Agenda Today

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Agenda Today

• Returned quiz and Ohio Instruments earlier
• Midwest Ice Cream Case
• Answer questions about variance schemes
• Go over chapter 11 ideas

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Remember the Systems View?
The Organization as a System of Interrelated
Elements
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Stakeholders

• The individuals, groups of individuals, and
  institutions that define an organizations
  success or affect the organizations ability to
  achieve its objectives. Stakeholders include
  customers, employees, suppliers, owners and the
  community.

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Strategy Considerations

• 1. Identifying the alternative means by which the
  organization might compete for customers. Where
  are we going to compete in the golden triangle of
  cost, quality, and functionality and in what
  markets.
• 2. Evaluating each of these alternative means
  relative to the capabilities and expectations of
  the stakeholders.

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Role of Strategy

• The role of strategic planning is to define the
  relationship that the organization will develop
  with each of its stakeholder groups so that all
  the components fit together.

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Planning, Decision Making, and Control
Mission identifies organizations stakeholders
and broad objectives
Planning and Decision Making
Objectives specify specific performance goals
sought over the next 5 to 10 years
Control
Strategies specify the organizations form,
resource allocations, and broad business
decisions used to seek objectives
Observations and measurement of short-term
performance determine whether the organization is
on track to achieve its long-term objectives
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Process

• Any integrated group of activities designed to
  achieve a specific purpose.

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Performance measurement

• Performance measurement focuses on process
  results and how those results contribute to the
  organizations secondary objectives

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Strategic Objectives

• Primary Objectives - what the owners expect from
  their participation in the organization
• Secondary Objectives - what the organization
  expects to give to and receive from each
  stakeholder group other than its owners

Do you agree with this statement from your text?
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Secondary Objectives Reflect

• What the organization expects from each of its
  stakeholder groups to help it achieve its primary
  objectives
• What the organization must provide to each
  stakeholder group to secure from that group what
  the organization needs to achieve its primary
  objectives.

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GOAL
The Nature of Control
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In Control???

• A system is in control if it is on a path that
  will lead it to achieving its objectives.
  Otherwise, the system is out of control.
• The key concept here is achieving goals and
  objectives, not necessarily conformance to plan.
• Another key concept is that controls are not
  sufficient to achieve control.

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Organization Level and Measurement Focus
11-29
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Organization Level and Measurement Focus

Performance Measurement Type
Major Responsibility
Organization Level
Middle
A mix of operating measures that include both
output and outcome measures and reflect how well
units are working together to meet stakeholder
requirements (system response time, system
quality, and rate of new product introduction)
and financial measures (cost per unit,
productivity, or profit margin) that compare
performance to competitors to evaluate the
efficacy of the systems the organization has in
place
Coordinate existing systems and develop new ones
to achieve intermediate-term performance on
critical success factors
supervisors and managers
11-30
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Organization Level and Measurement Focus

Performance Measurement Type
Major Responsibility
Organization Level
Upper
Aggregated measures of outcome performance, such
as return on investment, number of safety
incidents, rate of new product introduction that
reflects senior level employees responsibility
for meeting the organizations commitment to its
stakeholders
Identify opportunities to develop new markets
vice presidents, presidents
11-31
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Timing of Control
Feedback or Reactive Control
Feedforward or Proactive Control
Concurrent Control
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Types of Control Systems

• Task Control - setting rules and ensuring that
  they are followed
• Results Control - specifying what is important in
  the organization and letting workers decide how
  best to do the job

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Task and Results Control Summary
Task Control
Results Control
Element
Organization environment
Stable
Changing
Control question
Were rules followed?
Were objectives achieved?
Locus of responsibility
Top down
Bottom up
Employee role
Follow rules
Achieve stated objectives
Risk level
High
Low
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Problems with Results Control

• Has the causal link between secondary results and
  primary results been identified?
• Can organizations measure the right thing?
  (Measure is a strong standard.)
• Is it possible to associate a given result with a
  given person or decision?
• Results are influenced by the environment, which
  is uncontrollable.

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Managing Causes, Not Results

• Managing the performance of the primary objective
  requires understanding the causes of that
  performance and managing those causes
  effectively.
• Managers must manage the secondary performance
  measures which are drivers of performance on
  primary objectives.

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Performance Measures

• Entity measures
• Stock returns (dividends appreciation)
• Return on total investment (ROI)
• Return on equity (ROE)
• Residual income (including EVA)
• Income from operations
• Income from continuing activities
• Net income

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Performance Measures

• Segment measures
• Contribution margin
• Short-run performance margin
• Segment margin
• Variances from plan

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Performance measures

• Short-run performance margin Definition
  contribution margin less separable, discretionary
  fixed costs (a.k.a. performance margin).
• Segment margin
• Definition Performance margin less separable,
  committed fixed costs

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Control versus Responsibility

• Spheres of responsibility are primary, control
  less achievable.
• The opportunity to influence is a consideration
  in constructing performance reports.

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Accounting Methods

• Accounting performance measures are frequently
  modified to reflect the level of control, or lack
  of control, that individuals may have in specific
  situations.
• Modify a budget to reflect the actual activity
  volumes experienced (flexible budgeting)
• Adapt a plan to reflect the operating environment
  actually experienced.

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Accounting Methods

• Adopt a relative performance standard against
  which to evaluate individuals. For example, a
  purchasing agents ability to get good prices can
  be measured against a price index or some simple
  trading rule that constitutes an external,
  relative standard.
• Limit reporting to key success factors

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Accounting Methods

• Emphasize more controllable factors, and
  de-emphasize less controllable factors as in
  segment reports
• Isolate one factor at a time in variance systems
  to focus on areas of responsibility related to
  single performance factors
• Use of reporting entities consistent with
  responsibility levels

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An overriding issue

• Strategic alignment of incentives
• Individual vis-a-vis organization
• Function vis-a-vis function
• Entity vis-a-vis entity
• Incentives do work!

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Accounting entities

• cost center
• revenue center
• profit center
• investment center
• administered center
• support center
• division (business unit)

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Balanced Scorecard

• A set of performance targets and an approach to
  performance measurement that stresses meeting all
  the organizations objectives relating to both
  its primary and secondary objectives - hence the
  balance. Obviously, this leaves open the
  question of trade-offs.

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Implementing a Balanced Scorecard
1.

• Management must define the organizations
  primary objectives

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Implementing a Balanced Scorecard

• The organization must understand how stakeholders
  and processes contribute to its primary objectives

2.
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Implementing a Balanced Scorecard

• The organization must develop a set of secondary
  objectives that are the drivers of performance on
  primary objectives

3.
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Implementing a Balanced Scorecard
4.

• The organization must develop a set of measures
  to monitor performance on both primary and
  secondary objectives

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Implementing a Balanced Scorecard

• The organization must develop a set of processes,
  along with their attendant implicit and explicit
  contracts with stakeholders, to achieve those
  primary objectives

5.
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Implementing a Balanced Scorecard
6.

• The organization must make specific and,
  therefore, public statements about its beliefs
  concerning how processes create results

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A Balanced Scorecard Provides

• A method for the organization to systematically
  consider what it should do to develop an
  internally consistent and comprehensive system of
  planning and control
• and . . .

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A Balanced Scorecard Provides

• a basis for understanding the difference between
  successful and unsuccessful organizations

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