Managerial Control Systems: A Case Study Of Statoil

Describe about the Managerial Control Systems?.

Considering the company selected for developing the report is known as Statoil, which is a Norwegian company headquartered in Stavanger and operates in the oil and gas industry. The company has its significant presence to be one of the market leaders in the particular industry, which can be defined by the size of employees and amount of revenues. The company has 32,000 employees with the significant presence in 32 countries globally. Alternatively, it has achieved revenue approximately of US$60 billion, which is recorded from its operation of 2005 (Simons 2013). However, because of some major twist of events with the company in 2006, Statoil has become a budget independent organization in 2007. Although deserting the budget will entirely be a new experience for the enterprise, it sees some new and efficient opportunities by welcoming the beyond budgeting movement. The similar example can be observed in the case of Borealis, which has abandoned its budgeting system in the mod-1990s to implement the best practices and becoming a budget-free organization. With the help of the case study related to Statoil, it can be determined that the major aim of Statoil be to cope up with the ever-changing requirements of the global environment. Therefore, the following portions of the report are developed to investigate the rationale of the identified processes as part of the managerial control system of the company.

For the organization selected as Statoil, the traditional way of annual budgeting process was used by the company within the multinational oil and gas industry. Later the executive committee of the company in May 2005 decided to discontinue the traditional budgeting method to introduce an advanced way of budgeting inspired by the beyond budgeting principles. However, in the case of the managers of Statoil, they believe that the budgeting process is highly harmful for the corporation. This particular belief has led the managers to claim that no budget is prepared by their company (Kaplan and Atkinson 2015). Substantially, the specific statement claimed by the managers has some certain reasons, which are needed to be discussed in the following paragraph.

The newly identified budgeting system will force the three different aims of the process into one single set of numbers. The three identified aims are setting the target, forecasting the budget, and allocating the resources. It can be seen that these three different aims are distinct from each other, and thus, they should be treated as a unique process. The new budgeting system identified by Statoil executive panel is looking forward to combining these unique processes within the same framework, which gives rise to the possibility of hampering the quality of the overall output. More clearly, it can be explained that the process of forecasting can be biased, as the same numbers are utilised for accomplishing the job, which also utilised for setting the target. It is also possible that the set of figures were utilised for the case of allocating the resources (Kerzner 2013). Therefore, decent results cannot be achieved with this newly adopted system, which drives the managers of Statoil to believe that budgeting process is not a part of the company anymore.

Requirement 2

Apart from that, Statoil has designed a particular framework called as Ambition-to-Action, which is dedicated to providing integration to the organizational strategy for the roles and responsibilities played by its employees. Furthermore, the effectiveness of the framework is based on offering the employees the appropriate freedom and flexibility as well. Based on this proposed framework, the company is required to update its documents as per the necessity, but not in a periodic interval (monthly or annual basis). The mentioned fact leads the managers of the company to believe that there is no need of adopting or updating to a new budgeting process as of now. Also because of that, they claimed that the company prepares no budget.

For operating in a multinational global business environment, a business corporation should need to develop a good performance in order to clinch to one of the leading positions in the respective market. It is a basic fact that the good or satisfactory performance of an organization is highly driven by the fundamental reassessment of the financial performance indicators involving the operation. In order to hold such a performance and coping up with the changing requirements of the organizational environment, Statoil decided to abandon the traditional method of budgeting from its internal organizational environment. There are some specific reasons behind such an important decision made by the decision-making council of the organization. The major ones amongst such reasons should need to be highlighted critically within this particular section.

The first and foremost reason for deserting the traditional budget is that the particular way of budgeting fails to provide the necessary flexibility to the organization with respect to the dynamically changing organizational environment (Miller and Rice 2013). It is observed that the organizational environment associated with the operations conducted by Statoil is highly unpredictable, and the particular demand involving the industry is continuously increasing. These certain facts on a combined basis are forcing the company to depend on a single figure to set the organizational target, forecasting the budget, and allocating the resources. Based on the beliefs of Statoil, these individual processes are separated from each other, and the managers or executives should need to deal with each process independently.

Apart from that identified reason, another effective factor causing relinquishment of the traditional budgeting system of the organization back in 2005 is considered as the application of a new model. It is observed that the new model was applied to the different unit levels, areas, and groups of the business integrated with the deeper pilot series. Influenced by this significant factor, the respective board of Statoil no longer accepted the traditional budgeting system (Bauer et al. 2012). Instead, the board has set some specific strategic objectives, key performance indicator (KPI) targets, and procedures for the company. Therefore, it can be clearly determined that developing and implementing the alternative performance management approaches is the core intention of Statoil by abandoning the existing budgeting system from the internal environment.

Requirement 3

It is disclosed earlier that the abandoning the existing budgeting system and introducing a new and efficient model to achieve the results is highly inspired by the beyond budgeting approaches by the executive committee of Statoil. Considering the situation, the board of the company thought that the existing budgeting system follows the traditional approach, and it is excessively inflexible to meet the ever-changing demands of the oil and gas industry. Based on such a decision, the board decided to discontinue the approaches of the traditional budgeting system to emphasise more on establishing and implementing the strategic objectives, KPI targets, and specific set of organizational procedures. Therefore, a significant change within the internal environment of the company can be noticed during the particular timeframe of Statoil’s organizational structure (Zsambok and Klein 2014). However, the certain was also dependent to a substantial extent to the roles played by the line managers and supervisors from different levels.

In order to initiate and implement the proposed changes successfully, the CFO and the project managers were required to play their important roles by successfully communicating the major weaknesses of the existing budgeting technique, i.e. traditional budgeting method. The certain changes as mentioned in the earlier portion are highly influenced by the implications of Beyond Budgeting process, which is considered as a management model dedicated to overcoming the problems caused by the traditional budgeting approaches. The primary emphasis is provided by Statoil to this particular management model due to the practices are concentrated on increasing the adaptability of the organization within the certain business environment. In order to replace the existing budgeting methods and approaches, different processes under the Beyond Budgeting technique are adopted by the company. Importantly, these processes are designed and implemented by ensuring the compliance with seven vital principles of beyond budgeting approach (Kim and Feamster 2013). The first principles based on developing and shaping up the leadership approach of the organization to be able to identify the drivers of change within the current business environment efficaciously. Rest of the seven principles majorly focuses on right practices from the management and leadership ideas.

There are some critical processes determined by Bjarte Bogsnes, the beyond budgeting project managers, for implementation purposed and ensuring the achievement of goals by the company. These processes are collectively known as the Ambition-to-Action method for the selected organization. The following approaches and practices are responsible for replacing the traditional way of budgeting approach for the selected company. The first and foremost process identified by the CFO and project manager of Statoil is the strategic planning. As part of the process, two executive committee meetings were held within the organization each year for developing the clear understanding of the strategic concepts and challenges over the past number of years based on the organizational performance in different periods (Scott and Davis 2015). With the help of the understanding gained regarding the strategic directions and trends of the organization, the process supports the establishment of strategic objectives and ambition statement for Statoil. The formation of these targets and the statement is done by considering the long-running effect over the different operational period of the organization.

After accomplishing the strategic planning stage, Statoil shifts its focus to set the performance target for the company by considering its ambitions and relativeness. The certain considerations were done due to the goals are related to inputs and outputs of the organization. Apart from that, another major advantage can be gained by the company with such a consideration. It allows the organization to conduct a performance comparison concerning the performance and outcomes of other different organizations within the same industry.

Next, forecasting is designed to develop a superior estimate about the expected outcomes of the performance. The significance of this process is to make sure that the preliminary warnings concerning the possible challenges or issues can be gained by the company in an advance (DRURY 2013). Successful implementation of the identified process will ensure Statoil take the corrective measures according to the necessity.

Lastly, allocation of resource is observed to be another major process implemented within the internal environment of Statoil. The process is not a mechanical function related to the target or the forecasts. As part of the process, the managers of the company are provided with the freedom to utilise the quantity of resources defined by the scope of responsibility.

Considering the analysis of the case study related to Statoil, it is determined that Ambition-to-Action System is identified by the company in a mean to embrace and integrate the Beyond Budgeting approaches. The particular system is designated to form and integrate the organizational strategy for the employee of the company to shape up their functions while maintaining independence and flexibility to their commitments. Ambition-to-Action system is developed with five different principles, which are outlined below:

Importance is provided to the performance, and it can outperform the peers.

Based on the code of conducts of the company, it is necessary to develop the right set of actions according to the situation. Here the decision-making criteria related to the Ambition-to-Action are maintained in such a manner to ensure the sound business judgement for the company.

With the help of establishing the identified framework, the needful resources are made available for allocation depending on each scenario.

Different actions of the business are developed by considering the future consequences, which ensures the overall priority to be provided to the way of conducting those actions (Bauer et al. 2012).

Conducting the performance assessment is also an essential factor for developing Ambition-to-Action, as the process is done with considering the holistic approach related to the delivery and behaviour.

On the other hand, the beyond budgeting process is based on 12 core principles for increasing the organizational adaptability with the certain business situation. Out of the 12 principles, six are dedicated to shaping up the leadership attitudes and approaches for addressing the major drivers of change, whereas the rest of the principles are based on organising the leadership actions and managerial functions. According to the statement made by the project manager of beyond budget, it is necessary for the organization to prepare the traditional budgets in order to deal with the transactions of external parties of the company. Without preparing such budget would make the managers of the company becoming  critically confused regarding the understanding of the external interfaces (Zsambok and Klein 2014). Therefore, it can be determined that the project managers have implemented some additional features to the Ambition-to-Action system to cope up with the changing scenario of the business. It is clear from the statement that the project manager has not completely eradicated budgeting system of the organization in order to achieve the identified purposes. Similarly, Baard Venge argued that becoming dynamic and altering the overall processes as part of the internal control system of the organization is highly difficult given the scenario all the external parties are not highly dynamic to the respective environment. It is observed that the majority of the external organizations believes in the annual budget, which forces the certain company to maintain the traditional budgeting approaches in line with the newly identified model.

Based on the particular understanding developed within the portion, it is acknowledged that not all the 12 fundamental principles of beyond budgeting are integrated and adopted in the Ambition-to-Action system. Because of the varying needs of the external parties of Statoil, the traditional budgeting practices are also withhold.

By the help of the analysis of the case study, critical knowledge is developed concentrating on the concepts of Beyond Budgeting philosophy. The certain philosophy is explained as the coherent model of management with the having the ten years’ experience. The applicability of the management model is based on the effectiveness of the associated theories to bring positive and relevant changes within the internal environment of the organizations (Scott and Davis 2015). On the other hand, the adaptability of any new management model requires the establishment of varying understandings for the different business schools and management consultants. In order to develop the suitable level of knowledge regarding the new paradigm a reasonably consistent communication is essential.

In the case of beyond budgeting, it still not achieved that certain stage in the global business environment. The academics and business consultants are constantly focusing on developing the in-depth knowledge about the particular model for expanding its utilisation to the various global business enterprises. The preliminary understanding related to the identified management model suggests that the adoption of the approaches is rare outside Europe. Apart from the major reason causing the limited utilisation of the model, some other contributory factors also play significant roles in the process. These factors are briefly elaborated below:

The application of the beyond budget approach is based on different backgrounds of the people. The common understanding of the people leads them to perceive that the overall approaches as part of the procedure are only about removing the budgets from the organization (Miller and Rice 2013). However, the original aim of beyond budget is meaningfully broader and deeper, as it ensures the capability of the organization is enhanced to adopt the key changes in the business environment.

There are different articles and statements from the field of business management claiming beyond budgeting approaches to replace the existing budgeting system of the organization with the rolling forecasts. However, the perception of rolling forecast and beyond budgeting is entirely dissimilar to each other.

From the example of one of the largest oil and gas companies known as Statoil from Scandinavia and the European pharmaceutical company Borealis, it can be determined that the application of Beyond Budgeting be only for the rich companies. This is one of the primary reasons, which limits the other companies outside Europe to embrace the model.

Last but not the least, one of the widespread perceptions regarding the implementation of beyond budgeting approaches is that the process ensures losing of control from the different levels of authority.

There are some principle reasons recognised causing the managers of Statoil to become highly dissatisfied with the traditional method of budgeting followed by the company. These reasons are outlined and stated in the following portion.

• Firstly, the limited longevity of the assumptions made for preparing the budget is responsible for creating the unpleasing attitudes among the managers. Different assumptions developed for creating the budgets become obsolete after a short period.
  
  
• Secondly, with the application of the traditional budgeting system, the operating managers gained the facility by assuming the budgeted cost as their entitlements (Kerzner 2013). On the other hand, the other line managers were abandoned from doing additional things that can create values for them as well as the organization.
  
  
• Thirdly, the traditional budgeting system exercised by Statoil was highly centralised with the essential requirement of micro-management. Micro-management is a complex aspect, which demands the need of adequate knowledge and expertise. It is something, which makes the managers to become
  
  
• Fourthly, the managers were required to be involved in multiple multifaceted functions as part of the traditional budgeting system observed within the organization. They were responsible for conducting variance analysis with explaining the variances and reviewing the past performances of the organization, instead of participating in the future decision-making process of the organization.
  
  
• Lastly, the traditional budgeting process is performed on an annual basis, which is not relevant to some extent of areas for the business of Statoil.

Conclusion

Based on the overall efforts and identified knowledge extracted, it can be concluded that appropriate planning and implementation plays major roles in the success of organization, apart from the identifying the suitable guidelines and system. The Proper way to planning and executing facilitates the organization to support the achievement of its predefined goals and objectives in a sufficient manner. With the emergence of Ambition-to-Action processes identified and implemented by Statoil to replace its traditional budgeting system, it is evident that the modern day organizations are beginning to incorporate risks to their internal managerial control system for effectively surviving into the competitive business environment. Despite the identified fact, it is suggested to maintain both the traditional and newly identified model within the internal control system for effectively satisfying the varying needs of the industry.

References

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Kerzner, H.R., 2013. Project management: a systems approach to planning, scheduling, and controlling. John Wiley & Sons.

Kim, H. and Feamster, N., 2013. Improving network management with software defined networking. Communications Magazine, IEEE, 51(2), pp.114-119.

Miller, E.J. and Rice, A.K. eds., 2013. Systems of organization: The control of task and sentient boundaries. Routledge.

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