Slide 1Slide 2Performance Evaluation and the Balanced ScorecardLearning Objective 1Centralized and Decentralized OperationsResponsibility CentersS11-4: Classify Types of SubunitsLearning Objective 2Goals of Performance Evaluation SystemsLimitations of Financial Performance MeasuresLearning Objective 3Balanced ScorecardSlide 13Four PerspectivesE11-19: Classify KPI’s by Balanced Scorecard PerspectiveLearning Objective 4Performance ReportsCost Center Performance Reports: Exhibit 11-5Revenue Center Performance Reports: Exhibit 11-6Profit Center Performance Reports: Exhibit 11-7Centralized Services Decision TreeE11-20: Complete and Analyze a Performance ReportLearning Objective 5Investment CentersSummary Performance MeasuresReturn On Investment (ROI)ROIE11-22: Compute Each Division’s ROIE11-22: Compute Each Division’s Sales Margin and Interpret Results (continued)E11-22: Calculate Each Division’s Capital Turnover (continued)E11-22: Expanded ROI Formula (continued)Residual IncomeEconomic Value AddedRI vs EVAE11-23: Calculate Each Division’s RIE11-23: Calculate Each Division’s EVA (continued)Slide 37Slide 38End of Chapter 11Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 1Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.2Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Performance Evaluation and the Balanced ScorecardChapter 113Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Learning Objective 1Explain why and how companies decentralize4Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Centralized and Decentralized OperationsCentralized DecentralizedDecision making and planningOwner/Manager Delegated to unit managersApplicationbaseSmall scope of operations Business characteristic - Geographic area, product line, customer base, business function, other. Advantages• Avoids duplication of costs• Simplifies goal congruence•Frees management time•Uses experts knowledge• Improves Customer Relations • Vast training and experience • Increases managers’ motivation and retention Disadvantages•Limits management time•Managers knowledge limited•Customer Relations strained •Costly Training for one•Decreases managers’ motivation and retention• Duplicates certain costs or assets• Problems with Goal Congruence5Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Responsibility CentersResponsibility Center Manager is responsible for…ExamplesCost Center Controlling Costs Production line at Dell computerRevenue Center Generating Sales Revenue Midwest sales region at Pace FoodsProfit Center Producing profit through generating sales and controlling costsProduct line at Anheuser-BuschInvestment Center Producing profit and managing the division’s invested capitalCompany divisions such as Walt Disney World Resorts6Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. S11-4: Classify Types of Subunits1. Manager of Holiday Inn’s central reservation office2. Managers of various corporate-owned Holiday Inn locations3. Manager of the Holiday Inn corporate division4. Manager of the Housekeeping Department at a Holiday Inn5. Manager of the Holiday Inn Express corporate division6. Manager of the complimentary breakfast buffet at a Holiday Inn ExpressCost centerInvestment centerInvestment centerCost centerInvestment centerCost center7Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Learning Objective 2Explain why companies use performance evaluation systems8Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Goals of Performance Evaluation Systems•Promoting goal congruence and coordination•Communicating expectations•Motivating unit managers•Providing feedback•Benchmarking9Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Limitations of Financial Performance Measures•Management needs both:– Lag indicators– Lead indicators•Tendency to focus on short-term achievements10Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Learning Objective 3Describe the balanced scorecard and identify key performance indicators for each perspective11Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Balanced Scorecard•Measure company’s activities in terms of its vision and strategies•Financial and operational performance measures are considered•Link company goals to key performance indicators12Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. COMPANY GOALSCOMPANY GOALSCRITICAL FACTORS(customer satisfaction, operational efficiency, employee excellence, financial profitability)KEY PERFORMANCE INDICATORS (KPIs)(market share, yield rate, employee training hours, revenue growth)KEY PERFORMANCE INDICATORS (KPIs)(market share, yield rate, employee training hours, revenue growth)13Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. Four Perspectives•Financial perspective–How do we look to shareholders?•Customer perspective–How do customers see us?•Internal business perspective–At what business processes must we excel to satisfy customer and financial objectives?•Learning and growth perspective–Can we continue to improve and create value?14Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. E11-19: Classify KPI’s by Balanced Scorecard Perspectivea. Number of customer complaints b. Number of information system upgrades completedc. Economic Value Added (EVA)d. New product development timee. Employee turnover ratef. Percentage of products with online help manualsg. Customer retentionh. Percentage of compensation based on performancei. Percentage of orders filled each weekj. Gross margin growthk. Number of new patentsl. Employee satisfaction ratings Customer perspectiveLearning and growth perspectiveFinancial perspectiveInternal business perspectiveLearning and growth perspectiveInternal business perspectiveCustomer perspectiveLearning and growth perspectiveInternal business perspectiveFinancial perspectiveLearning and growth