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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3
Advantages
Disadvantages
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4
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Responsibility
Center
Manager is responsible for:
Cost center
?
Revenue center
?
Profit center
?
Investment center
?
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6
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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9
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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11
COMPANY
GOALS
Examples of critical factors and
corresponding KPIs
CRITICAL
FACTORS
Customer
satisfaction
Operational
efficiency
Employee
excellence
Financial
profitability
KEY
PERFORMANCE
INDICATORS
Market
share
Yield rate
Training
hours
Revenue
growth
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12
Financial
Customer
Internal
Business
Learning
and Growth
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

How do we look to shareholders?
KPIs:
◦ Sales revenue growth
◦ Gross margin growth
◦ Return on investment
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14



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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16


How can we continue to improve and create value?
Three factors:
◦ Employee capabilities
◦ System capabilities
◦ Company’s climate for action
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(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
Key performance indicator
Number of customer complaints
Number of information systems upgrades completed
EVA
New product line development time
Employee turnover rate
Percentage of products with online help manuals
Customer retention
Percentage of compensation based on performance
Percentage of orders filled each week
Gross margin growth
Number of new patents
Balanced
scorecard
perspective
?
?
?
?
?
?
?
?
?
?
?
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(l)
(m)
(n)
(o)
(p)
(q)
(r)
(s)
(t)
(u)
(v)
(w)
Key performance indicator
Employee satisfaction ratings
Manufacturing cycle time
Earnings growth
Average machine setup time
Number of new customers
Employee promotion rate
Cash flow from operations
Customer satisfaction ratings
Machine downtime
Finished products per day per employee
Percentage of employees with access to upgraded systems
Wait time per order prior to start of production
Balanced
scorecard
perspective
?
?
?
?
?
?
?
?
?
?
?
?
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19
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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21



Management by exception
Should focus on information, not blame
Some variances are uncontrollable
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22
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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24
?
ROI
?
ROI
?
?
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Profit
margin
Capital
turnover
?
?
?
?
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Operating income
ROI
Total assets
Residential
$63,700
? %
$196,000
Professional
$162,400
? %
$406,000
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Operating income
Profit margin
Sales
Residential
$63,700
? %
$580,000
Professional
$162,400
? %
$1,100,000
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Sales
Capital
turnover
Total assets
Residential
$580,000
?
$196,000
Professional
?
$1,100,000
$406,000
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29
ROI
Profit
margin
Capital
turnover
Residential
? %
10.98%
2.96
Professional
? %
14.76%
2.71
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30

Compares division’s operating income with
minimum operating income expected given the
size of the division’s assets
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?
RI
minus
Minimum acceptable income
Minimum
acceptable
income
?
Total 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
?
minus
Total
assets
Current
liabilities
?%
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Return on investments
Residual income
Economic value added
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36

Measurement issues

Short-term focus
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37