Managerial Accounting: Link Strategy with an Organization’s Structure
Companies and other organizations establish goals that they plan to meet, such as benchmarks for sales, profitability, new products, and even employee satisfaction. Ideally, all employees know the organization’s goals and understand their roles in meeting them. The plan to meet the company’s goals is called the strategy.
Managers should structure the company’s operations to support its strategy to meet the company’s goals. Doing so usually means breaking the strategy down into smaller tasks that different managers and departments can take responsibility for performing.
In the typical chain of command for a small company, some number of vice presidents report to a president, each overseeing a different aspect of executing the company’s strategy. A separate group of employees reports to each vice president. The organizational structure requires the president to delegate tasks to individual vice presidents, who in turn delegate tasks to their employees.
Suppose that the NNW Company has a goal to earn $100,000 in profit. Part of its strategy is to advertise in social media outlets to encourage more teenagers to buy its leading product, the MacGuffin. The company hopes the ads will lure more teens to MacGuffins, increasing the company’s sales and net income.
To implement this strategy, NNW needs to prepare a master budget that provides a kind of a road map to outline how exactly the company plans to sell more MacGuffins and increase its profits. The budget breaks up the strategy into different tasks and objectives, assigning them to managers and departments throughout the company.
For example, NNW’s Advertising department takes responsibility for creating a social media campaign. Sales agents are responsible for identifying new distribution channels for MacGuffins (which in turn will increase sales and profitability). A factory worker’s role is to produce MacGuffins (increasing sales and profitability). A maintenance worker’s role is to keep the office in shipshape condition so that other employees can effectively work to increase MacGuffin sales while keeping costs down.
Management controls help managers identify weaker and stronger areas within the organization and understand how performance in those areas affects the implementation of the overall strategy.
For example, suppose NNW senior managers budget $50,000 for the Advertising department to spend on the new MacGuffin social media campaign. When examining the advertising budget report, senior managers notice that the department only spent $30,000 on the campaign, a favorable variance of $20,000 (favorable because it increased income).
Managers now need to ascertain why the Advertising department spent so little on its social media campaign even though the social media angle is such an important part of its growth strategy.
When delegating tasks, managers must give both authority and accountability to complete those tasks:
Authority: The subordinate must receive authority to perform the task.
Accountability: The subordinate must be accountable to the manager for performing the task.
For example, an NNW sales agent receives office space, samples, and computer software needed to serve customers, but she’s also accountable for sales made to those customers.
The factory worker receives a workstation and job responsibilities to produce goods and then is made accountable for the amount and quality of goods produced. The maintenance worker receives the supplies and equipment needed to keep the office clean. A supervisor checks to make sure that all cleaning procedures were followed.