PLANNING AND CYBERNATIC CONTROLS

“Long Range, Action Planning, and Budgets”

By:

Eka Darmadi Lim 3094802

Gerry Geraldo Y 3094806

Reni Handuweni 3104011

Isa Tridjojo 3105802

Class: Y

University of Surabaya

Faculty of Business and Economics

International Class (IBN & PA)

2012

Figure of “Management Control Package”

There are a number of reasons why studying the MCS package phenomenon is

important. Firstly, MCS do not operate in isolation. While much of the MCS research

considers single themes or practices that are seemingly unconnected from each other

and the context in which they operate, these invariably sit within a broader control

system.

There are five types of controls in the typology; planning, cybernetic, reward and

compensation, administrative and cultural controls.

Planning Controls

Firstly, it sets out the goals of the functional areas of the organization, there by

directing effort and behavior. Secondly, it provides the standards to be achieved in

relation to the goals, and clarifies the level of effort and behavior expected from

organization members.

In relation to planning, there are two broad approaches. The first is action planning, in

which the goals and actions for the immediate future, usually a 12-month period or

less, are established. This has a tactical focus. The second broad approach is long-

range planning, in which the goals and actions for the medium and long run are

established. This has a more strategic focus.

Component inside Planning Controls:

1. Action Planning

2. Long Range Planning

Cybernetic

There are five characteristics of cybernetic control (Green and Welsh, 1988).

First, there are measures that enable quantification of an underlying phenomenon,

activity or system. Second, there are standards of performance or targets to be met.

Third, there is a feedback process that enables comparison of the outcome of the

activities with the standard. This variance analysis arising from the feedback is the

fourth aspect of cybernetic control systems. Fifth is the ability to modify the system’s

behavior or underlying activities

Component Inside Cybernetic:

1. Budgets

2. Financial Measurement

3. Non-Financial Measurement

4. Hybrids

Reward / Compensation

Motivating and increasing the performance of individuals and groups through

attaching rewards to control effort direction, effort duration, and effort intensity.

Administrative

Administrative control systems are those that direct employee behavior through the

organizing of individuals (organization design and structure), the monitoring of

behavior and who employees are made accountable to for their behavior

(governance); and through the process of specifying how tasks or behaviors are to be

performed or not performed (policies and procedures), (Simons, 1987).

Component inside Administrative

1. Organizational design and structure

2. Governance Structures within the firms

3. Procedures and policies

Culture

The values, beliefs and social norms which are established influence employees

behavior. (Birnberg and Snodgrass, 1988; Dent, 1991; Pratt and Beaulieu, 1992).

Cybernetic Controls

Cybernetic control as “a process in which a feedback loop is represented by using

standards of performance, measuring system performance, comparing that

performance to standards, feeding back information about unwanted variances in the

systems, and modifying the system’s comportment”

In organizations a cybernetic system can either be an information system or control

system contingent upon how it is used. A cybernetic system would be an information

and decision-support system if managers themselves detected unwanted variances and

modified their underlying behavior or activity that influenced the variance (for

example in a production process) without anyone else’s involvement.

Four basic Cybernetic systems in M.C.S

1. Budgets

2. Financial Measurement

3. Non-Financial Measurement

4. Hybrid

Budgeting is central to, and the foundation of,MCSin most organizations and its use is

almost universal (Bunce et al.,1995). This is due to its “ability to weave together all

the disparate threads of an organization into a comprehensive plan that serves many

different purposes, particularly performance planning and ex post evaluation of actual

performance vis a vis the plan” (Hansen et al., 2003; p. 96).

Non-financial measures are becoming an increasingly important part of MCS within

contemporary organizations and they may be used to overcome some of the perceived

limitations in financial measures and to identify the drivers of performance. They may

also be the result of using other management initiatives, such as TQM.

Finally, hybrid performance measurement systems contain both financial and non-

financial measures. Hybrid forms of performance measurement have been in use for

some time, with the earlier approaches including such systems of management by

objectives (MBO) (Greenwood, 1981; Kondrasuk, 1981). In more recent times the

BSC, which is a comprehensive MCS with both financial and non-financial

performance measures, has become quite dominant (Ittner and Larcker, 1998; Kaplan

and Norton, 1992, 1996a,b, 2001a,b; Malina and Selto, 2001).

Planning Control

Planning and budgeting system are important element of financial results

control systems. Planning and Budgeting systems essentially produce written plans

that clarify organization’s goals, how to get there (strategies), and what results should

be expected (performance targets).

Planning is decision making in advance or we can say planning is looking

ahead and chalking out future courses of action to be followed.

When an organization setting their plan of the company the managers must be aware

with the conditions of environment which facing their organization and forecast future

conditions so the managers must be good in making decisions. Setting goals and

developing plans helps the organization to move in a focused direction while

operating in an efficient and effective manner.

As we seen on the figure of management control package, planning control is

divided into long-range planning and action planning. Action planning, the goals, and

actions for the immediate future, 12 months period or less, are established. (Tactical

focus).

Strategic planning is an organization's process of defining its strategy, or

direction, and making decisions on allocating its resources to pursue this strategy. Or

establishing a plan to realize a goal or group of goals over a number of years based on

current knowledge about the future. Long range planning is necessary precisely

because it cannot forecast. Once long-range planning has been set it represent the

organization's long-term direction.

Simply put, strategic planning determines where an organization is going over

the next year or more, how it's going to get there and how it'll know if it got there or

not. The focus of a strategic plan is usually on the entire organization, while the focus

of a business plan is usually on a particular product, service or program.

There are a variety of perspectives, models and approaches used in strategic

planning. The way that a strategic plan is developed depends on the nature of the

organization's leadership, culture of the organization, complexity of the organization's

environment, size of the organization, expertise of planners, etc. For example, there

are a variety of strategic planning models, including goals-based, issues-based,

organic, scenario (some would assert that scenario planning is more of a technique

than model), etc.

1. Goals-based planning is probably the most common and starts with focus on

the organization's mission (and vision and/or values), goals to work toward the

mission, strategies to achieve the goals, and action planning (who will do what

and by when).

2. Issues-based strategic planning often starts by examining issues facing the

organization, strategies to address those issues and action plans.

Some plans are scoped to one year, many to three years, and some to five to ten years

into the future. Some plans include only top-level information and no action plans.

Some plans are five to eight pages long, while others can be considerably longer.

Strategic planning involves both analysis of the past (using data cost, revenue,

etc.) and forecast of the future. Then it leads to the creation of hypotheses, about how

the firm and each of its businesses will perform within an uncertain competitive

environment.

A complete, formal strategic planning process leads to definitions of the

corporate diversification strategy and the strategies of all the SBU, identification of

resource requirements, and statement of tentative performance goals. Strategic

planning provides a framework for the more detailed planning that takes place in the

planning cycles that follow. By the end of the cycle, business unit managers should

have reached agreement with corporate management about their unit’s charter,

objectives, and strategy.

Six iterative steps of Strategic planning processes:

1. Develop a corporate vision, mission, and objectives for the firm.

2. Understand the firm’s present position, SWOT.

3. Decide on a corporate diversification strategy that identifies what businesses

the firm should and should not be in.

4. Decide on a strategy for each SBU, the path of action that best takes advantage

of each business’s opportunities and strengths.

5. Prepare the strategic plan, which is qualitative and quantitative representation

of strategic actions to be taken and the likely outcome.

6. Monitor performance and update the strategic plan as necessary.

Tools for Strategic Planning

The most useful tools for strategic planning are SWOT analysis (Strengths,

Weaknesses, Opportunities, and Threats). The main objective of this tool is to analyze

internal strategic factors, strengths and weaknesses attributed to the organization, and

external factors beyond control of the organization such as opportunities and threats.

Other tools include:

Balanced Scorecards, which creates a systematic framework for strategic

planning;

Scenario planning, which was originally used in the military and recently used

by large corporations to analyze future scenarios.

Purpose of Strategic Plan for Organizations:

Strategic plans bring many advantages for the organizations, those are:

1. Strategic plans clearly define the purpose of the organization and to establish

realistic goals and objectives consistent with that mission in a defined time

frame within the organization’s capacity for implementation. Therefore,

strategic plan may help to solve major problems in the organization.

2. By developing Strategic plans, organizations can communicate their goals and

objectives to the organization’s key leaders. By providing clearer focus for the

organization, the production can be more efficient and effective by focusing

the organization’s resources on the key priorities.

3. Develop a sense of ownership of the plan. Because in making the strategic

plan, planners should listen to everyone’s opinions (managers involved) in

order to build consensus about where the organization is going.

4. Provide a base from which progress can be measured and establish a

mechanism for informed change when needed.

When Should Strategic Planning Be Done?

The scheduling for the strategic planning process depends on the nature and needs of

the organization and its immediate external environment. For example, planning

should be carried out frequently in an organization whose products and services are in

an industry that is changing rapidly.

Strategic planning should be done when an organization is just getting started. (The

strategic plan is usually part of an overall business plan, along with a marketing plan,

financial plan and operational/management plan). Strategic planning should also be

done in preparation for a new major venture, for example, developing a new

department, division, major new product or line of products, etc.

Action planning is the planning that guides your day-to-day work. In other

words action planning means a sequence of steps that must be taken, or activities that

must be performed well, for a strategy to succeed. Action planning needs a strategic

plan to know what is the main goals of the company or where are the company

manage to get. Action planning is important because without action planning the

strategic planning will remain a grand dream and the company won’t achieved their

goals. Strategic planning will help the company to prepare the action planning. An

action plan is how you're going to implement that strategy.

Action plan has three major elements:

1. Specific tasks

The specific task means what to achieve and being done also who will

make it done.

2. Time horizon

Estimated length of time for a plan, program, or project to complete, an

endeavor to succeed, an investment to yield returns, an obligation to

become due, a right to mature, etc. In the time horizon it has to be clear

when is the goals being achieved.

3. Resource allocation

Resource allocation focused on what specific funds are available for

specific activities sometimes it called action program.

An effective action plan should give the company a concrete timetable and set

of clearly defined steps to help the company to reach their objective, rather than

aimlessly wondering what to do next. It helps the company to focus on their ideas.

The goals of the company must be “smart” which means specific, measurable,

actionable, realistic, and timely because by setting “smart goals the company can

make modifications in their activities to accommodate the goals and update are they

still on the track or not and when targets are missed it’s easier to react quickly and

make necessary changes.

Action planning is a cyclical process, and once you have been through one

cycle, you can start again at the beginning. But in the real life it might be different

because in the real life it could be more complicated if we compared with the theory.

In the real life you may change your goals as you progress, and you must be prepared

to revise your plan as circumstances dictate.

The stage that the company has to follow when they setting the action

planning are they have to know where is their position in the current time they also

have to review their achievements and progress, and undertake self-assessment.

Beside knowing where are their position they also have to set their goals which mean

the company already set where they want to put the company between the society and

the segment their target to achieve their goals. After setting their goals the company

must decide the strategy they will use and implemented it.

The main step in preparing an action plan are :

1. Have a clear objective

2. List the benefit that the company would gain by achieving their goals

3. Define clearly what step that the company will take

4. Arrange the steps in a logical, chronological order and put a date by which the

company will start each step

5. Try to map out several paths to the goals

6. Think about the type of problem that might encounter at each step.

7. Review the progress

Effective planning processes make control system proactive, not just reactive

because an action control force managers to think about the future and make decision

in advance. Managers should develop a better understanding of the organization’s

opportunities and threats, strength and weakness, and the effects of possible strategic

and operational decision.

Budgeting

The process of budgeting is initiated with the establishment of specific targets

of performance and is followed by executing plans to achieve such desired goals and

from time to time comparing actual results with the targets of performances/goals.

Although the effectiveness of budgeting processes varies among institutions,

invariably a process does exist. Most institutions of higher education also have a

strategic plan and a strategic planning process. Once again, the effectiveness of the

process may vary, but a process does exist.

Strategic planning also has a relation to budgeting because they both involve a

planning but they have different activities in two processes. The budgeting process

focuses on a single year, whereas strategic planning focuses on activities that extend

over a period of several years. Strategic planning precedes budgeting and provides the

framework within which the annual budget is developed. Another difference is

product lines or other programs essentially structure the former, while the latter is

structured by responsibility centers.

The contrast between budgeting and forecasting is budget concern to

management plan, with the implicit assumption that positive steps will be taken by the

budgeter (the manager who prepares the budget) to make actual events correspond to

the plan. While forecast is merely a prediction of what will most likely happen,

carrying no implication that the forecaster will attempt to so shape events that the

forecast will be realized.

The uses of budgets are:

Preparation of an operating budget has four principal purposes.

1. Fine-Turning the strategic plan

2. Coordination

3. Assigning responsibility

4. Basis for performance evaluation

A budget acts as the formal process that establishes the authority on how funds

are to be collected and spent. Management’s objective is to provide a logical, detailed

and realistic spending plan. Once a plan has been decided upon and is formally

adopted by the company, the budget acts as an effective management tool by

providing a means of identifying and allocating limited resources (Revenues), and

monitoring their use (Expenditures).

The budget also is used to help prevent the company from overspending. Budget

reports provide management with information on operations, allowing the

organization to monitor and control spending and revenue collection while they are in

progress. Hence, budgets alone are meaningless unless they are used to motivate

responsible action and to direct operations toward accomplishing objectives that have

been established by management as desirable.

Types of Plans and Their Contents

Strategic Plan:

Revenue and expense for each major program

Not necessarily by responsibility centers

Not as much detail as operating budget

More expense are variable

For several years

Total reconciles to operating budget

Operating Budget:

For organization as a whole and for each business unit

Classified by responsibility centers

Typically includes revenues, production cost & cost of sales, marketing

expense, logistics expense, general and administrative, research &

development, income taxes, net income

Expenses may be flexible, discretionary, committed

For one year divided into months or quarters

Total reconciles to strategic plan

Capital Budget:

Each major capital project listed separately

Total project expenditures by quarters

Other Budgets: Budgeted balance sheet that shows the balance sheet

implications of decisions included in the operating budget and the capital

budget,

: Budgeted cash flow statement shows how much of the cash

needs during the year will be supplied by retained earnings and how much if

any must be obtained by borrowing or from other outside sources,

: Management by objectives that managers are responsible for

attaining during the budget year are set forth in the budgets described

above.

Budget Preparation Process

Organization

Budget department: normally reports to the corporate controller, administers

the information flow of the budgetary control system.

Budget committee: consists of member of senior management, such as the

chief executive officer, chief operating officer, and the chief financial officer.

The budget committee performs a vital role.

Issuance of Guidelines

If a company has a strategic planning process, the first year of the strategic

plan is the beginning of the budget preparation process. If the company has no

strategic plan, management needs to think about the future.

Unlike budget preparation, development of the strategic plan usually does not

involve lower-level responsibility center managers.

Initial Budget Proposal

Using the guidelines, responsibility center managers, assisted by their staffs,

develop a budget request.

Negotiation

The budgeter discusses the proposed budget with his or her superior.

Review and approval

The proposed budgets go up through successive levels in the organization.

Budget revisions

One of the principal considerations in budget administration is the procedure

for revising a budget after it has been approved.

Contingency budgets

Some companies routinely prepare contingency budgets that identify

management actions to be taken if there is a significant decrease in the sales

volume from what was anticipated at the time of developing the budget.

Quantitative Techniques

Although mathematical techniques and computers improve the budgetary

process, they do not solve the critical problems of budgetary control. The critical

problems in budgeting tend to be in the behavioral area.

Simulation: is a method that constructs a model of a real situation and then

manipulates this model in such a way as to draw some conclusions about the

real situation. The preparation and review of a budget is a simulation process.

Probability estimates: each number in a budget is a point estimate. Some

authors have proposed that budgets be prepared initially using probability

distributions instead of point estimates: that is, the budget committee would

approve a number of probability distributions rather than specific amounts.

Budget Limitations

a. The budget is based on estimates or projections of the activities to be come,

the accuracy of the estimate is dependent upon experience and the ability of

the estimator or projector, inaccuracy resulting budget not good as a planning,

coordinating, and monitoring well.

b. The budget must be adjusted to changes in conditions and assumptions. The

budget is prepared on the basis of the conditions and assumptions underlying

the preparation budget necessitated a revision of the budget so that the budget

can be used as a management tool. Changes in such assumptions or conditions

may include: the rate of inflation or government policy in the field of

economics.

c. The budget can be used as a tool by management only if all parties, especially

the managers of the company, continuously and coordinated effort and is

responsible for achieving goals specified in the budget.

d. All parties in the company needs to realize that the budget is a tool to help

management, but it can not replace the function management and "judgment"

is required on the basis of management knowledge and experience.

Principal Terms of the Program Budget Successfully

1. Healthy Corporate Organization

A healthy organization is an organization that is based on the system

particular organization, may conduct a functional division of tasks with clear,

and define the lines of authority and responsibility firmly.

2. Adequate Accounting Systems

The success of the program budget should be supported by the

accounting system appropriate, include:

a. Classification of accounts between the same budgets with the realization

that will be recorded by the accounting, the realization that the budget can

be compared.

b. Accounting records of the transaction will provide information from the

realization.

c. The report presented can be made in accordance with the determination of

the level of responsibility of the individual or the organization.

3. Research and Analysis

Research and analysis is required to establish performance gauges, which can

be either standard or estimated, so that the budget can be used base analysis to

measure good performance.

4. Support from the Executive

Budget may work well when there is active support from the executive from

the base level or below, this involves human relationships in carrying out the

activities, therefore the benchmark used to measure achievement with just

must have.

CASE

Budgeting – an unnecessary evil

1. What is the extent of dissatisfaction with budgeting system in North American

Companies? Are companies planning to abandon their budgeting systems or

radically modify them? So if how?

In North American, more than 150 organizations listed budgeting as the

most frequent used. So many people use budgeting system and their

organization still working well until now. If there is any dissatisfaction,

they prefer to modify them rather than abandon their budgeting systems.

2. What role does the budgeting system play in today’s organization? How do

managers deal with the conflicting role of budgets?

Some organizations adopt the traditional roles, some organizations

combine the role with their own analysis and condition. As we mention

before, a budget acts as the formal process that establishes the authority on

how funds are to be collected and spent. Management’s objective is to

provide a logical, detailed and realistic spending plan. Once a plan has

been decided upon and is formally adopted by the company, the budget

acts as an effective management tool by providing a means of identifying

and allocating limited resources (Revenues), and monitoring their use

(Expenditures).

Budget reports provide management with information on operations,

allowing the organization to monitor and control spending and revenue

collection while they are in progress. Hence, budgets alone are

meaningless unless they are used to motivate responsible action and to

direct operations toward accomplishing objectives that have been

established by management as desirable.

3. If the budget is no longer playing some of its traditional roles, what process is

organization using to achieve the roles hat budgets traditionally played?

Operational and strategic planning process. We can use them to achieve

their role.

4. Are organization beginning to adopt some of the basic components of the

BBRT’s empowerment and performance Management?

Yes. They adopt some of the basic components of the BBRT’s

empowerment and performance Management such as activity based

models to improve their organizations.

5. Model? If so, which elements are being adopted and what type of organization

are doing so?

(1) Activity and resource consumption rates, (2) resource capacity, (3)

resource cost, (4) product/service demand quantity, and (5) product/service

price. Because traditional budgeting processes do not collect information on

activity and resource consumption rates, they offer fewer possibilities to adjust

the budget.

6. Are any patterns evident in the control elements of high performance

companies that are satisfied with their budgeting system?

There are many companies in North America that are satisfied with their

budgeting system.

Source

1. http://www.managementstudyguide.com/planning_function.htm

2. http://www.flatworldknowledge.com/node/1564

3. http://business.yourdictionary.com/long-range-planning

4. http://www.kent.ac.uk/careers/sk/skillsactionplanning.htm

5. http://managementhelp.org/strategicplanning/actionplanning.htm

6.