Controlling instruments in the "INTOP" business game

Table of contents

List of figures

List of abbreviations

1. Introduction

2. Application of strategic controlling instruments in the radio industry
2.1 Structural analysis of the radio industry using Porter’s Five Forces
2.2 Discussion of possible strategies using Porter’s generic strategies
2.3 Operationalization of the strategy of cost leadership using Kaplan and Norton’s Balanced Scorecard

3. Application of operative controlling instruments in the radio industry
3.1 Steering of the product policy using a multiple-stage margin accounting system
3.2 Planning of a regional sales organisation using a break-even analysis

4. Conclusion

Appendix I: Calculation of the experience curve effects in subchapter 3.1

List of literature

List of figures

Figure 1: The original Balanced Scorecard

Figure 2: The modified Balanced Scorecard

Figure 3: Cost structure analysis using a three-stage margin accounting system

Figure 4: Graphical break-even analysis for alternative forms of selling

List of abbreviations

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1. Introduction

Hans B. Thorelli, Robert L. Graves and Lloyd T. Howells, the initial developers of INTOP, put strong emphasis on the “ubiquity of entrepreneurial opportunities and decision situations”^[1] that INTOP participants have to cope with. Against this complex background, this paper aims at showing how strategic and operative controlling instruments can be used to structure information and thus to provide support in both strategic and operative decision situations.

The underlying understanding of controlling in this paper is based on Robert J. Mockler’s concept of management control as “a systematic effort by business management to compare performance to predetermined standards, plans or objectives (…)”^[2]. According to Mockler, controlling begins with a firm’s plans and expectations which shape its objectives and standards. These objectives and standards are considered as preconditions for performance measurement.^[3]

Given its aim, this paper is split into two parts. Chapter two deals with the strategic dimension of controlling. In 2.1, the structure of the radio industry is analysed using Porter’s five forces. In 2.2, the results of this analysis are used to discuss a radio producer’s strategic alternatives, following Porter’s three generic strategies. 2.3 includes an exemplary operationalization of the strategy of cost leadership using Kaplan and Norton’s Balanced Scorecard. In chapter three, controlling is seen from its operative perspective. In 3.1, it is shown how a multiple-stage margin accounting system can be used to improve decisions concerning product policy. In 3.2, a break-even analysis is used to determine the right timing for the implementation of a regional sales organisation.

To provide an in-depth analysis of a specific industry, this paper solely deals with the INTOP radio industry. However, the instruments applied can also be used by firms that are engaged in the vacuum cleaner industry. Since more than one strategy can lay the foundations for success in INTOP, this paper shall not dictate one particular strategy that automatically leads to success. Instead, it provides an overview of alternative strategic approaches each of which can make, if implemented appropriately, INTOP participants succeed. The selection of instruments applied in this paper is not exhaustive.^[4] The instruments that are presented were selected because they can be used to handle problems that are of high importance in the specific context of INTOP.

2. Application of strategic controlling instruments in the radio industry

2.1 Structural analysis of the radio industry using Porter’s Five Forces

Before a strategy can be formulated, the basic characteristics of a firm’s target industry have to be identified as they determine the framework in which a strategy can be developed. As for the INTOP radio industry, the target industry’s basic characteristics correspond to the rules and mechanisms, either predetermined or arisen in the course of the game, that hold true for this industry. INTOP participants have to identify these rules and mechanisms and find ways to take advantage of them. Michael E. Porter’s structural analysis is an instrument that can help them fulfil this task.

Porter identifies five competitive forces that firms in any given industry are exposed to: the threat of new entrants, bargaining power of buyers, the threat of substitute products, bargaining power of suppliers and rivalry among existing firms.^[5] These five forces jointly determine the intensity of competition in an industry. The strength of each force depends on an industry’s basic structural characteristics. The threat of new entrants is low if a potential entrant can expect retaliation from established firms and/or if entry barriers are high.^[6] An important entry barrier are cost advantages, for example through economies of scale or experience. If economies of scale can be realised and experience kept proprietary, a firm can build up entry barriers.^[7] Bargaining power of buyers can pose a threat if a firm cannot differentiate its products from those of competitors and/or if there are individual buyer groups who combine a huge sales volume and/or pose the threat of backward integration.^[8] The threat of substitute products can be a matter of concern if a firm’s products compete with products of other industries.^[9] Bargaining power of suppliers depends on the extent of influence that individual supplier groups can exert on a firm.^[10] Whether rivalry among existing firms can pose a threat depends on an industry’s degree of product differentiation. If the degree of product differentiation is low, all firms in an industry intensely compete for the same customers.^[11]

The threat of substitute products is irrelevant for the radio industry. Porter defines substitute products as “other products that can perform the same function as the product of the industry”^[12]. Since there is no product that fulfils this criterion, a radio producer solely faces competition from within his own industry. Another force that can be ignored is the bargaining power of suppliers. If they are ordered on time^[13], raw materials can always be bought at a fixed market price^[14]. Thus, individual suppliers cannot threaten a radio producer, for example with an increase in prices or even the withholding of important raw materials.^[15]

In contrast, the threat of new entrants plays an important role in the radio industry. Whether an established radio producer’s reaction to a market entry can be anticipated accurately partly depends on whether he already was confronted with an entrant. If this is not the case, his reaction has to be inferred from other factors, such as his financial resources that indicate his ability to retaliate.^[16] Since the annual financial statements of a firm’s competitors are only published once a year^[17], other data has to be used as a reference point. Data that, if interpreted correctly, can indicate an established radio producer’s financial situation is for example information concerning past and current turnovers, cost information, for example on construction costs that recently accrued, and outstanding trade credits. Another valuable information that helps anticipate the extent of retaliation is the number of radio factories that a radio producer employs. A high number indicates that the radio industry is of strategic importance to him. If he even is non-diversified, the radio business is his sole source of operating profit. Thus, he can be expected to react sharply to a new entrant. The other important factor influencing the threat of new entrants are entry barriers. An established radio producer with a huge market share can have a cost advantage over competitors with a smaller market share. Since he produces more radios per quarter than his competitors to satisfy demand, his fixed costs, such as the five per cent quarterly depreciations of his plants^[18], are spread over more production units. Thus, he ceteris paribus has a cost advantage. Consequently, an entrant either has to come in at large scale to equalise his cost disadvantage or accept it, which entails other problems. For instance, a new entrant with a cost disadvantage can be constrained in his price policy because he cannot profitably match the price of an established radio producer. Apart from economies of scale, experience is of high relevance for the radio industry due to the five per cent experience curve that applies to the other variable production costs.^[19] Whether a radio producer can benefit from experience curve effects and the extent to which they can be exploited depend on his market share over time^[20] as well as other factors that affect the other variable production costs, such as a plant’s capacity utilisation.^[21]

Bargaining power of buyers is only partly simulated in INTOP. There are no individual buyer groups that can pose a threat to a radio producer, for example through the combination of a huge sales volume. Moreover, radios are consumer products, and consumers, unlike firms on upstream value chain steps, cannot pose the threat of backward integration. However, a radio producer can eliminate a typical reason for bargaining power of buyers by increasing switching costs through the creation of customer loyalty as well as quality differentiation.

2.2 Discussion of possible strategies using Porter’s generic strategies

Once the basic characteristics of its target industry have been identified, a firm has to derive an appropriate strategy to succeed in its chosen industry. Michael E. Porter elaborates on different strategic alternatives that a firm can pursue and thus provides an appropriate theoretical background to discuss possible strategies for a radio producer in INTOP.

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^[1] Cf. Thorelli, Hans B. / Graves, Robert L. / Howells, Lloyd T., International Operation Simulation, 1962, p. 297.

^[2] Mockler, Robert J., Developing the Science of Management Control, 1970, p. 14.

^[3] Cf. Mockler, Robert J., Developing the Science of Management Control, 1970, p. 14.

^[4] For a broader selection of strategic controlling instruments, cf. for example Buchholz, L., Strategische­s Controlling, 2009, pp. 67-223; for a broader selection of operative controlling instruments, cf. for example Peemöller, V.H., Controlling, 2005 , pp. 226-367.

^[5] Cf. Porter, M.E., Competitive Strategy, 1980, p. 4.

^[6] Cf. Porter, M.E., Competitive Strategy, 1980, pp. 6 f.

^[7] Cf. Porter, M.E., Competitive Strategy, 1980, pp. 15-17.

^[8] Cf. Porter, M.E., Competitive Strategy, 1980, pp. 24 f.

^[9] Cf. Porter, M.E., Competitive Strategy, 1980, p. 23.

^[10] Cf. Porter, M.E., Competitive Strategy, 1980, p. 27.

^[11] Cf. Porter, M.E., Competitive Strategy, 1980, p. 19.

^[12] Porter, M.E., Competitive Strategy, 1980, p. 23.

^[13] Cf. Baetge, J. / Fischer, T. / Kunberger, A., Management Information, 2013, p. 23.

^[14] Cf. Baetge, J. / Fischer, T. / Kunberger, A., Management Information, 2013, p. 25.

^[15] Purchases from competitors or the administrator that are subject to negotiations are only an option if a firm does not manage to place its order in time.

^[16] Cf. Porter, M.E., Competitive Strategy, 1980, p. 14.

^[17] Cf. Baetge, J. / Fischer, T. / Kunberger, A., Management Information, 2013, p. 17.

^[18] Cf. Baetge, J. / Fischer, T. / Kunberger, A., Management Information, 2013, p. 24.

^[19] Cf. Baetge, J. / Fischer, T. / Kunberger, A., Management Information, 2013, pp. 26 f.

^[20] Representing a firm’s cumulative output.

^[21] Cf. Baetge, J. / Fischer, T. / Kunberger, A., Management Information, 2013, pp. 25 f.