Lukas Rieder, Author at Management Control: Blog and Downloads

Mission+Vision+Values

Examples of good documents on corporate policy, demarcation between policy and strategy. Content-related elements of a corporate policy.

Why the Differentiation between Mission, Vision and Values?

“Sheer Driving Pleasure” is the widely known vision of BMW. It has been valid since 1973 and is also applied to models with electric drive (see https://www.bmw.com/en/automotive-life/the-history-of-the-bmw-slogan.html). This vision is part of the corporate policy.
Purpose, visions, values and generally valid rules of conduct are part of the “corporate policy” planning level. Corporate policy should describe who the company is and/or wants to become.
Because corporate policy is used as a collective term for the self-identification of an organization and for the description of its intended future position, terms such as vision, mission, strategy, rules of conduct and governance are often not clearly distinguished from each other and are not separated from strategy and operation. This in turn leads to the fact that the importance of such statements is not sufficiently recognized within the company.
To clearly assign the various sub-contents of a corporate policy, we use the structure from the St. Gallen Management Model (p. 31 ff.):

Vision: Basic statement for which the company wants to be known and what position it wants to achieve in its area of expansion.

Mission statement: Brief description of the overarching values, rules and lines of development. They apply above all to all employees.

Management concepts: These define the key values to be adhered to and the positions to be achieved in future developments. According to the division into natural, social, economic and technological sub-environments, see the article “Management Control Requires Environmental Reference”), a technology/market-related, an economic and a social concept are to be described. These three management concepts should also specify through which social, technological and economic developments the organization will contribute to the protection of the natural environment.

In his book “Levers of Control, p. 33ff., see bibliograpy” Robert Simons states that every organization is purpose-oriented and that a corporate policy is needed to fulfill its purpose. This policy should contain the core values and beliefs as well as the general boundaries (risks to avoid). Vision, mission statement and the three management concepts thus form the top-level documentation for guiding the behavior of managers, for deriving strategies and for operational implementation (fulfilment of purpose).

“Wacker Chemie AG is a technology leader in the chemical industry, produces for all global key industries and is active in the fields of silicones, polymers, life sciences and polysilicon.”
With this definition, the company describes the product areas it stands for and the industries in which it wants to win its customers.
It is worth studying the corporate policy principles of this group, which has sales of around EUR 5 billion. Their Codes of Conduct can be downloaded as a PDF file from there: https://www.wacker.com/cms/de-de/about-wacker/wacker-at-a-glance/corporate-strategy-and-policy-guidelines/ethical-principles.html .

In our opinion, strategies are not part of corporate policy. They define with which products or services in which markets which positions can be achieved. A company can operate in different markets with different products or services, which means that different strategies can be pursued in different markets. To structure this requires the definition of strategic business units (SBU). Each SBU can pursue an independent strategy but must adhere to the corporate policy guidelines.

Environmental Changes are Crucial

Presumed developments in the sub-environments are to be well structured for holistic planning and control.

Presumed Environmental Changes are Crucial for Management Control

Every organization is constantly exchanging with its environment. “Out there” are the customers, potential employees, suppliers, financers, the state and other public institutions with their specifications and laws, as well as the social groups with their changing perceptions. All this is embedded in the natural environment.

How can environmental factors be structured in such a way that management can relate them directly to its strategic and operational decisions? We use structuring in partial environments (taken from Hans Ulrich, p. 31). Four sub-environments are distinguished:

Natural environment:

This includes everything that happens on earth, including that which is caused by extraterrestrial influences. Although humans can disturb the development of the natural environment, they cannot directly influence it for the good.

Social environment:

Everything that is shaped by behavior, rules and interaction between people. This also includes developments and specifications of governmental and international organizations, changes in interpersonal rules of conduct, changes in mentality and changes in social interaction.

Technological environment:

Changes in sales and procurement markets, new technologies and application areas, and changes in potential competitors.

Economic environment:

Whoever provides financial resources to build or operate organizations wants to be compensated for sacrifycing other investments or consumption. He considers whether his use of funds will be remunerated in line with market conditions. To do this, he weighs the security of the cash or value return against the interest that can be realized with other investments. This in turn depends on the possible compensation of alternative investments and the risk to be taken.

Example topics in the sub-environments

When establishing or expanding a business, opportunities and risks must be identified and weighed up. For this purpose, they must be documented and assessed.

The management control system is the appropriate place to record this documentation and the resulting findings for the management bodies. The four environmental dimensions help to structure, sort and weight the planning statements. They also help to consider all environmental variables when defining the development lines. Examples include:

- What influencing factors from the natural environment could make it necessary to adapt our business model? Which elements could make success impossible or, on the contrary spur it on?
- To what extent do other structures of living together (e.g., patchwork families, work-life balance, less full-time employment) affect our applied management processes as well as the availability of our employees? Will the increasing density of legal regulations generate higher personnel requirements or even make the profitable continuation of our current business impossible?
- Are new application technologies, raw materials and manufacturing processes emerging that will open up new sales opportunities for our products and services? Are there any recognizable saturation or substitution tendencies in the market that could render our existing offerings obsolete? Do new technological standards, e.g., operating systems of computers, require an adaptation of our own products and services?
- Are there any developments to be suspected in the customer acquisition process that could jeopardize our sales success to date or are sales intermediaries conceivable who could help to make our products and services better known? Can the concentration of suppliers in saturated markets endanger our existence? Are our competitors theoretically able to produce their products more cost-effectively than we are?
- What profitability is to be achieved so that existing equity and debt capital providers continue to invest in our business and – if necessary – new investors can be attracted? What is the degree of self-financing needed to be able to make independent decisions even in periods of low profit and to prevent loan terminations?

In the establishment of corporate policy and strategies a link to environmental developments must be created. In our experience, it is helpful to structure the decisions to be made according to the four sub-environments mentioned.
For a more in-depth consideration of the corporate environments, see section 1.1 in the book “Management Control System” (https://management-control.eu/store).

Management Control System Definition

A Management Control System is developed for all managers, irrespective of their hierarchical position. Its purpose is to support decision making and comparison of actuals to plan.

Management Control System Definition

A management control system helps all managers to plan and control in an integrated way. This improves company-wide coordination and the achievement of objectives.
It comprises the following subsystems:

Management Accounting + Piloting + Early Warning

Early Warning:
Early warning is intended to recognize and structure opportunities and threats in the various corporate environments and, as far as possible, make them measurable. In particular, it is necessary to find out which company-related early warning indicators from the environments can describe significant developments that provide relevant input for strategic and operational planning (opportunities and risks for the future of the company).

Pilot control:
To seize opportunities requires the planning company to build up and maintain the necessary success potentials. Strengths can arise from special skills and abilities of the personnel, large management capacity, suitable knowledge for market cultivation, new products and services, advantages through comprehensive process integration or particularly suitable manufacturing facilities. Weaknesses can possibly prevent the translation of opportunities into operational success.

Internal strengths can usually only be built up (or possibly purchased) over a period of several years. For the preparation of operational plans and budgets, parameters are to be found that can measure desired developments in a forward-looking way. Here are some examples: Development of management capacity (number of potential managers in relation to existing ones), development of adherence to deadlines in projects and in delivery readiness, progress in new customer acquisition per time unit.

Insofar as weaknesses in an organization are the result of factual or technical knowledge and application gaps, they can often be mitigated by training and further education or by hiring suitable people. Weaknesses that are rooted in the individual person can hardly be eliminated, especially when employees produce very good results as long as they can work on their own but do not feel comfortable in teams.

In contrast to early warning data, parameters for assessing the development of success potentials (development and expansion of future strengths and reduction of existing weaknesses) are mainly obtained from internal company data. Because the data used for this purpose serves as the basis for medium-term planning, it must be available before the actual operational planning. They are the internal input for planning decisions. This is why we call them piloting factors.

Accounting for management:

In the operational area (medium-term and annual planning as well as tactics (disposition)), plans are more finely detailed and the associated objectives are defined and hopefully also implemented. Accounting for Management is intended to enable managers at all hierarchical levels to translate their plans into objectives for the actual activities and to prepare the target to actual comparisons.

Target to actual comparison is intended to find starting points that will lead to the definitive achievement of objectives in the coming periods (e.g., months). It is created in monetary values so that different consumptions and services can be compared with each other.

This requires a consistently management-oriented cost, performance, revenue and contribution accounting up to Earnings Before Interest and Taxes (EBIT). It must be able to map plan, target, actual and forecast. The data foundation comes from the tactical systems (Enterprise Resource Planning Systems (ERP)) and from ledger accounting.

AMPLE for Sustainable Success

5 Top-Controls are the uppermost deciding parameters of sustainably successful organizations

AMPLE for Sustainable Success

There are five elements, or “top controls”, that constitute the uppermost deciding parameters of any successful organization. Sustainably successful companies organize themselves and thus also their management tasks according to these, which we call AMPLE for short, as described below.

Attractiveness for employees

Every organization must be able to find and retain employees who have the skills, abilities and knowledge to invent, develop and manufacture products and services in a customer-focused manner and to operate the necessary internal processes in line with the needs of the customers and the own organization.

Therefore, conditions must be created in the organization that appear more attractive from the point of view of existing and potential employees than those of other potential employers. Good pay is an important factor. However, surveys repeatedly show that professional and position-related development opportunities, further education opportunities, employee promotion and, above all, the purpose of the work and the way of working together are decisive.

Market position

A company’s market position improves when its own products and services generate more benefits in the eyes of existing and potential customers than the offers of other providers. Net sales price is only one factor. Rather, market position depends on whether in customers’ purchase decisions the company’s offer-benefits are ranked higher than those of other suppliers.

Profitability

The net proceeds generated must cover the costs of the entire current operation, enable the preservation of the existing substance, and achieve a return in line with the market for all investors. In addition, money for the development of future success potentials must also be earned.

Without generating these funds, a company cannot invest enough in its market position and in evolution. It will not be viable in the medium term. In order to do this it is also necessary to improve internal input/output ratios, i.e., to increase productivity everywhere and continuously.

Liquidity

If a company does not have enough available funds (cash balances or open credit limits), it can neither pay wages nor invoices due on time. This is usually the end, as only a few can avert bankruptcy. Solvency at all times must therefore be planned and controlled in both the short and the long term.

Evolution

Every company must permanently develop further and improve. Other suppliers offer existing products and services cheaper, products or services become too expensive to produce, or are no longer in demand.

Internal, especially administrative processes, must be adapted to new requirements and handled more efficiently. This requires constant innovation and improvement. Evolution is indispensable. Many formerly world-famous companies have disappeared because they did not promote their evolution with enough vigor.

A five-pointed star is chosen for the AMPLE representation to indicate that the relationships between the five elements must be brought into a fluid equilibrium if an organization is to be sustainably successful. The difficulty in this endeavor is that the interactions between the five elements can be both supporting and contradictory.

For example, if a company tries to improve its market position by granting discounts or reductions, capacity utilization in the factory increases, but due to lower net revenues per unit, contribution margins decrease and, as a result, cash flow and profit decrease. Due to the high capacity utilization, new investments in plants become necessary, but due to the lower cash flow the money for this is only available to a limited extent. Lower cash flow also means that less can be invested in evolution and that less money is available to improve the attractiveness of jobs. AMPLE will fall out of the flow equilibrium and, if countermeasures are not taken in time, insolvency will occur in the medium term.

Further explanations of our AMPLE can be found in section 1.1. of the book Management Control with integrated Planning, chapters 1.1 and 2.

Objectives and Key Results OKR

OKR and MBO are central instruments for achieving management success.

Ideas are simple, implementation is everything! This is the mantra of John Doerr, the consultant of Google and other successful companies who introduced the OKR system and sees it as the basis for sensational success in development and results (see: J. Doerr, OKR Objectives & Key Results, 2017).

Ideas are simple, implementation is everything! OKR

In his book, Doerr uses numerous real examples from global corporations as well as small companies to demonstrate that consistent goal orientation is an indispensable key to sustainable success.
The concept of leading with goals is not new. Peter Drucker already laid the foundation for this approach in his publication “The Practice of Management” as early as 1954. George Odiorne described the theoretical concept of Management by Objectives (MBO) and concretized the practical implementation in “The Human Side of Management (1987)”. It seems important to us that Odiorne recognized that the successful application of the MBO system only occurs when objectives are not set by a superior but are transformed into a cross-hierarchical agreement on objectives. Doerr came to the same conclusions (OKR Objectives and Key Results, p. 10).

According to Doerr, an objective determines the “what?”. Objectives should be aggressive and yet realistic, tangible and unmistakable. Their achievement should represent a clear added value for the organization (cf. ibid., p. 226). The SMART formula attributed to P. Drucker (specific, measurable, actively influenceable, realistic and terminated) means almost the same in terms of content.
Key Results express milestones with the associated results. The latter must be measurable, be it with key figures or with documented results (OKR, p. 226).

Management by agreeing on objectives has been an integral part of our management control systematics for years. We are therefore very pleased that Doerr, with his examples from the practice of successful companies, brings two elements to the fore: The objectives must be agreed upon so that the results to be achieved by the individual actors fit in with the overall objectives of the organization and each objective must be defined in a measurable or at least verifiable form. Every manager will confirm from his experience that finding objectives is relatively easy, but realizing them is very exhausting.
In our opinion, objectives, their metrics and the results achieved should be documented in the management control system. Google even goes so far as to allow every employee to see all objectives, including those of his colleagues, bosses and even the executives.
Management by agreeing on objectives is completely interwoven with the management cycle in the integrated management system, since the latter also serves to determine the results and to look for corrective measures if a goal has not been fully achieved. In the various planning or management levels (corporate policy, strategy, operational management) it is also necessary to agree on objectives, to provide the necessary resources and, in accordance with the management cycle, to analyze whether the intentions have become results.
These interrelationships are consequently also determinants for the design of the management control system.

No Objectives / no Success

Objectives are results or states to be realized. Therefore they must be formulated in a measurable or at least verifiable way.

No Objectives / no Success

An athlete wants to finish the next competition as one of the three best. If he reaches rank 3 or better, he is successful. An efficiency target of 3% is agreed in a production. It is achieved when the production costs per unit are at least 3% lower than in the previous year.

It is necessary to define the results to be achieved as objectives in order to be able to judge whether a target has been achieved at all. Objectives are results or states to be realized. Therefore they must be formulated in a measurable or at least verifiable way.

Target contents and target levels must be agreed. On the one hand, an objective should be a challenge for the person taking over and, on the other hand it should be achievable with effort. Target setting “from above” causes a defensive attitude in the person whose goal is being set and is hardly accepted.

Objectives should primarily be formulated for a planned year. This makes them easier to coordinate with the annual planning and it can be monitored during the course of the year to see how far the achievement of objectives has already progressed. Corporate policy, strategic and medium-term objectives form the basis for agreeing on annual objectives. The latter are also to be formulated as conditions or results to be achieved.

Management Cycle

The Management Cycle Determines the Value Types

Every manager, whether group leader or CEO, follows the management cycle. He has to plan his area of responsibility. The results they need to achieve must be agreed as objectives with their boss and their own employees in terms of content and deadlines. This requires that target content and target levels be coordinated with the capacities to be provided (people, equipment, money) and with the available knowledge (know how). If investments, process improvements or training are necessary to achieve the objectives, the necessary funds must be budgeted and released. Insofar as project orders are to be provided for this purpose, these must also be planned.

Agreeing on objectives and planning therefore take place in parallel. Their mutual coordination is the prerequisite for the budget resolution (1 + 2).

Plan implementation can be “disturbed” by various internal and external influences. For this reason, the actual results must be measured periodically (3) and compared with the objectives and the plans. This is done in a plan to actual comparison (4). The purpose of this comparison is to find and implement corrective actions (5) which will enable improved achievement of objectives in the next reporting periods.

The integrated planning and control system (IPAC) must be able to map this generally valid management cycle. For this purpose, four value types must be stored in the system:

Plan, actual, variance, forecast (expectation).

Each manager should be able to recognize how well he has succeeded in achieving the plan in his area and what variances have occurred. Starting from the variances he considers which corrective measures could lead to achieving the original plan (and thus also the goal) in subsequent periods. The monitoring process therefore involves not only identifying variances, but also deciding on and implementing corrective measures.

The forecast helps in the management process to assess whether the corrections decided upon will be sufficient to achieve the agreed objectives by the end of the year or project, or whether further measures, possibly in other areas, need to be introduced. It is important to start from the expected effects of the corrective measures when preparing forecasts and not simply extrapolate planned or actual values from previous periods.

Variances in value between planned and actual figures may also be due to the fact that more or less work was produced in a period than planned. In such cases, the responsible manager rightly demands that actual costs be compared with the planned costs of the work actually performed, not with the original planned values. This requires using flexible budgeting in the management accounting system.

Given the requirements resulting from the generally applicable management cycle, management accounting systems adequate for decision-making must be designed in such a way that they:

- can present plan and actual figures in quantities, activities and values,
- enable target to actual comparison by valuing actual activities at planned cost rates (“should-be costs”) and comparing them with actual costs,
- enable each manager to enter into the system expected activities and values in his area (usually cost center) for the rest of the planning year or project in order to quantify his expectations (forecast).

From the management cycle It can also be derived that in the plans as well as in the actual analysis, only those items need to be listed that the responsible manager can directly influence and therefore be responsible for. The management accounting system should therefore not allocate fixed costs to cost centers or products if the receiver cannot personally determine the quantity and the content of the service on which the allocation is based (i.e., there should be no fixed cost allocation).

Main Questions of each Planning Stage

Mission, strategy and operation should answer different questions for different application scopes and timespans.

The Main Questions of each Planning Stage

Before implementation of its operational plan, each company needs to distinguish between four planning levels (or management levels), as in each of these levels a different question needs to be addressed.

Corporate policy (or mission statement) defines what the organization plans to become in the future and how it will distinguish itself from others. A company must consider the requirements of the various environments in which it operates and, if necessary, react to changes in these requirements. These adjustments should be reflected in the core values of the owners and senior management to determine whether the whole business can become what it wants to be.

As noted in our book (Management Control with Integrated Planning), the basic corporate policy statements are documented in three corporate concepts: the performance-based concept, the financial concept, and the social concept. The performance-based concept should be in line with the technological and market environments. Elements of the financial concept are profitability to be achieved, financing structure, use of results, maintenance of liquidity. The social concept sets out the guidelines on topics such as management methods, employee development, and conduct towards government, associations and competitors.

Strategic planning defines which markets are to be served, with which products and services, which technologies appear to be decisive for implementation, and in which price segments one wants to offer. Additionally it is necessary to identify which existing internal potentials for success must be enhanced and which new ones must be built up in order to reach the wanted market positions.

In operational planning the results to be achieved are recorded in terms of content and deadlines. The question is therefore how and by when the targeted market positions are to be achieved. In operational medium-term planning (usually 2 – 5 years), the focus is on building up and expanding the success potentials required for strategy implementation. The planning contents are often structured according to functional areas, because the potentials have to be built up there (personnel, market development, suppliers, plants, IT, financing). To document these plans, it is advisable to define functional concepts. In this way, it can be tracked whether the development of potentials is progressing properly and on schedule.

In (operational) annual planning, the results (objectives) to be achieved in the planned year are derived from the strategies and the functional concepts and transferred to the sub-budgets. This makes it clear to everyone involved what contributions they should make to ensure that the organization as a whole achieves its goals. Finally, the content-related plans and objectives must also be represented in terms of value, so that it is clear whether the plans are financially feasible. This is done in the cost, activity, revenue and profit and loss account (via management accounting).

Because customers order products in different quantities and at different times than planned, because unexpected plant downtimes occur, and because employees can be absent or projects delayed, tactical planning and control during the year is necessary. The majority of the data required for planning is managed in the ERP (Enterprise Resource Planning) systems. The comparison of actual data with planning supports employees and managers in meeting their annual targets.

Piloting

Organizations need to develop strengths and generate potentials for success by building and maintaining internal capacities while mitigating impending weaknesses. Yet the hectic pace of searching for everyday successes and planning for the near future often leads to neglecting medium-term developments in planning and control.

Piloting information should ensure that essential planning and implementation tasks for the medium-term future of an organization are not forgotten. The aim is to build up the potential for medium-term success timely. With appropriate and responsibility-related indicators, managers in all areas should be able to recognize whether they are developing their area in the medium term in such a way that the strategic goals of the organization can be achieved. Questions for this topic include:

- Will we have the necessary managers and specialists in good time to realize our development plans?
- Which positions will have to be filled in the near future as a result of retirements and departures?
- In which areas are capacity bottlenecks (personnel and plant-related) to be expected in the near future?
- In which areas is it necessary to build up know-how in order to achieve the targeted market positions?
- What improvements in efficiency can be achieved in the medium term to maintain competitiveness?

We have chosen the term “piloting“ because this type of information processing pilots operative planning and control in advance. The main purpose of internal company information is to ensure that the organization will be able to meet the future challenges of environmental developments and create the conditions for implementing its own strategic objectives. Since this work is primarily to be carried out in the functional areas, the potential input control parameters are subsequently worked out area by area.

Early Warning

Sustainable organizations need to identify opportunities, avoid or mitigate risks, and find and assess new market potentials. Milk has been around since time immemorial. Who still buys raw milk directly from the farmer (and likes to drink it)? Supply and consumption needs have changed, as have the forms in which products and services are presented.

Early warning

Early warning is intended to help an organization to recognize emerging or at least presumed developments in the business environment early enough to be able to react. It is about finding opportunities for future business fields and identifying threats that could limit or even prevent the success of existing and future business.

Early warning cannot create certainty. However, it should lead the managers of an organization to consciously deal with ongoing or emerging changes in the various environments and take the findings into account in their strategic and operational planning decisions.

Following and evaluating new developments in terms of needs, attitudes, available materials and services, legal requirements and political trends is not only very time-consuming; there is also no guarantee that nothing is forgotten or fails to appear on the radar.

In order to limit the diversity somewhat, two approaches are used in our book to identify the relevant developments in a structured way and to prepare them for the planning process:

- General observation of focal points in reporting on the various sub-environments
- Derivation of specific early warning indicators that could influence the success of existing and future own strategic business areas.

In summary, the following picture emerges:

Early warning should help to define the strategies with their basic parameters and to determine the resulting requirements on the functional concepts.

In addition to the strategic insights, the early warning system should disclose which internal developments are to be realized by when so that the potential for strategy realization is available in good time.