Performance Managment Flashcards
ROI - Disadvantage
Managers that have a higher average ROI than the company will reject investments that may bring down their ROI, even if it would be profitable for the company
Residual Income (RI) - Disadvantage
If an investment will provide returns only in the immediate future that managers may forgo long term results to improve short term performance measures
Strategic Control framework
Examine underlying strategies - Differences? Yes > Take corrective action
No > Examine actual performance- Differences? Yes > Take corrective action
No> Continue
Examining underlying strategies= Information control
Examining actual behaviour = Behavioural control
Factors impacting cost
- Economies of scale - Avg cost per unit down as quantity goes up
- Learning Curve Economies - operationally adept, practice, experience
- Diseconomies of scale - Become too large & bureaucratic, operational cost offsetting benefit
- Differential low cost access to productive inputs - ability to buy raw materials at low price
- Technology independent of scale - Owning technology to lower costs
- Blue Ocean - Create new market where there is no competition, low cost, high differentiation
Risk response options
Accepting risk Sharing risk Transferring risk Reducing or mitigating risk Avoiding risk
Techniques for risk management
- Heat map
- Benchmarking
- Probabilistic models
- Sensitivity models - probability and impact
- Scenario planning
Porters Five Forces
- Threat of new entrants - More competition, less profit, barriers to entry, customer loyalty, economies of scale
- Threat of substitutes - Customer propensity, relative price, ease of substitution, quality
- Bargaining power of customers - volume of buyers, volume of goods, price sensitivity, cost of switching
- Bargaining power of suppliers - cost of switching, substitute products, distribution channels
- Rivalry among competitors - price wars, degree of concentration of power, competitive advantage
Internal Analysis (5)
- System and processes - effective and efficient
- Culture - Beliefs, morals, customs
- Financial capital - Monetary resources to operate and maintain
- Human capital- Human attributes, ability to perform, knowledge, competence, creativity
- Intellectual capital - Retaining and developing
Beyond compliance behaviour (4)
- Win-win - Org meets mandate while reducing environmental damage
- Margin of safety - Building just in case buffer to reduce risks of accidents
- Anticipatory compliance - proactively responding to trends of increasing regulations
- Good citizenship - enhancing reputation by acting in a socially responsible manner
Smart Objectives
Specific - Detailed & clearly understood
Measurable - can be tracked & verified
Appropriate - Aligned with vision and mission
Realistic - Achievable but challenging
Time-Bound - Timing information
Levels of strategy (3)
- Corporate level (organizational) - determine what industries & markets to compete in, overall governance and goals (Mission, vision)
- Business level (division) - resources, capabilities, competencies of divisions. Consistent goals to the organization
- Functional level - Marketing, production, operations, IT, HR, R&D, financial
Strategic Vehicles (5)
Diversification Defensive Integration Intensive Unbundling and outsourcing
Disadvantages of BSC
- high cost of implementation
- often requires additional & detailed accounting information for shareholders
- Metrics must be relevant to org’s situation and strategy
- Can become non-value added
Balance Score Card (BSC)
- Financial perspective - Return on asset, % of growth, equity
- Customer perspective - Customer satisfaction, market share growth
- Internal business process - delivery time, # of defects, variance analysis
- Learning & growth - hours of training, number of mentors
Risk Management process (6)
- Determine tolerance/Risk - Board in consultation with mgmt. Must reflect mission/vision
- Ensure business model is aligned - Board
- Identify & evaluate risks - Management
- Compare against tolerance/appetite - Management
- Determine & implement responses - Management proposes, board oversees
- Monitor & adjust - Board & Management
Board Committees
Governance and nominations Audit Finance Executive HR & compensation Public relations
Benefits of ABM & ABC
- Improve accuracy of product pricing and costing
- Understanding of overheads and their cost drivers
- Focus on eliminating non-value added activities
Value chain secondary activities
Procurement - purchasing, raw materials, supplies, equipment, buildings
Technological - R7D, process review
HR mgmt - recruiting, hiring, training
Firm infrastructure - general mgmt, finance, legal, government relations
Business process management (BPM)
- Optimizes business processes, therefore improving efficiency & flexibility
- Aim is for continuous process improvements and innovate with new technologies
Cost of Quality (COQ)
Prevention Costs - working with suppliers on quality, training production employees, improving process reliability
Appraisal Costs - testing raw materials, testing worker & equipment conformance to specifications, inspecting completed or WIP products
Internal Failure Costs - Scrap, rework
External Failure Costs - Customer complaint department, warranty, product recalls
Disadvantages to ABM & ABC
- Costly implementation, extensive review of operations to establish cost pools and drivers
- Performance measures remaining tied to externally reported profit measures
- maintaining two costing systems for GAAP purposes
Risk tolerance
The highest level of risk an organization is willing to accept, based on its resources.
This decision is influenced by the decision maker’s character
Value chain - primary activities
Inbound logistics- receiving, inventory control, warehousing
Operations/Production - Machining, packing, assembly, equipment maintenance
Outbound logistics - Order processing, FG warehousing, distribution
Marketing & Sales - Sales force mgmt, distribution mgmt, advertising, promos
Service- Installation, repair, training, tuning, adjustments
What is environmental scanning
What is currently happening and what is expected to happen in the future?
- early warning system for opportunities and threats
- monitor trends over time
- improve competitive position
Integration Strategies (Strategic Vehicle)
Integration - How much of the value chain does the org own?
Vertical Integration
- Forward - controlling distribution to consumer
- Backward - Controlling suppliers
Horizontal Integration - expanding activities in value chain to increase market share, reduce competition, or exploit economics of scale (buying competitors)
Defensive Strategies (Strategic Vehicle)
Defensive - Allow direction change when in distress - too fast growth, reduce # of products, shifts in consumer preference, changes in tech
- Divestiture - Selling off non- or underperforming assets or BU’s. Free up capital, rejuvenate
- Retrenchment - Returning to core business by selling off secondary assets or BY. Withdraw from markets or product lines.
Types of Enterprise Risk
Strategic Risk - Mistakes or miscalculation made in planning, implementing, executing strategies
Operational Risk - Risk of loss resulting from inadequate or failed resources
Compliance Risk - Risk to earnings or assets arising from violations or non-conformance
Reporting Risk- Risk resulting from misreporting of information of either financial or company practices.
Advantages of BSC
Aligns with company’s strategy & daily activities
Summarizes the org’s goals & objectives on one page
Balanced view of performance
Risk Appetite
The amount of risk that corresponds to the level of return the org is pursuing
Capacity Resource Planning
Lead Strategy: Aggressive strategy where capacity is increased in anticipation of demand. Trade off: win customers/higher costs
Lag Strategy: Conservative strategy where capacity increases after demand. Trade off: Low cast/Lose customers
Average capacity: Moderate strategy where capacity is increased to meet average demand expected. Tradeoff: Shares both risks to a lessor extent.
Corporate Social Responsibility
Good corporate citizens
Accountable for impact on stakeholders
Behave ethically & Contribute to economic development
ISO guidelines for corporate responsibility
Lean Management
Where JIT looks to reduce waste and increase efficiency for the sake of cost cutting, lean management does it to improve customer value.
Activity Based Costing
A costing method is a costing method that divides overhead and indirect costs (activities) to cost pools and assigns cost drivers to each pool such as hours or units. The cost driver rate is determined and used to assign costs to related products and services. This model assigns more indirect costs (overhead) into direct costs compared to conventional costing (Absorption costing)
Management by Objectives
A dialogue where manager and direct report come to an agreement on a final set of goals, objectives, measures & time periods that are aligned with the mission and vision of the org
Challenges using Management by objectives
Managers may not be open to others ideas
Managers need interpersonal skills
Individual may not understand how their roles fit into the org goals
Not enough time to deal with every problem
Benefits using Management by objectives
Directs attention & focus on results
Committing to measures that helps the org achieve broader goals
Involved in setting goals
Help grow & develop employees
Activity based management
A change in focus from measuring & allocating costs to managing the underlying activates that drive costs
Business process reengineering
Completely rethinking & redesigning business processes
Dramatically improving performance to obtain strategy
Often involves reorganizing the value chain
Alternate strategies to growth
Joint Ventures - business agreement that combines resources to develop a new entity with new assets
Strategic Alliance - Cooperative effort between 2 or more separate orgs to develop, manufacture, or sell products or services
Merger - 2 firms combined to create a new entity that create synergies & economies to scale
Acquisition - Purchase of one firm by another to increase market share, economies of scale and scope.
Common Stakeholders
Suppliers government employees/ union Lenders/ Creditors Customers Shareholders Regulators Community Industry & professional bodies Strategic alliances Environment
PESTEL
Political: Imposed by governments Economic: Growth, inflation, interest Social: Demographics, mortality, diversity Technological: Automation, R&D Environmental: Climate, Weather Legal: Legal, rights
ROI and RI calculations
ROI: (net income / Sales x (Sales /Assets) OR
net profit margin / Asset turnover
Residual income: Operating income - (RRR or WACC x investment)
Systems development Methodologies
Waterfall: Sequential phases, output of one becomes input of next
Agile: Break into small deliverables
Extreme Programming (XP): Emphasis on fast & continuous communication w/ end user in all phases
Rapid application development (RAD): Rapid development of prototypes based on user feedback
Scrum: Using small teams to produce small deliverables in 30 day sprints
Rational Unified Process (RUP): IBM methodology breaks down into 4 gates: inception, elaboration, construction, transition.
Participatory Design: Users are the experts & heavily involved & controlling design phase
Marco forces affecting orgs
Environmental scanning
Economic: Interest, GDP, CPI
Demographic: income, age, ethnicity, life span
Social & cultural: Urbanization, diversity
Environmental: Climate change, natural disasters
Political and Government: Wars, Coups, change in government
Legal: Litigious environments, Different laws
Technological: Adapting to change, innovation
Strategic planning steps (5)
Setting mission vision, values, objectives
Environmental scanning & industry analysis
Strategy formulation
Strategy implementation
Strategy evaluation & performance measures
Diversification Strategies (Strategic Vehicle) (3)
Diversification: Expanding into different area, new growth opportunities.
1 - Concentric - new products related to core business
2- Horizontal - new products not related to core but will appeal to existing customers
3 - Conglomerate - Enter entirely new market, no synergy with core
Intensive Strategies (Strategic Vehicle) (3)
Intensive Strategies: Growth through concentration (do more with less)
1- Product Development - refining or redeveloping new products, add value to attract customers
2 - Market penetration - increasing market share by increasing consumer awareness with marketing, promos, pricing, capture & hold.
3- Market development - Exploit new segments for current products. Target non-buying customers or new regions with new uses for existing products
Total Quality management
TQM: Process mapping
Identify the best process and ensure conformance.
Using graphs, run charts, pareto charts, scatter diagrams
Discuss activity based management activities:
- Operational management activities
- Strategic management activities
- Operational management activities - doing things right
- efficiency of operations
- business process re-engineering
- Quality management & performance measures - Strategic management activities - Doing the right things
- Choose activities to reduce overall costs & improve profits
- product design / mix, supply chain CRM
