chapter 23. explain why and how companies decentralize
TRANSCRIPT
![Page 1: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/1.jpg)
Chapter 23
![Page 2: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/2.jpg)
Explain why and how companies decentralize
![Page 3: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/3.jpg)
Companies decentralize as they grow Split operations into different divisions or
operating units Top management delegates decision-
making to unit managers
Copyright (c) 2009 Prentice Hall. All rights reserved. 3
![Page 4: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/4.jpg)
Advantages Disadvantages
Copyright (c) 2009 Prentice Hall. All rights reserved. 4
![Page 5: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/5.jpg)
Copyright (c) 2009 Prentice Hall. All rights reserved. 5
![Page 6: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/6.jpg)
Copyright (c) 2009 Prentice Hall. All rights reserved.
Responsibility Center
Manager is responsible for:
Cost center ?
Revenue center ?
Profit center ?
Investment center
?
6
![Page 7: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/7.jpg)
Explain why companies use performance evaluation systems
![Page 8: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/8.jpg)
When companies decentralize, top management needs a system to communicate goals to subunit managers
Copyright (c) 2009 Prentice Hall. All rights reserved. 8
![Page 9: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/9.jpg)
Financial measures tend to be lag indicators Management also needs lead indicators Tendency to focus on short-term
achievements
Copyright (c) 2009 Prentice Hall. All rights reserved. 9
![Page 10: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/10.jpg)
Describe the balanced scorecard and identify key performance indicators for each
perspective
![Page 11: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/11.jpg)
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
Copyright (c) 2009 Prentice Hall. All rights reserved. 11
![Page 12: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/12.jpg)
Copyright (c) 2009 Prentice Hall. All rights reserved.
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
12
![Page 13: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/13.jpg)
Copyright (c) 2009 Prentice Hall. All rights reserved. 13
![Page 14: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/14.jpg)
How do we look to shareholders? KPIs:
◦ Sales revenue growth◦ Gross margin growth◦ Return on investment
Copyright (c) 2009 Prentice Hall. All rights reserved. 14
![Page 15: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/15.jpg)
How do customers see us? Customer concerns: KPIs:
◦ Customer satisfaction◦ Market share◦ Number of customers and repeat customers◦ Rate of on time deliveries
Copyright (c) 2009 Prentice Hall. All rights reserved. 15
![Page 16: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/16.jpg)
At what business processes must we excel? Three factors:
◦ Innovation ◦ Operations◦ Post-sales service
Copyright (c) 2009 Prentice Hall. All rights reserved. 16
![Page 17: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/17.jpg)
How can we continue to improve and create value?
Three factors:◦ Employee capabilities◦ System capabilities◦ Company’s climate for action
Copyright (c) 2009 Prentice Hall. All rights reserved. 17
![Page 18: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/18.jpg)
Copyright (c) 2009 Prentice Hall. All rights reserved.
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
18
![Page 19: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/19.jpg)
Copyright (c) 2009 Prentice Hall. All rights reserved.
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
19
![Page 20: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/20.jpg)
Use performance reports to evaluate cost, revenue, and profit centers
![Page 21: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/21.jpg)
Report financial performance of responsibility centers
Cost center Revenue center Profit center
Copyright (c) 2009 Prentice Hall. All rights reserved. 21
![Page 22: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/22.jpg)
Management by exception Should focus on information, not blame Some variances are uncontrollable
Copyright (c) 2009 Prentice Hall. All rights reserved. 22
![Page 23: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/23.jpg)
Use ROI, RI, and EVA to evaluate investment centers
![Page 24: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/24.jpg)
Performance measures:◦ Return on investment (ROI)◦ Residual income (RI)◦ Economic value added (EVA)
Copyright (c) 2009 Prentice Hall. All rights reserved. 24
![Page 25: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/25.jpg)
Copyright (c) 2009 Prentice Hall. All rights reserved.
ROIROI??
??
ROIROI ?? ??
25
![Page 26: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/26.jpg)
Copyright (c) 2009 Prentice Hall. All rights reserved.
??
??
??
Profit marginProfit
margin
Capital turnoverCapital
turnover
??
26
![Page 27: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/27.jpg)
Copyright (c) 2009 Prentice Hall. All rights reserved.
ROIROIOperating incomeOperating income
Total assetsTotal assets
Residential
$63,700$63,700
$196,000$196,000? %? %
Professional $162,400$162,400
$406,000$406,000? %? %
27
![Page 28: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/28.jpg)
Copyright (c) 2009 Prentice Hall. All rights reserved.
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? %? %
28
![Page 29: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/29.jpg)
Copyright (c) 2009 Prentice Hall. All rights reserved.
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
29
![Page 30: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/30.jpg)
Copyright (c) 2009 Prentice Hall. All rights reserved.
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? %? %
30
![Page 31: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/31.jpg)
Compares division’s operating income with minimum operating income expected given the size of the division’s assets
Copyright (c) 2009 Prentice Hall. All rights reserved. 31
![Page 32: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/32.jpg)
Copyright (c) 2009 Prentice Hall. All rights reserved.
??
RIRI
Minimum acceptable income
Minimum acceptable income
minus
Minimum acceptable
income
Minimum acceptable
income?? Total assetsTotal assets
32
![Page 33: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/33.jpg)
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
Copyright (c) 2009 Prentice Hall. All rights reserved. 33
![Page 34: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/34.jpg)
Special type of RI calculation Considerations:
◦ Income available to stakeholders◦ Assets used to generate income for stakeholders◦ Minimum rate of return required by stakeholders
Copyright (c) 2009 Prentice Hall. All rights reserved. 34
![Page 35: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/35.jpg)
Copyright (c) 2009 Prentice Hall. All rights reserved.
EVA
?
Total assets
Current liabilities ? %
minus
35
![Page 36: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/36.jpg)
Copyright (c) 2009 Prentice Hall. All rights reserved. 36
![Page 37: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/37.jpg)
Measurement issues
Short-term focus
Copyright (c) 2009 Prentice Hall. All rights reserved. 37
![Page 38: Chapter 23. Explain why and how companies decentralize](https://reader036.vdocuments.us/reader036/viewer/2022062516/56649d705503460f94a522cc/html5/thumbnails/38.jpg)