible to extend the lifespan by either modifying
the product, changing its image to appeal to new market segments, or finding new uses for it.
Generally it will be necessary to adapt the marketing effort in each phase, and the ideal situation is
one in which new products are introduced at such a rate that optimum profits can be maintained by
some products reaching maturity at the time that others are beginning to decline, and so on.
The product in question is deleted at the time when it ceases to be profitable, even though it is still
generating sales revenue. But any deletion decision should be preceded by serious consideration fo
the areas n which it may be possible to improve the product’s performance. In particular, areas to
consider are selling methods, channels, the advertising message, promotions, the brand image, the
pack, the quality and design of the product, and the adequacy of the service offered.
Under no circumstances should a declining product be allowed to continue in decline without
evaluation because it may be consuming resources that could more fruitfully be employed elsewhere.
A declining product will rend to take up a disproportionate amount of management time; may require
frequent price adjustments; will involve short – hence expensive – production runs; and may damage
the company’s image. Pareto’s law will often apply in that 80 per cent of sales will come from 20 per
cent of products and the weakest 20 per cent of products may absorb 80 per cent of management’s
attention.
Reviewing the product line should not be a rare action but should rather be undertaken in a regular
and planned manner.
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For example, all products could be reviewed every three months and any that are less profitable than,
say, the average for the range should be the subject of revised plans to improve their performance.
SRD Example
Heskett gives the example of a marketing proposal from the safety Razor Division of the Gillette
Company for a line of blank audiocassettes. The market penetration of the SRDs razors and blades
was such that no further increase was likely, thus growth would have to come via diversification.
Estimates of the size and rate of growth of the market for blank audiocassettes made it particularly
attractive.
In the USA the most popular tape was the 60-minute one, available as follows:
Type
Budget quality
Standard quality
Professional quality
Price
$1.00
$1.75-$2.00
$2.98
Competition was fierce and price-oriented some 50 per cent of tape sales were of budget quality,
typically unbranded, with well-known companies supplying standard and professional quality tapes
under such brand names as Sony, 3M, Memorex.
If SRD used 10 per cent of its existing sales force’s effort to sell cassettes via existing outlets with ht
e50 per cent discount off retail price that was customary for cassettes, and if an advertising budget for
Year 1 was set at $2 million, and if unit costs were as follows:
And if the fixed annual costs of an assembly plant with capacity to handle 1 million cassettes per
month were $500,000, there is the basis for an economic appraisal of alternative marketing
programmes.
Cassettes case (bought out)
Standard quality tape (60 minutes)
Professional quality tape (60 minutes)
Assembly labours
$0.159
$0.214
$0.322
$0.200
The table below shows an outline programme offering standard quality cassettes at a price that is a
little higher than that applicable to budget cassettes. The break-even volume is almost 40 million
units per annum, which is greatly in excess of the capacity of the assembly plant. It also represents 85
per cent of the total retail market of budget-priced cassettes. On grounds of feasibility this does not
appear to be a viable proposition.
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Table 25
Item
Price to final consumer
Price to retailer or wholesaler
Variable costs per tape
Cassette case
Standard quality tape
Assembly labour
Total
Contribution
Fixed costs per annum
Assembly plant
Sales force costs (10%)
Advertising
Total
Break-even sales volume
Computation
$1.30 per tape
$0.650
$0.159
$0.214
$0.200
$0.573
$0.077
$500,000
$550,000
$2,000,000
$3,050,000
$3,050,000
$0.077
=39,600,000
tapes
39,600,000 X $1.30 = $51.5 million retail value
Alternative marketing programmes to allow SRD to enter the cassettes market might entail:
Raising list price
Reducing trade margins
Using a small sales team and only selling via wholesalers
Reducing the proposed advertising budget
Investing in manufacturing facilities.
These alternatives might be considered individually or interactively and there would be knock-on
effects for other elements of the marking mix also.
Significant effort would need to be applied to define the market, its segments, growth rates, etc., in
order to determine the viability of alternative marketing programmes. Relevant factors would include:
The quality of forecasts;
The rate at which market conditions favourable to entry might change;
Alternatives to blank cassette tapes as vehicles for SRD’s growth;
Assumed buyer behaviour patterns within the cassette market;
Assumptions about other elements of the marketing mix.
Three alternative marketing programmes have been developed by SRD. The steps through which they
were developed are shown in the figure below.
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These alternatives are the marketing of budget cassettes, the marketing of standard cassettes at a low
price, and the marketing of professional cassettes. Only the last two would use the Gillette brand
name, although all three would have to generate an equivalent profit to Gillette’s overall level.
Figure 39: A conceptual scheme for the economic appraisal of a marketing programme
Determination of:
1. Product characteristics
2. Nature of marketing program
No go
Calculation of:
1. Margin to channel members
2. Price to manufacturer
3. Variable costs (possibly including profit element)
4. Contribution per unit
5. Total fixed costs
6. Sales needed to achieve target profit point
7. Size and trend of relevant market
8. Share of relevant market needed to achieve targeted sales level
Appraisal of:
1. Likelihood of success, including potential for competitive response,
channel and market acceptance of strategy
2. Risk
3. Rewards
Go
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5: How can we Ensure Arrival?
The concepts of strategic architecture and control
When considering how best to implement a chosen strategy there are a number of factors which have
to be taken into account which are concerned with the design and structure of the organization. We
have already seen that the environment in which the organization exists has a major influence both on
what it can do, and how it can do it. How stable the environment is will have an effect on strategic
implementation. In turbulent times Drucker has said, although by definition there is irregular, erratic
convert the threat of change into opportunities for productive and profitable action, and these are the
appropriate, and so we need to take account of the state of the environment when implementing a
chosen strategic option.
The diversity of an organization is also relevant to strategy implementation. There are big differences
between, for example, the needs of a large multinational corporation and those of a small local
business.
The extent to which modern technology is employed is also an important factor. Decisions about
exporting products will be different for a local pottery to make, than for a mass production company.
Accountability of the management of an organization also plays a part in the strategic design.
Whether they are acceptable to shareholder or to rate or taxpayers will influence how the structure is
designed.
Strategic control aims to be a balanced between strategic planning and financial control. In the
decentralization of power from the ‘head office’ type of control to its investment in the SBUs of an
organization. Complete independence is rarely obtained. The changes, which occur usually, move
away from tight control at the centre towards strategic control, where the centre acts as a shaper of
strategy.
The Importance of Organizational Design and Structure Implementation
When considering this relationship the work of Goold and Campbell is very relevant.
They studied the styles of relationship between the centre of an organization and its SBUs and placed
them in the following categories:
 Strategic planning
 Financial control
 Strategic control
By looking at the planning influence and the control influence of the centre and the SBUs, they came
up the following:
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Planning influence is related to the centre’s efforts to shape strategies as they emerge and
before decision are taken
Control influence refers to the way in which the centre reacts to the results achieved.
Strategic planning style
This is when the centre acts as master planner, accepting inputs form SBUs but setting the broad
strategy. SBUs are regarded by the centre as just providing operational delivery of the master plan. It
arises due to a lack of confidence in SBUs managers and results in control and co-ordination by the
centre being at a high level. It provides good integration across SBUs, which is useful if resources are
shared, and, by allowing the use of unskilled labour, it reduces costs.
This is a bureaucratic design, which, since decisions are taken at top management levels, does not
rely on short-tem views.
Problems with this system can arise due to:
 Slow communications
 Resistance by SBU managers, who see their role as entirely tactical and can spend a lot of time
‘nit-picking
 Fewer low-risk strategies than if the strategy came from the SBU operating managers
 Resistance to the closing-down of poorly performing units.
This type of arrangement tends to lead to concentration in a few core areas where it is possible to
have a degree of expertise.
Goold and Campbell gave BOC, Cadbury and Lex as examples of this type.
Financial Control Style
This is the extreme opposite of strategic planning. In this case the centre acts as a shareholder or
banker for the SBUs. The SBU managers lead the strategy within a budgetary control framework.
The centre
 Sets financial targets
 Appraises divisions’ performance
 Appraises capital bids from divisions
Low-risk strategies are pursued, but profitability ratios are higher.
SBUs are able to diversify by deciding on entry to new markets or in developing new products. They
may even be allowed to use funding from outside the parent group so as to support new
developments. Growth is mainly via acquisitions rather than by internal development.
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Companies of this type appear to be:
 Quicker to replace managers
 Fiercer in applying pressure via monitoring
 Better at recognizing and rewarding good performance as compared with those who adopt the styles
of strategic planning or strategic control.
Goold and Campbell quote BTR, Hanson Trust and Tarmac as examples.
Strategic Control Style
As we saw earlier, this style aims to be a balance between the other two styles. Where the strategic
control style operates the centre’s control is concerned with:
 The organization’s overall strategy
 The balance of activities and the role of each division
 The organization’s policies on such matters as employment, etc.
The formulation of strategy begins with the SBUs but requires be testing and agreeing by corporate
management, i.e., it is a bottom-up process within central guidelines.
Power lies where there is the expertise.
Budgets and decisions cannot be over-controlled by the centre as this would produce delays and
confusion, but it remains responsible for assessing the performance of divisions against their own
business plans. Within which the annual budget has an important role.
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Relationship between the centre and its divisions, as suggested by Goold and Campbell are shown in
the table below:
Table 26
Strategic planning
Financial control
Strategic control
Description – key
Centre acts as
Centre act as
Centre acts as ‘strategic
features
‘masterplanner’
‘shareholder/banker
shaper’
Advantages
Top-down
Bottom-up
Highly prescribed
Financial targets
Detailed controls
Co-ordination
Control of investment
Responsiveness
Bottom-up
Strategic and financial
targets
Less detailed controls
Centre/divisions
complementary
Ability to co-ordinate
Potential problems
Examples
Centre our of touch
Loss of direction
Divisions tactical
Centre does not add
value
BOC
Cadbury
Lex
STC
Public sector pre-1990s
BTR
Hanson
Tarmac
Motivation
Too much bargaining
Culture change needed
New bureaucracies
ICI
Courtaulds
Public sector post1990s
Strategic control demands that the organization has a clear understanding of how responsibility for
strategy is divided between the centre and the divisions.
The centre has responsibility for:
 Defining key policies
 Allocating resources to divisions
 Assessing the performance of divisions
All other activities may be developed to the divisions themselves.
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Planning and control
Having selected the CSFs, there is no particular collection of controls available to all managers
because of the wide range of products and services offered by different organizations, and the number
of policies and plans.
There is, however, a large number of standards which can be used to measure certain types of
performance.
For example
 The contents of a product and its dimensions can be written down and used to control its quality.
The rate of production can be quantified as number of products per day, shift, etc.
 Costs can be measured in terms of components per unit
 Business income can be recorded as profit
 Financial stability can be checked via cash available, working capital, and depreciation etc.
The ability to select critical control points is an important part of management, since sound control
depends upon them.
Good managers know, however, that could is an integral part of the planning process, which is not an
exact science, but that reviewing actual outcomes against anticipated ones will help to improve
performance.
There are three basic elements associated with the control process.
 Setting the objectives or specific standards
 Evaluating performance and measuring actual progress
 Providing feedback for management to enable them to take corrective decisions and modify
plans.
For the planning process to work effectively, there must be a willingness to change plans if
necessary. Flexibility is essential, as also is a communication system which allows progress,
developments or changes to be highlighted to management within the timeframe when effective
action can be taken.
Control needs to take place at the three levels of planning:
Corporate
Marketing
Tactical/product
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Managers need to be clear about how they will evaluate the effectiveness of their plans, so that where
necessary feedback systems can be developed, and resources can be switched in order to achieved
new objectives.
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Control Mechanisms
Most control systems are concerned with costs, or quality or safety.
Budgets
Planning is carried out in order to ensure the organization gets the best out of its limited resources.
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.
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
These costs are usually considered under five budget headings:
i. The cash budget – liquidity, opening and closing balances, inflow of cash.
ii. Budgeted profit and loss account – matching income received with costs incurred over a set
period of time
iii. Budgeted balance sheet – which looks at the total assets fo a SBU and its liabilities, such as
repayments of loans
iv. Budgeted funds statement – the sources of funding and how they are linked to corporate
objectives
v. Capital budget – which concerns resource capacity and the budgets for alternative strategic
choices.
The basis on which a budget is set is referred to as ‘appreciation’, and this can be:
 % of past or projected future sales
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 % increase on previous budget
 in order to match the competition
 what is considered to be needed for the task
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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 fo
the product which meets customer’s expectations.
In addition, 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.
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