Chapter 11 Performance Evaluation and the Balanced Scoreboard 1 Why Do Companies Decentralize Operations a Centralized Decision Making The owner or top manager often makes all planning and operating decisions usually with smaller firm s b Decentralized Decision Making Splitting operations into different divisions or operating units top management delegates decision making responsibility to the unit managers i Advantages 1 Frees Top Management s Time Since unit managers are the ones in charge top managers can concentrate on long term strategic planning and higher level decisions 2 Supports Use of Expert Knowledge Allows top management to hire the expertise each business unit needs for specific operations 3 Improves Customer Relations By only focusing on one segment of the company unit managers can maintain closer contact with important customers 4 Provides Training Unit managers are training to become effective top managers 5 Improves Motivation and Retention Empowering unit managers to make decisions increases managers motivation and retention and improves job performance satisfaction ii Disadvantages 1 Duplication of Costs Each unit may need its own assets such as a payroll department or specific software 2 Problems Achieving Goal Congruence Decentralized company s often struggle to have unit manager s goals align with top management s goals c Responsibility Centers A part or subunit of an organization whose manager is accountable for specific activities Page 619 i Cost Center Controlling costs 1 Example Production lines legal departments accounting departments ii Revenue Center Generating sales revenue 1 Example Sales departments iii Profit Center Producing profit through generating sales and controlling costs 1 Example Product lines iv Investment Center Producing profit and managing the division s invested capital 1 Example Company divisions 2 What are Performance Evaluation Systems when decentralization occurs i Goals of the PES a Provide top management with a framework for maintaining control over the entire organization 1 Promoting Goal Congruence and Coordination Each unit must move in a synchronized fashion toward the overall company goals 2 Communicating Expectations Unit managers need to understand the goals of the whole company and the specific part that their units play in attaining these goals 3 Motivating Unit Managers Upper management may offer bonuses to unit managers who meet or exceed performance targets 4 Providing Feedback Provide upper management with the feedback it needs to maintain control over the entire organization if targets are not met at the upper level top management will take corrective action 5 Benchmarking Practice of comparing the unit s achievements against other company subunits other companies in the same industry the best practices in the industry or the subunit s past performance b Limitations of Financial Performance Measurement Financial measurements tend to be lag indicators rather than lead indicators because they provide more information about the past than the future and on short term achievements instead of long term achievements c Balanced Scoreboard Management must consider both financial performance measures and operational performance measures which measure future performance i Key Performance Indicators KPI s Help managers assess whether the company is achieving its goals such as customer satisfaction ratings market share ii Four Perspectives 1 Financial Perspective How do we look to shareholders a Ultimate Goal Increase the company s profits by increasing revenue controlling costs and increasing productivity b KPI s Sales revenue growth gross margin growth ROI 2 Customer Perspective How do customers see us a Customers are concerned with the products price the product s quality the sales service quality and the product s delivery time b Use customer satisfaction ratings c KPI s Percentage of market share increases in of customers of repeat customers and rate on time deliveries 3 Internal Business Perspective At what business process must we excel to satisfy customer and financial objectives a Incorporates innovation operations and post sales service b KPI s of new products developed or new product development over time of units produced hour defect rates of warranty claims received average repair time average wait time for customer service i BASED ON PRODUCTION 4 Learning and Growth Perspective Can we continue to improve and create value a Focus Employee capabilities information system capabilities and the company s climate for action b KPI s hours of employee training employee satisfaction employee turnover and of employee suggestions implemented percentage of employees having online access to info about customers percentage of processes with real time feedback on quality cycle time and cost 3 How do Managers Evaluate the Financial Performance of Cost Revenue and Profit Centers a Cost Center Performance Reports i Focus on the flexible budget variance ii Use Management by Exception to determine which variances in the performance report 1 Ex Management may look at only those variances that exceed a certain dollar are worth investigating b Revenue Center Reports amount i Highlight both the flexible budget variance the sales volume variance ii In addition revenue centers may be evaluated in terms of revenue growth percentage c Profit Center Reports i Includes both revenues expenses 4 How do Managers Evaluate the Financial Performance of Investment Centers a Investment Centers large divisions of the company the duties of an investment center s manager are similar to those of a CEO i Responsible for generating profit and making the best use of the investment center s assets ii Measure two factors 1 How much income the division is generating and 2 how efficiently the division is using its assets b Return on Investment ROI Operating Income Total Assets OR Sales Margin x CT i Measures the amount of income an investment center earns relative to the size of its assets ii Divisions with a higher ROI are more likely to receive extra funds because they have a track record of providing a higher return iii Sales Margin Operating Income Sales 1 How much operating income the division earns on every 1 of sales iv Capital Turnover Sales Total Assets 1 Shows how efficiently a division uses its assets to generate sales c Residual Income RI Looks at whether the division has created any excess or residual income above and beyond management s
View Full Document
Unlocking...