Tag: Operational planning

Do BSC and Management Control fit?

The Balanced Scorecard is intended to measure and assess how well the strategy has been implemented during the reported period. In the Management Control System, different planning levels are distinguished (see the post “The Main Questions of each Planning Stage”). Corporate policy expresses what purpose the company should fulfill from the point of view of the owners and what guidelines for development they envisage. The strategies are developed from this. Formulated corporate policy and strategies are prerequisites for the introduction of the BSC.

Do BSC and Management Control fit
Do BSC and Management Control fit?

In the post “Strategy and Functional Concepts”, it was explained that there is hardly one common strategy for the entire company because each independent product/market combination can appear differently in its respective market. The strategic plans and goals are thus to be formulated by strategic business unit, SBU. This also corresponds to the recommendation of Kaplan and Norton in The Strategy Focused Organization, p. 45f.”.

An SBU is to be formed if different product/market combinations occur with their own corresponding pricing and offering and possibly even the unique selling proposition is different. This leads to a strategy per SBU and consequently to a specific BSC for this business unit.

In the post “Strategy and Functional Concepts”, we recommend answering six question groups when creating and documenting an SBU strategy:

Basic Idea, Framework, Assessment, Objectives, Plan of Measures, Critical Assumptions.

The objectives are the starting point for the creation of the BSC, the plan of measures is the input for operational planning. The critical assumptions are to be scrutinized when assessing whether a strategy should be pursued further, adapted or cancelled.

The agreed SBU-strategies and their objectives form the input for mid-range planning and for defining the results to be achieved in the coming year. In the functional concepts, the BSC-perspectives “processes” and “potentials” come to the fore. This is because operational planning must determine how the conditions for achieving the market and financial targets are to be created in the internal units.

This means that results to be achieved in the functional areas must also be defined as objectives. It should be possible to measure the success of implementation with the BSC.  The processes are also to be specified in a verifiable form. The intention to “expand the customer base” does not help with work planning in the areas concerned, nor is it defined how much is to be achieved and how the results achieved are to be measured. The rules for agreeing on objectives are to be applied to both strategic and operational planning. It must therefore be specified which unit (cost center) is to acquire how many new customers, by when, which criteria are to be applied so that someone is counted as a new customer, and in which year what number of new customers is to be created.

In annual planning it is important to define the results to be achieved, i.e., measurable targets, in the planning of sales, revenue, production, projects, cost centers and investments, so that progress can be measured.

Implementation of the BSC thus requires that the ideas and rules of management by objectives are applied in all areas, that the quantity- and performance-related plan and actual data are available in the ERP (Enterprise Resource Management) and CRM (Customer Relationship Management) systems, and that decision-relevant plan, target and actual data on values and inventories are provided in Management Accounting.

Overall, the BSC runs parallel to the planning stages required in the management control system. Kaplan and Norton assume the same sequence and the same contents of the planning stages as described in this blog. Based on the corporate policy and strategic definitions, the measurable short- and medium-term objectives for market development are to be derived. To realize them the personnel and material prerequisites must be created in the functional areas. This is done in cost centers and projects. The BSC measures and assesses whether these results are being achieved on time and within budget by means of target to actual comparisons.

If the management control system is set up as outlined in this blog, the planning data required for the BSC will also be generated.

The next post will analyze whether the management control system can also provide the actual data required for evaluation.

Master Plan for Integrated Planning and Control

The Master Plan for Integrated Planning and Control is the IMS

The Integrated Management System (IMS) represents the various elements and subsystems of comprehensive planning and control with their interdependencies. Fredmund Malik developed it based on the St. Gallen Management Model (SGMM). The IMS shows which subsystems and elements are necessary and sufficient for correct and good management. The IMS presentation presented here is slightly adapted to facilitate access to the design of the integrated information system. However, the original content was not changed.

The management topics and the necessary tools are presented in four quadrants.

The Master Plan for Integrated Planning and Control
The Master Plan for Integrated Planning and Control
  • In quadrant 1, top left, the planning or management levels can be seen, which range from the purpose of the company to annual planning (see “The Main Questions of Each Planning Stage“).
  • Projects are listed on the demarcation line between company-related and employee-related. This is because real projects usually develop from strategic and medium-term planning. For their realization, the partial results to be achieved in a planned year must be reflected in the personal annual objectives of the assigned project managers and (employees). For space reasons, the box “Projects” is placed in the area above the year. Long- as well as short-range projects should also be included in the personal annual objectives with their milestones (partial results to be achieved).
  • Organizational structures and processes are derived from the strategic intentions and plans as well as from the functional concepts, which has an impact on operational planning and on the assignment of tasks (functions) and responsibilities. These tasks and responsibilities can be documented with the functional diagram (see glossary).
  • The realization of strategies and functional concepts requires management capacity. Therefore, both the need for managers and the development of junior managers must be qualified and quantified in the information system (quadrant 3).
  • Quadrant 4, bottom right, shows how the annual objectives of individuals are translated into results. With management by objectives, personal goals and orders are derived from higher-level objectives or projects. The principles of delegation and self-organization are also included in the implementation path. This results in responsibility for achieving objectives and enabling self-control (see page “Management by Objectives”). Management Control depends on the documentation of objectives in the information system and on the ability to track results achieved according to quantities, qualities, deadlines and results QQDR.
  • Performance appraisal provides feedback of the results achieved to the person or management function in quadrant 3. Questions regarding the need for technical and managerial competencies must also be addressed there and considered in the multi-year planning. The additional managemers to be recruited and trained are in turn a prerequisite for achieving the strategic and operational objectives defined in quadrant 1.
  • In quadrant 2, bottom left, the tactical control of the achievement of objectives takes place during the year. For this purpose it is necessary to map all processes and structures of the company in databases. On the one hand, the data must be contained in the information system as planned values so that the plan-calculation can be created. On the other hand, the real events must be mapped in terms of quantity, time and value down to all details that determine results and are relevant to decision-making. At this lowest level (customers, products, individual processes, purchased materials, operating materials and services, and existing plants), the database for integrated planning and control is created. Planning and recording at the lowest level is also indispensable because the data must be able to be evaluated multidimensionally and condensed into higher generic terms.
  • This information system is usually implemented with the help of an ERP (Enterprise Resource Planning) system. Fully developed ERP systems range from customer acquisition to research and development, from merchandise management and production to wage administration, asset management, internal accounting and bookkeeping. This enables them to cover the requirements of annual planning and tactical control for plan, target and actual.
  • Finally, controlling is the entire process of defining objectives, planning and control in the financial and performance area (see “Management, Controlling, Controller“). With the help of feedforward (corporate policy and strategy) and feedback (comparison of what was achieved with what was planned), managers try to prepare corrective actions that determine the future, decide on their realization, and subsequently assess the extent to which they have already been successfully implemented. Findings from the controlling process can have an impact at all planning levels. The controlling process is thus placed overlapping both left quadrants.

The personal annual objectives are exactly in the middle of the integrated management system because they describe the results to be achieved by the individual (manager) in the planned year in a measurable or verifiable form. To enable these persons to assess the progress they have made towards achieving their objectives (self-control), the ERP system should provide the database to generate regular plan-to-actual comparisons.

In this blog, the IMS forms the blueprint for the design of the integral management control system.