chapter 23. explain why and how companies decentralize
TRANSCRIPT
Chapter 23
Explain why and how companies decentralize
Companies decentralize as they grow Split operations into different divisions or
operating units Top management delegates decision-
making to unit managers
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Advantages Disadvantages
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Responsibility Center
Manager is responsible for:
Cost center ?
Revenue center ?
Profit center ?
Investment center
?
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Explain why companies use performance evaluation systems
When companies decentralize, top management needs a system to communicate goals to subunit managers
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Financial measures tend to be lag indicators Management also needs lead indicators Tendency to focus on short-term
achievements
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Describe the balanced scorecard and identify key performance indicators for each
perspective
Management must consider both financial and operational performance measures
Measures should be linked with company goals and strategy
Financial measures are only one measure among many
Uses key performance indicators
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COMPANY GOALS
CRITICAL FACTORS
KEY PERFORMANCE
INDICATORS
Examples of critical factors and corresponding KPIs
Operational
efficiency
Employee
excellence
Financial profitabili
ty
Market share
Yield rateTraining
hoursRevenue growth
Customer satisfactio
n
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How do we look to shareholders? KPIs:
◦ Sales revenue growth◦ Gross margin growth◦ Return on investment
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How do customers see us? Customer concerns: KPIs:
◦ Customer satisfaction◦ Market share◦ Number of customers and repeat customers◦ Rate of on time deliveries
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At what business processes must we excel? Three factors:
◦ Innovation ◦ Operations◦ Post-sales service
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How can we continue to improve and create value?
Three factors:◦ Employee capabilities◦ System capabilities◦ Company’s climate for action
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Balanced scorecard
perspective
(a) Number of customer complaints ?(b) Number of information systems upgrades completed ?(c) EVA ?(d) New product line development time ?(e) Employee turnover rate ?(f) Percentage of products with online help manuals ?(g) Customer retention ?(h) Percentage of compensation based on performance ?(i) Percentage of orders filled each week ?(j) Gross margin growth ?(k) Number of new patents ?
Key performance indicator
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Balanced scorecard
perspective
(l) Employee satisfaction ratings ?(m) Manufacturing cycle time ?(n) Earnings growth ?(o) Average machine setup time ?(p) Number of new customers ?(q) Employee promotion rate ?(r) Cash flow from operations ?(s) Customer satisfaction ratings ?(t) Machine downtime ?(u) Finished products per day per employee ?(v) Percentage of employees with access to upgraded systems ?(w) Wait time per order prior to start of production ?
Key performance indicator
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Use performance reports to evaluate cost, revenue, and profit centers
Report financial performance of responsibility centers
Cost center Revenue center Profit center
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Management by exception Should focus on information, not blame Some variances are uncontrollable
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Use ROI, RI, and EVA to evaluate investment centers
Performance measures:◦ Return on investment (ROI)◦ Residual income (RI)◦ Economic value added (EVA)
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ROIROI??
??
ROIROI ?? ??
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??
??
??
Profit marginProfit
margin
Capital turnoverCapital
turnover
??
26
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ROIROIOperating incomeOperating income
Total assetsTotal assets
Residential
$63,700$63,700
$196,000$196,000? %? %
Professional $162,400$162,400
$406,000$406,000? %? %
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Profit marginProfit
margin
Operating incomeOperating income
SalesSales
Residential $63,700$63,700
$580,000$580,000? %? %
$162,400$162,400
Professional
$1,100,000$1,100,000? %? %
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Total assetsTotal assets
Capital turnoverCapital
turnoverSalesSales
$580,000$580,000Residential
$196,000$196,000??
Professional
??$1,100,000$1,100,000
$406,000$406,000
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ROIROIProfit
marginProfit
margin
Capital turnove
r
Capital turnove
r
Residential
10.98%10.98% 2.962.96? %? %
Professional
14.76%14.76% 2.712.71? %? %
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Compares division’s operating income with minimum operating income expected given the size of the division’s assets
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??
RIRI
Minimum acceptable income
Minimum acceptable income
minus
Minimum acceptable
income
Minimum acceptable
income?? Total assetsTotal assets
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Promotes goal congruence better than ROI Incorporates management’s minimum
required rate of return Can use different target rates of return for
divisions with different levels of risk
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Special type of RI calculation Considerations:
◦ Income available to stakeholders◦ Assets used to generate income for stakeholders◦ Minimum rate of return required by stakeholders
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EVA
?
Total assets
Current liabilities ? %
minus
35
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Measurement issues
Short-term focus
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