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A U D I T I N G
KPMG and University of Illinois at Urbana-Champaign
Business Measurement Case Development and Research Program
Edited by
Timothy B. Bell
Director, Assurance Research,
Assurance & Advisory Services Center, KPMG LLP
Ira Solomon
R.C. Evans Endowed Chair in Commerce
Head, Department of Accountancy,
University of Illinois at Urbana-Champaign
Foreword by
D. Scott Showalter
National Managing Partner,
Assurance & Advisory Services Center, KPMG LLP
Visiting Executive Lecturer, University of Illinois at Urbana-Champaign
©2002 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association.
All Rights Reserved. Printed in the U.S.A.
This book is not intended to constitute an exhaustive coverage of all the policies and procedures comprising
KPMG’s full audit process, and how it comports with generally accepted auditing standards.
TA B L E
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C O N T E N T S
Foreword
D. Scott Showalter
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VII
Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XI
The Strategic-Systems Approach to Auditing
Timothy B. Bell , Mark E. Peecher, and Ira Solomon . . . . . . . . . . . . . . . .
1
A Guide to Selecting SSA Cases
Timothy B. Bell , Mark E. Peecher, and Ira Solomon
. . . . . . . . . . . . . . . . 35
CVS/Pharmacy: Growth Strategies in the Retail Drug Industry
Stephen Asare, Richard McGowan, Greg Trompeter, and
Arnold Wright . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . 59
IDEC Pharmaceuticals Corporation
Shawn M. Davis and Ronald R. King . . . . . . . . . . . . . . . . . . . . . . . . 97
Lincoln Savings and Loan
Merle Erickson, Brian Mayhew, and William L. Felix, Jr.,
. . . . . . . . . . . . . 139
Loblaw Companies Ltd.
Royston Greenwood and Steve Salterio .
. . . . . . . . . . . . . . . . . . . . . . 165
 2002 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association. All rights reserved.
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Mercedes-Benz U.S. International
Brian Ballou, Richard Tabor, and Mustafa Uzumeri
. . . . . . . . . . . . . . . . . 211
Rieter Automotive North America, Inc.
Roger D. Martin, Fred Phillips, and Michael D. Shields
. . . . . . . . . . . . . . 257
Trigon Healthcare, Inc.: Growth Through Acquisition in the
Hypercompetitive Managed Healthcare Environment
Anne York and Linda McDaniel . . . . . . . . . . . . . . . . . . . . . . . 289
Wells Fargo: Business-to-Business Electronic Commerce
George Foster, Mahendra Gupta, and Richard Palmer . . . . . . . . . . . . . . . 321
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 359
 2002 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association. All rights reserved.
F O R E W O R D
If ever there were any doubts about the criticality of the financial statement
audit to the efficient functioning of the capital markets, recent events have
dispelled them. Truthful and credible financial and nonfinancial business
information empowers the capital supplier to assess decision-relevant states
of the business, and competition within the capital markets for the best
returns on investments leads ultimately to an efficient allocation of
resources within our market economy. Information that is not perceived by
users to be credible, even if it is truthful, will be disbelieved, causing a shift
of resources from their most productive uses to less productive ones. In the
final analysis, everyone is impacted negatively by widespread perceptions
that business information is not credible, whether through poor decision-
changing business environment. In addition, KPMG has a longstanding
tradition of sharing information about our audit innovations with the
academic community. By treating our audit approach as an open standard,
we foster further improvements and innovations as others contribute their
critical analysis, empirical validation, and new ideas. We pride ourselves on
openness and strive to achieve excellence and marketplace differentiation
B U S I N E S S
M E A S U R E M E N T
through superior audit execution and continuous innovation, not secrecy.
R E S E A R C H
approach so that efficient and effective audits are possible in an ever-
A N D
KPMG has a longstanding tradition of continuously innovating our audit
D E V E L O P M E N T
other ripple effects throughout the economy.
C A S E
and wants and new business development, inefficient labor markets, or
P R O G R A M
making about savings investments, mismatches between consumer needs
 2002 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association. All rights reserved.
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F O R E W O R D
The quality of audits and the quality of audit education and research are
inextricably linked. High-quality scholarly research fosters learning by
educators and practitioners. Educators transfer new knowledge to students
who apply that knowledge upon entry into the profession.
professionals become tomorrow’s leaders and innovators.
These
They share
information on new innovations and other resources needed by researchers
to critically analyze and empirically validate new audit methods and
techniques and generate new ideas for further improvement.
These
interactions taken together form a self-reinforcing feedback loop
that fosters evolution of the profession so that its continued vitality
is ensured.
Consequently, leaders at KPMG have long understood
and auditing education, as well as support for scholarly research in these
areas, are strategic imperatives for the profession.
A recent example of our commitment to profession-wide learning is
distributing to the public the monograph entitled Auditing Organizations
Through a Strategic-Systems Lens: The KPMG Business Measurement
Measurement Case Development and Research Program. The monograph
demands placed on auditors when assessing the veracity of management’s
presents an overview of, and rationale for, recent audit innovations at
KPMG (and other firms) designed to help auditors better cope with an everincreasing level of business complexity and the related business-learning
assertions.
Following dissemination of the monograph, the case
development and research program was established to engage scholars in
the development of classroom materials relevant to a 21st century audit
environment, followed by scholarly research to advance knowledge and
enable further improvements in audit methods and techniques.
B U S I N E S S
M E A S U R E M E N T
D E V E L O P M E N T
Process and establishing the KPMG and University of Illinois Business
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R E S E A R C H
P R O G R A M
that proactive involvement in the continuous improvement of accounting
 2002 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association. All rights reserved.
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These projects were intentionally designed to be highly collaborative to
achieve significant synergies through the combination of complementary
talents and skills. Our goal was to produce some of the most realistic and
intellectually nurturing teaching materials available for business and
assurance education. We sought to do so by bringing together scholars with
technical expertise in theory development, critical analysis and curriculum
development, KPMG professionals with real-world experience applying
measurement and attestation models in complex real-life decision-making
venues, and business managers with a wealth of practical knowledge about
their industries, business models and business processes. I believe that after
presented in this volume were used in the classes.
Experiencing the
unfolding of the discovery process in the classroom by bright young minds
was both stimulating and gratifying. Students progressed rapidly from
novice-sponges who take in and react instantaneously to every new bit of
information to critical thinkers with basic systems-thinking skills for
internalizing and integrating relevant information about complex
businesses. Students came away from the learning experiences enabled by
the cases with an enhanced appreciation for the intellectual challenges of
auditing knowledge work and a sense of excitement about spending their
careers in a stimulating business-learning environment that continuously
presents novel learning opportunities. Now more than ever we collectively
B U S I N E S S
need to work hard to show students that our profession is intellectually
R E S E A R C H
sections of the introductory assurance course at UIUC. Several of the cases
A N D
During the 2001/2002 academic year, I co-taught with faculty several
D E V E L O P M E N T
firsthand the positive impact of the materials produced by our program.
C A S E
at Urbana-Champaign (UIUC), I have had the good fortune to observe
M E A S U R E M E N T
In my capacity as a Visiting Executive Lecturer at the University of Illinois
P R O G R A M
reading this volume, you will agree that we have achieved our goal.
 2002 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association. All rights reserved.
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challenging and rewarding, and the cases in this volume will help educators
to build that awareness through actual classroom experiences.
I hope that readers of this volume will give serious consideration to
adopting some of the cases developed under our program. Using these
cases will create in you a great sense of satisfaction that your students are
better equipped to critically analyze a business and apply this essential
knowledge to perform a better audit.
On behalf of all of my partners at KPMG, I would like to thank all of the
case developers for a job well done. We look forward to continuing our
P R O G R A M
National Managing Partner,
Assurance & Advisory Services Center, KPMG LLP
Visiting Executive Lecturer, University of Illinois at Urbana-Champaign
July 23, 2002
B U S I N E S S
M E A S U R E M E N T
C A S E
D E V E L O P M E N T
A N D
D. Scott Showalter
R E S E A R C H
collaborations with you to improve audit education and practice.
 2002 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association. All rights reserved.
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P R E FA C E
In the fall of 1997, KPMG Peat Marwick LLP1 (KPMG), the University of
Illinois at Urbana-Champaign (UIUC), and the KPMG Foundation
(Foundation) introduced the Business Measurement Case Development &
Research Program (Program) to the academic community. At that time,
many accounting educators were expressing concerns about their ability to
keep classroom materials and research activities current, given the rapid
pace at which commerce, business measurement, and auditing were
changing. Responding to this emerging need, KPMG, UIUC, and the
Foundation established the Program to support development of educational
materials grounded in current audit concepts and methods and set in realworld business contexts, and to offer successful case developers
presents a conceptual overview of, and blueprint for, strategic-systems
auditing (SSA)—an evolving business knowledge-acquisition approach
that guides the focus, breadth, and depth of the auditor’s knowledge
acquisition in today’s complex business environment. Under the SSA
approach, an auditor seeks to obtain an understanding of the client’s
business model—a simplified repesentation of the network of causes and
effects that determine the extent to which the entity creates value and earns
profits.
Some of the more important business-model causal factors
assessed by an auditor employing SSA are: (1) environmental factors that
B U S I N E S S
present opportunities to the entity for creation of strategic advantages; (2)
R E S E A R C H
1997 to all academic members of the American Accounting Association,
A N D
from UIUC and KPMG. The monograph, which was distributed gratis in
D E V E L O P M E N T
KPMG Business Measurement Process (Bell et al. 1997) by representatives
C A S E
monograph Auditing Organizations Through a Strategic-Systems Lens: The
M E A S U R E M E N T
The initial step in creating the Program was joint authoring of the
P R O G R A M
opportunities for innovative research.
1 Now KPMG LLP.
 2002 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association. All rights reserved.
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P R E FA C E
other external forces and trends presenting risks that can threaten the
entity’s ability to create and sustain these strategic advantages; (3) key
business processes and underlying competencies that are critical to
successful execution of the entity’s strategy; (4) business process risks
threatening the entity’s ability to create and sustain process advantages, and
related business controls; and (5) residual strategic and process risks and
their implications for financial reporting and audit risks. KPMG’s Business
Measurement Process (BMP) is presented in the monograph as a working
example of the SSA framework.
After the monograph was disseminated in 1997, KPMG and UIUC issued a
under the Program. The RFP delineated two interrelated Program phases:
(1) development of a case based on a major company for classroom use as
a vehicle for students to enhance their understanding of SSA concepts and
methods and (2) follow-on scholarly research to advance SSA knowledge
and methods. Under the Program guidelines, case development was funded
up to a maximum of $40,000 per case with follow-on research opportunities
for funding up to a maximum of $50,000 per research study. Twenty-three
case proposals totaling $814,546 were selected for funding during the
Program’s three annual submission periods. The eight cases that were
awarded funding in 1998 during the Program’s first submission period are
presented in this volume.
M E A S U R E M E N T
We begin this volume with a chapter that introduces SSA concepts and
extends the ideas presented in the original Bell et al. monograph. Ideas
B U S I N E S S
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Request For Proposals (RFP) inviting scholars to compete for funding
chapter describes how the cases contained in this volume address key
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discussed in Chapter 1 include elaborations on systems thinking, the
connection between client business risk and audit risk, and the formation
and utility of mental models in strategic-systems auditing. Thereafter, the
 2002 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association. All rights reserved.
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antecedents and knowledge-acquisition activities essential to SSA. The
chapter concludes by providing suggested responses to eight questions that
are (or perhaps should be) frequently asked about SSA. The second chapter
is intended to help instructors identify an efficient and synergistic subset of
the eight cases to assign in business courses. For a quick overview of the
topics covered in the cases, we provide tables characterizing each case in
terms of industry membership, strategic analysis frameworks, and business
processes, and the attendant business risks, critical success factors, and key
performance indicators. We also discuss in this chapter the rich information
set contained in the teaching notes that accompany each of the cases.
900,000 hits. More than 100,000 copies of the monograph were requested by,
and distributed to, professors and business and accounting professionals, and
more than 31,000 copies of completed cases were downloaded.2
The
remaining in–process cases funded under the Program will be posted to the
Web site when they are completed.
We would like to thank KPMG, the KPMG Foundation, and UIUC for
providing financial and other resources to make the Program possible. We
gratefully acknowledge the following people for their significant support of
and contributions to the Program: Frank Marrs (CEO, Gupton Marrs
2 These download numbers likely understate the case usage rate because some professors reproduce
multiple copies from one downloaded case copy.
R E S E A R C H
ended December 31, 2001, the Program’s Web site received approximately
A N D
valuable aids for successful use of the Program’s cases. During the two years
D E V E L O P M E N T
Professors who have used these teaching notes tell us that they are extremely
C A S E
for all cases funded under the Program free-of-charge at the Web site.
M E A S U R E M E N T
edu/kpmg-uiuc. Also, professors can obtain comprehensive teaching notes
B U S I N E S S
for download free-of-charge at the Program’s Web site: http://www.cba.uiuc.
P R O G R A M
The monograph and all cases funded under the Program are available
 2002 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association. All rights reserved.
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International and formerly at KPMG); Terry Strange, Scott Showalter,
Marty Finegan, Bernie Milano, Michael Tolpa, Ram Menon, Pam Bullis,
and Karen Bell (KPMG and the KPMG Foundation); Jeff Arricale (T. Rowe
Price and formerly at KPMG); Mark Peecher, Clif Brown, and Jean Seibold
(UIUC); Howard Thomas (Dean, Warwick Business School, University of
Warwick and formerly at UIUC); Robert Knechel (University of Florida);
and members of the Program Advisory Board—Katherine Schipper, (FASB
and formerly at Duke University), Krishna Palepu (Harvard University),
and William Kinney (University of Texas at Austin). In addition, we thank
all of the case developers, KPMG partners and staff, and client management
who gave so unselfishly of their time and other resources to nurture each of
Timothy B. Bell/KPMG LLP
Ira Solomon/UIUC
B U S I N E S S
M E A S U R E M E N T
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P R O G R A M
the case projects funded under the Program.
 2002 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association. All rights reserved.
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T H E S T R AT E G I C - S Y S T E M S
A P P R O A C H T O A U D I T I N G
P R O G R A M
Timothy B. Bell
KPMG LLP
Mark E. Peecher
B U S I N E S S
M E A S U R E M E N T
C A S E
D E V E L O P M E N T
A N D
R E S E A R C H
Ira Solomon
University of Illinois at Urbana-Champaign
 2002 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association. All rights reserved.
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T H E S T R AT E G I C - S Y S T E M S
A P P R O A C H T O A U D I T I N G
B
y the end of the 20th century,
advances in information technologies had reduced substantially the
propensity for error in processing routine business transactions.1 These
same forces, however, had dramatically altered the nature and complexity of
business activities and relationships. Concurrently, accelerating innovation
and competition, proliferation of stock-based compensation, and
heightened stock market sensitivity to unexpected earnings had increased
application of audit sampling to populations of routine transactions and
account balance details processed by error-prone manual accounting
systems. These methodologies, however, became increasingly less efficient
and effective as innovations in information technology altered the business
landscape. New methodologies were needed to help auditors obtain the indepth business knowledge required to assess the economic implications of
complex business relationships and activities and to guide the search for
instances in which managers may have exploited ambiguous and complex
1 Several studies have provided evidence of low error rates in the recording of routine business
transactions, especially those processed electronically, and a higher propensity for misstatement in
nonroutine transactions, especially those recorded manually by management. See, for example,
Houghton, C. W., and J. A. Fogarty, “Inherent Risk,” Auditing: A Journal of Practice & Theory (Spring
1991), pp. 1-21; Bell, T. B., W. R. Knechel, J. L. Payne, and J. J. Willingham, “An Empirical
Investigation of the Relationship Between the Computerization of Accounting Systems and the
Incidence and Size of Audit Differences,” Auditing: A Journal of Practice & Theory (Spring 1998, pp.
13-38); and Bell, T. B, and W. R. Knechel, “Empirical Analyses of Errors Discovered in Audits of
Property and Casualty Insurers,” Auditing: A Journal of Practice & Theory (Spring 1994), pp. 84-100.
R E S E A R C H
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Audit methodologies traditionally had heavily emphasized broad-based
D E V E L O P M E N T
to material fraudulent financial reporting.
C A S E
auditor’s responsibility for planning and performing the audit with respect
M E A S U R E M E N T
in, among other things, an expansion and concomitant clarification of the
B U S I N E S S
complex, rules-based financial accounting standards. These forces ushered
P R O G R A M
the temptation for managers to exploit ambiguities in a growing body of
 2002 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association. All rights reserved.
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accounting rules. In light of these trends, several of the larger public
accounting firms adapted their audit approaches to more heavily emphasize
the need to develop a sufficiently deep understanding of the past, present,
and future states of auditees’ businesses. Bell et al. (1997) call these new
audit approaches strategic-systems auditing (SSA), and present an overview
of KPMG’s Business Measurement Process (BMP) as an example of a SSA
approach.
An important aspect of SSA is an emphasis on obtaining the in-depth
knowledge needed to develop rich mental models (defined later) of the
business. Such business-knowledge-laden mental models are essential for
P R O G R A M
the auditor to discern the real states of the business, assess business risks,
and appraise attendant controls. Provided that the auditor’s mental model
contains sufficiently faithful representations of relevant past, current and
R E S E A R C H
future states of the business, he/she should be able to (1) make effective pretesting assessments of the risk of material misstatement (RMM) in
managers’ assertions, (2) design follow-on tests of controls and financial
A N D
statement amounts and disclosures that are sufficiently reliable and apply
them effectively, (3) make correct interpretations of the results of such tests,
D E V E L O P M E N T
and (4) form final assessments of RMM based on the accumulated results
of auditing procedures that provide sufficient risk assessment (i.e.,
estimation) power.
C A S E
Importantly, auditors employing SSA use in-depth knowledge of the
M E A S U R E M E N T
business to assess risk factors related to fraudulent financial reporting. In
particular, the degree to which managers have incentives to intentionally
misstate the financial statements depends largely on the real current
profitability of the business, its prospects for future profitability, and
B U S I N E S S
managers’ beliefs about the impact on their personal wealth of market
 2002 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association. All rights reserved.
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participants’ or others’ perceptions of these states.2 If poorly controlled,3
even currently profitable businesses can develop significant problems that
managers may seek to disguise through inappropriate accounting and
disclosure. Therefore, the risk that the auditor will fail to detect fraudulent
financial reporting should decrease substantially when an auditor develops
a veridical mental model of the business that reveals the business is wellcontrolled.
To gain an appreciation for the difficulty of detecting fraudulent financial
reporting, consider how the audit team’s knowledge acquisition task differs
from that of a physician. Patients describe their symptoms to physicians in
perpetrating auditees distort symptoms in the first place and may conceal
symptoms from auditors as they inquire and conduct other tests. The
primary difference between these two diagnostic inference venues,
therefore, is that, unlike physicians, auditors face a much more difficult
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2 Paragraph No. 7 of the exposure draft entitled, Consideration of Fraud in a Financial Statement Audit
(AICPA Auditing Standards Board, February 28, 2002) discusses the importance of obtaining an
understanding of incentives that may motivate managers to commit fraud. Paragraph No. 7 states the
following. “Three conditions generally are present when fraud occurs. First, management or other
employees have an incentive or are under pressure, which provides a reason to commit fraud. Second,
circumstances exist—for example, the absence of controls, ineffective controls, or the ability of
management to override controls—that provide an opportunity for a fraud to be perpetrated. Third,
those involved are able to rationalize a fraudulent act as being consistent with their personal code of
ethics. Some individuals possess an attitude, character, or set of ethical values that allow them to
knowingly and intentionally commit a dishonest act. However, even otherwise honest individuals can
commit fraud in an environment that imposes sufficient pressure on them. The greater the incentive
or pressure, the more likely an individual will be able to rationalize the acceptability of committing
fraud. Identifying individuals with the requisite attitude to commit fraud, or recognizing the
likelihood that management or other employees will rationalize to justify committing the act, is
difficult.”
3 The concept of business control as used here extends well beyond the concept of internal accounting
control. For example, a business whose strategy is no longer viable is not well controlled, or a
business that executes its core business processes so poorly that time, cost, and quality are negatively
impacted so as to lessen its competitiveness is not well controlled.
D E V E L O P M E N T
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problem-detection task. Auditors must acquire knowledge of symptoms
R E S E A R C H
to diagnose the probable cause(s) of the symptoms. In contrast, fraud-
P R O G R A M
the first place, and physicians follow up with a series of inquiries and tests
 2002 KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association. All rights reserved.
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(e.g., potential business problems), and diagnose their causes, via an
intensive and difficult search within strategically altered information
environments.4
Among other things, the SSA knowledge acquisition methodology directly
guides the auditors’ search for symptoms of the existence and emergence of
significant business problems.
The methodology guides the auditor’s
acquisition of information required to construct a mental model of the
organization using the systems-thinking approach while emphasizing
identification and assessment of auditee business risks. This approach
focuses the auditor’s knowledge acquisition activities on the significant
P R O G R A M
interdependencies among subsystems within the broad business system
comprising the auditee organization, other influential organizations and
agents, and other forces within the auditee’s economic environment. The
R E S E A R C H
SSA business risk assessment orientation defines one important audit
D E V E L O P M E N T
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knowledge acquisition objective in terms of the need to identify and learn
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M E A S U R E M E N T
C A S E
4 Appendix A of the exposure draft entitled, Consideration of Fraud in a Financial Statement Audit
[AICPA Auditing Standards Board, February 28, 2002] presents examples of business problems that
can create incentives to commit fraud. The four broad categories of examples presented for the
Incentives/Pressures condition in the appendix are: a) financial stability or profitability is threatened by
economic, industry, or entity operating conditions; b) excessive pressure exists for management to meet
the requirements or expectations of third parties (e.g., investment analysts); c) management or the
board of directors’ personal net worth is threatened by the entity's financial performance; and d) there
is excessive pressure on management or operating personnel to meet financial targets set up by the
board of directors or management. The types of incentives and pressures indicated in categories b)
through d) are determined largely by the existence of business problems such as those indicated in
category a). Also, whether the opportunities and attitude/rationalizations conditions would be relevant
to the risk of fraud depends largely on whether such business problems exist. Therefore, it would
appear that the auditor's assessment of the risk of fraud should focus largely on the detection of
business problems that could lead ultimately to financial instability and profit erosion.
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the nature of symptoms of significant business problems within the auditee
organization’s network of activities and interrelationships. 5
Auditors who acquire a strategic-systems understanding of the auditee
organization will have obtained a deep understanding of the important
states of the world that shape the fundamental economic status and
trajectory of the organization. This knowledge lays a strong foundation for
all remaining knowledge acquisition activities that culminate collectively in
the auditor’s opinion on the veracity of the financial statements.
This chapter is intended to clarify and extend thinking in the Bell et al.
organizations and then comment on some key properties of auditors’ mental
models.
Finally, we discuss how systems-thinking skills will enhance
students’ ability to build their own mental models of business organizations
5 Risk often is viewed as the possibility of future harm that could be caused by the occurrence of an
uncertain future event(s). However, an auditor using the SSA methodology to assist with his/her
problem detection is searching for symptoms of existing business problems that have already caused
harm to the business, but which may be unknown to the auditor, as well as possibilities of uncertain
future events that could cause harm to the business. Knowledge of existing business problems should
be helpful to the auditor’s assessment of the risk of fraud, and to developing expectations for financial
statement amounts and disclosures. Knowledge of possibilities of future harm to the business is needed
to assess the reasonableness of accounting estimates, as well as to reduce search costs during problem
detection on future audits. When we say that SSA “emphasizes identification and assessment of auditee
business risks,” included therein are existing business problems that have already caused harm to the
business, but are unknown to the auditor, and possible future events that could cause harm to the
business. The SSA business risk orientation speaks to the auditor’s need to search for past, current, and
future events or forces that have already, or can possibly in the future, cause harm to the business.
6 The Bell et al. (1997) monograph is available in PDF and html formats at
http://www.cba.uiuc.edu/kpmg-uiuc/monograph.html.
R E S E A R C H
systems auditors employ to develop rich mental models of auditee
A N D
describe four interrelated knowledge-acquisition activities that strategic-
D E V E L O P M E N T
between auditee organizations’ business risks and the RMM. We next
C A S E
SSA. The remainder of this chapter begins by discussing the strong relation
M E A S U R E M E N T
to help the reader understand the fundamental antecedents and rationale of
B U S I N E S S
Lens: The KPMG Business Measurement Process.6 Our overarching goal is
P R O G R A M
(1997) monograph, Auditing Organizations Through a Strategic-Systems
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and, based on feedback received from instructors and students, we provide
responses to frequently asked questions on key SSA principles.
An Overview of SSA
Unfortunately, in a great many places in our society, including academia and most
bureaucracies, prestige accrues principally to those who carefully study some aspect
of a problem, while discussion of the big picture is relegated to cocktail parties. . . . .
Now the chief of an organization, say a head of government or a CEO, has to behave
as if he or she is taking into account all the aspects of a situation, including the
interactions among them, which are often strong. It is not so easy, however, for the
chief to take a crude look at the whole if everyone else in the organization is concerned
only with a partial view.
P R O G R A M
M. Gell-Mann7
Perhaps the most important principle giving rise to the need for SSA is the
strong relation between RMM and the auditee’s business risks.
R E S E A R C H
Consequently, strategic-systems auditors believe that reliable assessments
of economic systems within which auditee organizations operate together
with auditee organizations’ business risks are needed to form audit opinions
A N D
on financial statements. Auditees’ business risks can change rapidly and
D E V E L O P M E N T
looking exclusively within the audited organizations. SSA has arisen,
C A S E
these changes frequently occur for reasons that cannot be discerned by
important web of interconnects between the auditee and other
therefore, in part because it addresses an endogenous demand for a
conceptual framework that helps one to meaningfully and simultaneously
assess an auditee’s business risks and RMM in light of an increasingly
M E A S U R E M E N T
organizations.
Some persons have trouble envisioning how business risks—threats to the
organization’s attainment of its strategic objectives—relate to RMM. The
B U S I N E S S
link can be clarified by a valuation assertion example. Consider an auditee
7 Gell-Mann, M., “The simple and the complex,” in Complexity, global politics, and national security, D.
S. Alberts and T.J. Czerwinski (eds.) Washington, D.C.: National Defense University (1996).
http://www.ndu.edu/inss/books/complexity/index.html (May 30, 2001).
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organization whose strategic objectives crucially depend on maintaining
harmonious relations with an alliance partner responsible for distributing its
products. The SSA auditor would monitor indicators of the relations with
the alliance partner because, if a dispute were to break out, numerous
business risks would elevate. Given such a dispute, an auditor employing
SSA might question the valuation of the accounts receivable from the
alliance partner and the appropriateness of recognizing alliance-related
revenues. Further, the RMM may become elevated more systemically with
respect to asset valuation if, going forward, previously anticipated
economic benefits related to the alliance were no longer expected. Such
questions can be raised, for example, using the IDEC case that appears in
incurring additional financing costs). Importantly, IDEC reduces such risks
through contracting and other alliance relationship management activities.
Another key SSA principle is anticipating how other entities’ actions and
business risks generate ripple effects that can affect auditee organizations’
business risks and, hence, RMM. The Lincoln Savings and Loan (LSL)
case, for example, illustrates how a complex interaction between interest
rate changes, regulators’ policy decisions, aggressive auditee management,
and real estate conditions can create derivative effects that significantly
increase RMM. The LSL case presents an organization that may not be able
to remain viable by investing more resources towards its historic practice of
B U S I N E S S
managing the interest rate spread. The interest rates required to recruit and
R E S E A R C H
business risks at IDEC (e.g., the inability to meet obligations without
A N D
with the alliance partner Genentech could itself heighten a number of other
D E V E L O P M E N T
significant source of IDEC’s operating cash flow and revenue, a dispute
C A S E
breakthrough drug that IDEC’s scientists discovered. Because the drug is a
M E A S U R E M E N T
Genentech, an organization that is responsible for distributing a
P R O G R A M
this volume. IDEC receives milestone payments from alliance partner
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retain customer deposits nearly exceeds the interest rates earned on longerterm home mortgages. Because it is a savings and loan organization, LSL
is limited by regulations as to the types of loans that it can make. As profits
erode, aggressive auditee management begins to invest in high risk
securities and real estate. But the real estate market turns down and,
regrettably, the aggressive auditee management engages in fraud. Whereas
using a traditional audit approach the LSL auditor did not detect this fraud,
the strategic-systems auditor may well have fared better by considering
technical compliance with GAAP against the backdrop of the
aforementioned business developments and interactions.
financial statement business measures reconcile with the auditors’
knowledge-laden expectations. These expectations concern both financial
statement and nonfinancial statement business measures and the
interrelationships among them. The strategic-systems auditor acquires
knowledge about the auditee’s strategy for creating value, its competitive
position, and its key business processes. Such knowledge helps the auditor
to identify and assess the auditee’s current business problems and business
risks.
Generally, to the extent that the auditee’s business risks are
uncontrolled and/or significant past or current business problems exist,
RMM increases, so it is critical for the auditor to develop an awareness of
these important states of the business.
Four interrelated knowledge acquisition activities within SSA are strategic
analysis (SA), process analysis (PA), business risk assessment (RA), and
business measurement (BM). SA and PA are conducted in sequence, with
the former informing the auditor about which business processes are critical
to attainment of the auditee’s strategic objectives.
RA and BM are
B U S I N E S S
M E A S U R E M E N T
C A S E
D E V E L O P M E N T
A N D
R E S E A R C H
P R O G R A M
Using SSA, auditors focus on the extent to which an organization’s
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conducted continuously and recursively throughout the audit.
Becoming
knowledgeable about the auditee’s business risks and business measures
helps auditors to contemplate RMMs about which one naturally should be
concerned and to discover other RMMs that should make them concerned.
Just as N. Rothschild once said, “There is no point getting into a panic about
the risks of life until you have compared the risks which worry you with
those that don’t but perhaps should.”8
During SA, the auditor acquires knowledge of the organization’s strategic
position, the markets in which it competes, its products and services, the set
of external forces and agents that should influence the auditee’s behavior,
situated and likely to be headed within its economic landscape, the auditor
can develop rudimentary financial statement expectations and identify the
business processes critical to the auditee’s attainment of strategic objectives.
Additionally, such an understanding helps the auditor to formulate
organization. PA equips the auditor with a deep understanding of core
business processes’ inputs, activities, outputs, critical success factors
(CSFs), and key performance indicators (KPIs). A CSF is a business
activity (or set of activities) that must be performed exceptionally well for
the organization to attain its strategic objectives. At the entity level core
business processes are CSFs because of their importance to the attainment
of strategic objectives. Within business processes, a subset of critical
8 See Rothschild, N., “Coming to grips with risk.” Address on BBC television reprinted in the Wall
Street Journal (March 13, 1979).
C A S E
those that create value for, and/or sustain the value-creation potential of, the
M E A S U R E M E N T
identifies and analyzes its core business processes. Core processes are
B U S I N E S S
Given the organization’s strategic position and objectives, the auditor
D E V E L O P M E N T
A N D
rudimentary business risk and RMM assessments.
R E S E A R C H
among other behaviors. By coming to understand where the auditee is
P R O G R A M
and the nature of the auditee’s suppliers, customers, and alliance partners,
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activities largely will determine the level of achieved process performance.
These activities, individually and in the aggregate, are CSFs at the process
level. A CSF at the process level can be, for example, the presence of
effective controls over a key activity within a business process. KPIs
include both backward- and forward-looking performance measures that
provide significant diagnosticity or predictive value, respectively, with
respect to the past, current, or likely future states of at least one CSF. KPIs
can be financial or nonfinancial and they typically are quantitative. Highlevel divisional managers use KPIs at the division level both to establish
accountability and decide on rewards for intra-division middle managers
and to identify how division operations can be improved in the future.
Also within PA, the auditor seeks to obtain an understanding of the linkages
between process-level performance and routine and nonroutine business
transactions, accounting estimates, financial statement account balances,
and other financial statement disclosures. A final yet critical task within PA
is to reflect on residual business risks to help design and execute other audit
procedures that either corroborate or refute the reliability of the
organization’s asserted KPIs.
If auditors determine that an organization’s KPIs are relevant and reliable
business measures, they can proceed with audit risk analyses. If, however,
the auditor determines that an organization’s KPIs are of questionable
M E A S U R E M E N T
reliability, it may be infeasible to audit the organization’s financial
statements in a cost-effective manner. In theory, there may be instances in
B U S I N E S S
C A S E
D E V E L O P M E N T
A N D
R E S E A R C H
P R O G R A M
Middle managers do the same within the business process subsystem.
some such instances, it may be possible to complete a bottom-up,
which an organization exercises effective control over its production of
financial statement performance measures but does not exercise effective
control over its production of business-process performance measures. In
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transactions-focused audit to obtain sufficient, competent evidential matter
to attain reasonable assurance. In other instances, though, scope limitations
are likely to arise because of the auditor’s inability to place the financial
statements into a meaningful strategic/business context. If such scope
limitations were material, the organization’s financial statements might not
be auditable.
Both during and after SA and PA, auditors perform RA and BM by
integrating their performance-level knowledge into their ever-evolving
mental models of the organization. When components, magnitudes, and
relationships within and among business measures that appear in the
relationships would be carefully scrutinized. This scrutiny can result in
management agreeing to adjust the financial statement items or in auditors
becoming satisfied that their expectations failed to account for legitimate
causes of the anomalies (i.e., the auditor revises his/her expectations based
on new information). In either of these cases, the auditor would issue an
unqualified audit report. An unlikely but possible outcome is that the
anomalies simply remain unresolved after scrutiny, in which case the
B U S I N E S S
M E A S U R E M E N T
C A S E
auditor may have to render a modified or disclaimer audit opinion.
R E S E A R C H
assessments of RMM would be elevated and, as such, the items or
A N D
If, however, such items or relationships fail to conform to expectations,
D E V E L O P M E N T
derived expectations, auditors may be persuaded that the RMM is fairly low.
P R O G R A M
organization’s financial statements harmonize with auditors’ analytically
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SSA and the Auditor’s Mental Model
Mental models consist of organized knowledge, integrated data about
patterns of cues, and rules for linking knowledge and cues (e.g., presumed
causal and/or associative relationships). Mental models are abstractions of
reality and their usefulness does not necessitate a complete, one-to-one (i.e.,
an isomorphic) representation of all facets of an auditee organization.
Typically, even for complex systems, a many-to-one abstraction from the
real world to elements of a mental model (i.e., a homomorphic
representation) will suffice for decision-making purposes.9
organization prior to the start of the current year’s audit engagement. If the
engagement is a continuing one, the auditor’s mental model will be based
on knowledge obtained during prior engagements and updated by industry
information. If, conversely, the engagement is new, the proposal process is
likely to have served as the primary impetus for formulating at least a
During the current year’s engagement, the auditor employing SSA draws on
humans simultaneously can manipulate only five to seven chunks of
B U S I N E S S
M E A S U R E M E N T
D E V E L O P M E N T
rudimentary mental model of the auditee organization.
C A S E
A N D
R E S E A R C H
P R O G R A M
Auditors likely possess at least a rudimentary mental model of the auditee
a variety of tools, some developed by experts in strategic management or
business policy, to reduce the cognitive load required to build a reliable
mental model of the organization.10 A robust finding in psychology is that
information at a time in working memory. Given the complexity of auditee
organizations’ economic webs, auditors benefit when environmental and
organizational factors can be chunked by virtue of shared relations to the
auditee organization (e.g., alliance partners).
9 Holland, J. H.. K. J. Holyoak, R.E. Nisbett, and P.R. Thagard, Induction: Processes of inference,
learning, and discovery (Cambridge, MA: The MIT Press, 1986).
10 See Chapter 2 for more discussion on specific tools that may be useful during SA.
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One way in which the auditor uses his or her mental model is to simulate
outcomes that are likely to occur (or have already occurred but are
unknown) within the auditee organization’s economic web. Whether an
auditor’s mental model is sufficient to allow reliable simulation is,
ultimately, a matter of professional judgment. Criteria for gauging the
sufficiency of one’s mental model, however, do exist. Gary Klein, a theorist
and consultant on decision-making, provides three criteria for judging
mental model reliability: coherence, applicability, and completeness.11
Coherent models allow one to understand why actions by and interactions
between key agents and organizations make collective sense. Models that
do not explain why a key organization’s actions make sense in the context
to influence the behavior of diverse organizations.
Once auditors believe that their model is sufficiently reliable, they run their
mental models. The act of running a mental model involves cognitively
simulating probable future interactions (or past but unknown interactions)
among observed cues to develop expectations for levels and
interrelationships (in degree and direction over time) among a group of
interrelated performance measures. By assessing the degree of expected
articulation among such a group of measures (including nonfinancial
statement and financial statement measures that originate within auditee
11 Klein, G., Sources of Power: How people make decisions (Cambridge, MA: The MIT Press, 1999) p. 58.
R E S E A R C H
should be able to develop expectations about how intermediaries are likely
A N D
leaps of faith about inter-organizational behaviors. For example, auditors
D E V E L O P M E N T
statements). Complete models do not require the auditor to make large
C A S E
can be more impoverished than models for conducting audits of financial
M E A S U R E M E N T
made (i.e., models required for conducting reviews of financial statements
B U S I N E S S
one with the necessary degree of assurance for the decisions that need to be
P R O G R A M
of other organizations’ actions lack coherence. Applicable models provide
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organizations or other organizations), auditors powerfully analyze whether
current- and future-period financial statements make sense.
Within the Wells Fargo case, for example, students identify and interpret a
set of nonfinancial performance measures related to the design and
development of B2B e-commerce services. These measures reveal current
states of Wells Fargo’s overall business and are leading indicators of likely
future financial statement performance measures. As such, these measures
have considerable utility for assessing the RMM associated with present
and future financial statement amounts and disclosures. When auditors
better assess the level and underlying sources of the RMM, they are better
assessments decrease with greater convergence between the organization’s
financial statement business measures and auditors’ SA/PA-based
expectations of the same.
A sometimes overlooked objective of SSA is to seek to ensure that entire
audit teams, not just engagement partners, acquire rich mental models of
the systems of which audited organizations are a part. Ensuring meaningful
degrees of homogeneity in the formation and refinement of audit team
members’ mental models helps improve audit effectiveness and efficiency.
Even if, as some may argue, most engagement partners historically have
cultivated rich mental models, SSA provides value by reducing
idiosyncratic variation in mental models across partners and subordinate
auditors. Reduced variation makes it easier for the team to communicate
business risks and RMMs and increases the subordinate auditors’ awareness
of important states of the business that provide the context for other
audit work.
B U S I N E S S
M E A S U R E M E N T
C A S E
D E V E L O P M E N T
A N D
R E S E A R C H
P R O G R A M
able to design additional procedures to reduce audit risk. In general, RMM
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Students may not appreciate all of the benefits that accompany the audit
team’s explicit formation and sharing of its mental models. When the audit
team develops a shared mental model of an audited organization,
collectively the team members become more aware of omissions and
maintained assumptions. Some assumptions, as it may turn out, may need to
be refined or discarded. Increased audit team situation awareness and scrutiny
of its shared mental model justify greater confidence when the team reasons
about how changes within or outside audited organizations’ boundaries will
affect RMM. The team can better judge whether proposed lines of audit
inquiry will be diagnostic given explicit communication of the team’s
collective understanding of the auditee. Finally, auditors who form and share
Performance of SSA tasks requires thinking skills that receive scant
coverage in today’s auditing standards or textbooks. However, there are
several ways students can begin to acquire these skills.12 We postulate that
strong strategic-systems thinking skills facilitate auditors’ achievement of
superior performance on SSA tasks. A recent study by Jacobson (2001)
describes several types of strategic-systems thinking skills.13 The primary
B U S I N E S S
12 Research on judgment and decision making commonly uses task performance to operationalize audit
expertise. Task performance is a function of ability and experience, which provides auditors with
knowledge acquisition opportunities. Such experiences can include first-hand encounters on realworld auditing tasks and second-hand encounters such as firm training and collegiate education. See,
e.g,. Libby, R. and J. Luft, “Determinants of judgment performance in accounting settings: Ability,
motivation, and environment,” Accounting, Organizations and Society (1993) 18, 425-450 and Libby,
R., “The role of knowledge and memory in audit judgment,” Judgment and Decision-Making Research
in Accounting and Auditing. Ashton, R.H. and A.H. Ashton, Eds. 176-206 (Cambridge University
Press, 1995).
13 Jacobson, M. J., “Problem solving, cognition, and complex systems: Differences between experts and
novices,” Complexity (January/February 2001) pp. 41-49.
M E A S U R E M E N T
C A S E
hypothesis examined in the Jacobson study is that key differences exist
A N D
Systems Thinking
D E V E L O P M E N T
its own organization is impoverished in certain areas and respects.
R E S E A R C H
P R O G R A M
their mental models of auditees may learn that management’s mental model of
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between strategic-systems scientists and undergraduates in terms of the
mental models used to aid their thinking.
Jacobson (2001) describes two fundamentally different mental models, a
clockwork model and complex systems model. These models can be
differentiated along six attributes, as shown in Table 1.14
B U S I N E S S
M E A S U R E M E N T
C A S E
D E V E L O P M E N T
A N D
R E S E A R C H
P R O G R A M
Table 1:
Different Mental Models Used to Guide Participants Thinking
Attributes
Clockwork
Mental Model
Complex Systems
Mental Model
Understanding
Reductive
Nonreductive
Control
Centralized
Decentralized
Causality
Single
Multiple
Action effects
Small actions cause
small effects
Small actions cause
large effects
Agent actions
Predictable
Stochastic
Final states
Static, teological
Equilibrative,
nonteological
Adapted from Table 1, p. 43, in Jacobson, M. J. (2001). “Problem solving, cognition, and complex
systems: Differences between experts and novices,” Complexity (January/February) pp. 41-49.
A key attribute concerns how people try to understand phenomena.
Clockwork thinkers are reductionists. They decompose systems, focus on
isolated parts (trees rather than forests), and conjecture about how these
parts influence others in a step-wise sequence. Complex-systems thinkers
focus on relations among meaningful clusters within the whole (forest).
They realize that clusters within the whole or the whole itself may differ
14 The author used eight attributes to contrast the two models. Here the attribute complexity is omitted
because only two comments were made by the participants that relate to it, and the attributes of final
causes and ontology are combined to form a final state attribute.
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from the sum of constituent parts and that a specific part’s influence
depends on many factors besides contiguity. As previously discussed,
auditors who adopt SSA engage in a holistic strategic analysis of auditees
to acquire a deep understanding of the economic web of which the auditee
is a part. Thus, using forest thinking, as opposed to tree-by-tree thinking, is
critical to SSA.15
Additionally, clockwork thinkers search for (usually exogenous) controls
arising from centralized agents/factors whereas complex-systems thinkers
search for (often endogenous) controls that arise from interactions among
decentralized agents/factors. To illustrate, strategic-systems auditors may
identify value-creating opportunities. Examples presented in the
Mercedes-Benz U.S. International case (MBUSI) are control structures that
interactively mitigate business risks related to events that could slow down
MBUSI’s in-sequence, just-in-time (JIT) assembly process. The auditor
to think in terms of a single cause yielding a single effect. Complexsystems thinkers envision multiple causes and effects, often with feedback
loops that make differentiating between cause and effect relatively
unproductive. In SSA, a primary reason to engage in activities such as SA
and PA is to populate the auditor’s mental model with alternative
explanations for observed phenomena so that undue reliance is not ascribed
to a single plausible explanation.
15 A discussion of forest thinking and tree-by-tree thinking appears in Barry Richmond, The “Thinking” in
Systems Thinking: Seven essential skills (Pegasus Communications, Inc., 2000).
C A S E
clockwork and complex-systems mental models. Clockwork thinkers tend
M E A S U R E M E N T
Causality is another dimension for which differences exist between
B U S I N E S S
controls reside inside and outside the MBUSI organization.
D E V E L O P M E N T
A N D
employing SSA (and the student reacting to the case) learns that such
R E S E A R C H
third-party organizations (e.g., regulators) mitigate business risks or
P R O G R A M
consider how control structures that are distributed across auditees and
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Additionally, whereas complex-systems thinkers realize that small actions
can compound exponentially through reinforcement loops, clockwork
thinkers generally overlook leverage points associated with small actions.
Leverage point identification is an integral part of strategic-systems
auditing. In the Lincoln Savings and Loan and Wells Fargo cases, to
illustrate, a careful strategic analysis reveals how small shifts in the interestrate spread encroach on one of the historic means of generating value for
both organizations (i.e., paying less interest on deposits than is earned on
loans). Many examples of leverage points exist. A small mathematical
error that reportedly would influence the average spreadsheet user about 1
in every 27,000 years of use ballooned into a media fiasco and a $475
recent controversy over Ford Explorers and Firestone tires. Apparently, tires
with a claimed incidence of tread separation of as little as 5 per 1,000,000,
a benchmark reportedly set by Ford, may raise safety concerns.16
Finally, systems thinkers consider how random shocks could perturb the
dynamics of systems’ equilibration processes.
In contrast, clockwork
deterministic, as if they were a matter of higher-order design (teological).
as well as the control structures employed to manage these risks. This
B U S I N E S S
M E A S U R E M E N T
D E V E L O P M E N T
thinkers tend to view phenomena as being relatively static and
C A S E
A N D
R E S E A R C H
P R O G R A M
million write-off for Intel Corporation. Another example involves the
Strategic-systems auditors understand that to provide reasonable assurance
on financial statements, they must acquire a deep understanding of the
business risks that threaten the auditee’s ever-changing business processes
understanding helps the auditor anticipate how realizations of some
16 Grove, A., Only the paranoid survive: How to exploit the crisis points that challenge every company
(Bantam Books, 1999) p. 12-16). Also see, White, J. B., S. Power, and T. Aeppel, “U.S. probe of
Firestone to conclude soon; inquiry into Ford Explorer could follow,” WSJ.com (June 20, 2001)
http://interactive.wsj.com/archive/retrieve.cgi?id= SB992964124569981170.djm, June 28, 2001).
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business risks are likely to affect the auditee and, thus, perturb the
performance attained within its key business processes.17
Returning to the Jacobson (2001) study, seven undergraduates and nine
complex-systems scientists (some of whom were advanced graduate
students) were the participants. All participants were asked to respond to
eight questions on complex adaptive systems (e.g., How would you design
a large city to provide food, housing, goods, services, and so on, to your
citizens so that there would be minimal shortages and surpluses?). The
investigator tracked the thoughts of participants via concurrent verbal
mental models appear to be at odds in that neither group’s comments reflect
a balanced mix of clockwork and complex-systems thinking. In particular,
while more than 80 percent of the scientist group’s comments reflect a
complex-systems mental model, roughly two-thirds of the undergraduates
group’s comments reflect a clockwork mental model.
In a related study, executives and undergraduates participated in a
simulation in which they tried to maximize the quality of life for a seminomadic tribe over 25 years. To improve their chances of success,
17 For additional insight on how systems thinking provides powerful decision-making advantages see, Klein,
G., Op. Cit. (1999). Especially relevant chapters include: Ch. 4, “The Power of Intuition,” Ch. 8, “The
Power to Spot Leverage Points,” Ch. 9, “Nonlinear Aspects of Problem Solving,” Ch. 10, “The Power to
See the Invisible,” and Ch. 13, “ The Power to Read Minds.”
18 Concurrent verbal protocols are a means of collecting useful data on human's decision processes. See,
e.g., Ericsson, K. A. and H. A. Simon, Protocol analysis: Verbal reports as data (Cambridge, MA: The
R E S E A R C H
shaded rows to denote complex-systems thinking. From these data, the two
A N D
findings, using gray-shaded rows to denote clockwork thinking and bronze-
D E V E L O P M E N T
Table 2 summarizes these
C A S E
indicative of a clockwork mental model.
M E A S U R E M E N T
of a complex-systems mental model and they made fewer comments
B U S I N E S S
Overall, the scientist group of participants made more comments indicative
P R O G R A M
protocols.18
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participants needed to recognize feedback mechanisms, interrelated
variables, and the likelihood of unpredictable side effects. The executives
performed markedly better, and their decision processes reinforced the
complex system mental model. They devoted significantly more time at the
beginning to gain a deep understanding of how variables were interrelated
and how early actions could have large effects over time. Relative to the
executives, the students acted first, stayed their course until feedback
suggested a problem, and then tried to correct their understanding. 19
Table 2:
Average Number of Comments Made Reflecting Different Mental Models
Description
Scientist Group
(n=9)
Undergraduate Group
(n=7)
0.4
3.3
Nonreductive
2.1
0.6
Centralized
0.1
2.1
Decentralized
3.6
0.7
Single
0.9
0.9
Multiple
4.9
3.1
Small actions cause small effects
0.2
1.0
Small actions cause large effects
0.4
0.0
Predictable
1.2
1.7
Stochastic
2.3
0.7
Static, teological
0.0
0.0
Equilibrative, nonteological
2.1
0.0
Understanding Reductive
Control
Causality
Action effects
Agent actions
Final states
B U S I N E S S
M E A S U R E M E N T
C A S E
D E V E L O P M E N T
A N D
R E S E A R C H
P R O G R A M
Attributes
19 Dörner, D. and J. Schölkopf, “Controlling complex systems; or, expertise as ‘grandmother’s know-how,’”
Towards a General Theory of Expertise, K. A. Ericsson and J. Smith, eds. (Cambridge University Press,
1991) pp. 218-239.
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Frequently Asked Questions about SSA
Following is a list of frequently asked questions about principles that are
associated with or underlie thinking skills pertinent to SSA.
Just as
students cannot master the thinking skills without actively applying and
generalizing these skills, they cannot apply and generalize such skills
without a sound understanding of their fundamental principles. Because of
the importance of the principles embedded in the following questions, we
recommend that they be assigned as homework or be used as discussion foci
within class breakout sessions.
usually occurs because students confuse their inductive learning process
with the auditor’s mental model formulation. Students need to be reminded
that when they encounter cases such as those published in this volume, they
are simultaneously learning a knowledge-acquisition skill and acquiring a
rudimentary strategic-systems model of an auditee organization. Students’
models of auditee organizations tend to be highly malleable because they
are just embarking along the learning curves associated with strategic and
business process analyses.
Auditors’ mental models, in contrast, are
unlikely to be as malleable (although research could shed light on the issue),
and even when auditors temporarily alter their mental models at an auditee’s
B U S I N E S S
suggestion, they seek corroboration. Suppose, for example, that the auditee
R E S E A R C H
whose mental models are rather well developed. Ironically, this projection
A N D
Students sometimes project the plasticity of their mental models to auditors
D E V E L O P M E N T
of the auditee organization?
C A S E
if an auditee is trying to cause the auditor to develop a false mental model
M E A S U R E M E N T
problem is that it always seems reasonable. How does an auditor ever know
P R O G R A M
1. My mental model of this organization seems reasonable to me, but the
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were to assert that, in contrast to the auditor’s current mental model, product
returns hardly ever occur. The auditor could interview large customers of
the audited organization, cross-check the assertion against quality control
business measures that are not reported in financial statements, and see if
the assertion squares with recent industry trends.
Still, students who raise this issue should be lauded for pointing out that
even auditors are well advised to guard against being overconfident in their
mental models. It is wrong to denigrate mental models because they are
sometimes wrong, but it is right to chastise auditors who become
overconfident in the mental models that they construct.20 One possible
P R O G R A M
2. When we first started talking about a new audit approach, I had
B U S I N E S S
M E A S U R E M E N T
C A S E
D E V E L O P M E N T
A N D
wrong in a significant way and to think creatively about which portions of
R E S E A R C H
remedy is for auditors, at regular intervals, to imagine that their model is
the model are most likely to be in need of refinement or corroboration.
envisioned acquiring new evidence. What constitutes evidence under SSA?
We have found that students frequently ask the SSA-specific portion of this
question without adequately understanding the more primitive concept of
audit evidence. Thus we first address the more general portion of this
question.
When doing so, it is useful to distinguish among auditor
knowledge, audit evidence, and audit documentation. Knowledge resides in
the auditor’s memory in the form of facts, rules, schemas, propositions,
preferences, and beliefs. At any point during the audit, the auditor's current
knowledge serves as the basis for design of audit procedures. Execution of
such procedures produces indicative information (i.e., evidence). The
auditor’s interpretation of evidence transforms his or her prior knowledge
into updated knowledge, which enables the auditor to assess the RMM at
the assertion, class-of-transactions, account-balance, financial-statement
20 Klein, G., Op Cit (1999) p. 68.
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and/or supplemental disclosures levels. And, once again, the auditor's
(updated) knowledge serves as the basis for the design of additional audit
procedures.
A positive feedback loop, therefore, exists during the audit as the auditor’s
current knowledge prompts new questions for updating assessments of the
RMM and determines the nature and extent of the additional evidence
needed to answer these questions, and new evidence catalyzes the creation
of new knowledge. While there are likely to be matters for which the
auditor will obtain only persuasive rather than convincing evidence
(AU§326. 22), in most cases there will be sufficient cycles of the evidence-
the audit, the auditor customarily documents some evidence and/or states of
knowledge (e.g., mental models) within work papers. Audit evidence varies
according to its amenability to being directly documented in work papers.
While, for example, returned confirmations easily can be stapled to a lead
schedule, assets that the auditor physically examines (such as loan
agreements or equipment) usually only can be described or represented in
work papers. The auditor applies professional judgment to ensure that audit
documentation is sufficient to show that the auditee’s accounting records
agree with the financial statements and that the standards of fieldwork have
been observed (AU§339.05). Students should understand that all audit
documentation is filtered in light of the auditor’s knowledge. They also
should understand that audit documentation represents only subsets of the
evidence considered and the knowledge accumulated by the auditor.
R E S E A R C H
A N D
the feedback loop between knowledge and evidence progresses throughout
D E V E L O P M E N T
Students sometimes confuse evidence with work paper documentation. As
C A S E
obtained and issue an unqualified opinion.
M E A S U R E M E N T
sufficiently low, he or she may conclude that reasonable assurance has been
B U S I N E S S
the auditor’s opinion is that the RMM for the financial statements is
P R O G R A M
knowledge positive feedback loop to be able to support an audit opinion. If
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When addressing the SSA-specific portion of the question, it is useful to
focus on how SSA endows the auditor with the means of acquiring indepth knowledge of states of the client’s business. Such knowledge is
critical because it empowers the auditor to understand the economic
substance of transactions and events (i.e., substance over form).
In
pursuing questions about economic substance, the auditor employing SSA
designs audit procedures yielding audit evidence capable of updating
numerous elements of his or her mental model. Because SSA broadens
and fortifies the auditor’s knowledge it may be that some of these audit
procedures might not even occur to non-SSA auditors (e.g., interview
suppliers). Thus, there may be instances in which the SSA auditor obtains
Further, if critical differences in knowledge about the states of the client’s
business were to exist, even if these two auditors were to perform the
same audit procedures and observe the same outcomes, they may reach
different audit conclusions about economic substance.
The LSL case contained in this volume can be used to help students
recognized profits on raw land sales, and such profits constituted the bulk
income. SFAS No. 66, Accounting for Sales of Real Estate, prescribes
B U S I N E S S
M E A S U R E M E N T
D E V E L O P M E N T
understand many of the concepts discussed above. In the case, LSL
C A S E
A N D
R E S E A R C H
P R O G R A M
evidence not considered or fully appreciated by the non-SSA auditor.
of its bottom-line income. The behavior of regulators assessing the
ongoing viability of the company to determine whether to take
supervisory action apparently was influenced by the reported bottom-line
rules for determining the timing of profit recognition on these land sales.
Under these rules, immediate recognition of the entire gain on real estate
sales is allowed for transactions for which collectibility of the sales price
is reasonably assured.
To assess the RMM for LSL’s land-sales-profit assertions, the auditor
must decide what specific questions to address, and what audit procedures
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to perform, to produce evidence on the collectibility of the sales prices.
SFAS No. 66 specifies criteria for assessment of whether the collectibility
of the sales price is reasonably assured. For a land sale to qualify for
immediate full profit recognition, the initial investment criterion requires a
25 percent down payment, and the payback criterion requires a loan
payback period less than 20 years. Herein lies a dilemma for the auditor.
On the one hand, rather convincing evidence can be obtained about the
question—“Does the form/structure of the transaction meet these criteria?”
Executed sales contracts and confirmations from buyers would be
convincing evidence that a transaction was, or was not, structured to meet
the criteria.
On the other hand, evidence about the structure of the
For example, the SSA auditor could seek evidence on the financial health
and net worth of the buyer, why the buyer would be willing to pay the
indicated price, current conditions in the real estate market, whether the
seller has provided the buyer with funds the buyer uses to make the down
payment, etc. In the final analysis, as illustrated by the LSL case, the SSA
knowledge-acquisition framework and attendant rich mental model of the
client’s business can improve the auditor’s understanding of the economic
actual execution of the audit stays about the same as before?
This question reflects a common but fundamental misunderstanding of
SSA. Under SSA, audit execution commences at the point the auditor
B U S I N E S S
3. Is SSA just a fancy extension of the audit planning process such that the
M E A S U R E M E N T
C A S E
substance of transactions and events, regardless of their form.
R E S E A R C H
SSA provides a framework especially useful for acquiring such evidence.
A N D
evidence concerning relevant states of the buyer’s and seller’s businesses.
D E V E L O P M E N T
reasonably assured. To address this question the auditor must obtain
P R O G R A M
transaction may not be sufficient for knowing whether collectibility is
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begins building his or her mental model of the auditee organization. It is
not meaningful, in our view, to partition SSA into a planning and execution
stage. All of the knowledge-acquisition activities in SSA enrich auditors’
memory database. Evidence helps auditors refine the lens through which
they view the audited organization and, based on this viewpoint, design
diagnostic audit tests and interpret the attendant test results.
4. Is SSA a way to produce revenue from new assurance services that has
little to do with auditing?
This question reflects another fairly common misunderstanding. First and
as they have done for years, auditors can inform auditees about business
problems, i.e., reportable conditions. The SSA approach, with its focus on the
articulation of financial statement business measures, nonfinancial statement
business measures, and an organization’s strategy, undoubtedly holds value to
auditees that transcends the traditional audit.21 At the same time, however, the
SSA approach sharpens auditors’ ability to acquire diagnostic audit evidence
Interestingly, some students who ask this question assume a static financial
strategic-systems assurance professional, however, does not rely on
B U S I N E S S
M E A S U R E M E N T
D E V E L O P M E N T
when business conditions change or are about to change.
C A S E
A N D
R E S E A R C H
P R O G R A M
foremost, the genesis of SSA is a desire to improve audit quality. Of course,
reporting model that allows little room for accounting for intangibles such
as human capital or for creative ways to disclose levels and changes in
business risks. New reporting models may well evolve over time.22 The
21 As one example, the recent SAS No. 90 requires auditors to discuss with members of the audit
committee the overall quality, not just the acceptability, of the accounting methods. Accounting
method quality implicitly is a matter of the auditor's professional judgment. Compared to the
traditional auditor, the auditor who employs SSA may be more capable of assessing accounting method
quality along additional important dimensions. In particular, the SSA auditor can more readily assess
the degree to which the auditee organization's financial statement business measures articulate with its
nonfinancial statement business measures and, from an economic substance perspective, with its
strategic objectives.
22 For information as to how organizations may report business risks in the future see, e.g., Financial
reporting of risk: Proposals for a statement of business risk at
http://www.icaew.co.uk/depts/td/tdfrc2/risk.
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statutory financial reporting models to delimit his or her value propositions.
In the competitive marketplace for reliable, high-quality information, the
demand for and supply of other financial measures as well as nonfinancial
business measures will continue to expand. It will be interesting over time
to observe how many or few of these measures will be reported or disclosed
in statutory financial statements.
5. You talk about complex interactions that happen within strategic systems
but what is an interaction and are there different kinds of interactions?
Phrases such as strategic interaction can apply to the predictability and
same values of X and Y caused, as examples, a 13 degree increase, a 10,000
degree increase, a slight decrease, or no change at all. A related and critical
observation is that, in the absence of an interaction, reductionistic
knowledge of the isolated effects is tantamount to knowledge of the
combined effects. For interactions, however, knowledge of the isolated
effects can be nondiagnostic of combined effects.
Behavioral game theorists attempt to understand decision-maker behavior
arising from a special class of interactions that we call strategic-systems
interactions. Strategic-systems interactions occur because decision makers
try to anticipate the behavior of others before acting. These interactions are
interesting in that potential effects necessarily have some influence on the
B U S I N E S S
causes that manifest. Nonsystems thinkers, however, typically presume that
R E S E A R C H
degree increase. Interactions would be evident though if combination of the
A N D
causes a two-degree increase while, in combination, X and Y cause a five-
D E V E L O P M E N T
interaction exists when, in isolation, X causes a three-degree increase and Y
C A S E
effects, while additive causes produce linear effects. To illustrate, no
M E A S U R E M E N T
the nature of the cause-effect relation itself. Interactions produce nonlinear
P R O G R A M
nature of how causes (e.g., inputs) generate effects (e.g., outputs) as well as
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anticipated effects have little bearing on prior causes. Systems theorists
believe that strategic agents try to anticipate how other strategic agents will
behave in response to environmental conditions and/or to their own
strategic behavior. Thus, these theorists believe that it is fruitful to think in
terms of system behavior instead of in terms of agent behavior, per se.
Nonsystems thinkers might, as an example, see value in flatly classifying
some liquids as more dangerous (e.g., flammable) than others without
giving consideration to the decision problem at hand and possible strategic
behavior. Systems-thinkers consider the joint effects of strategic agents’
behavior when they are around different liquids. To illustrate, suppose that
to handle either a flammable liquid (i.e., flash point < 140ºF) or a
combustible liquid (i.e., flash point between 140ºF and 200ºF). To think
about what action would be most likely to endanger B, A must consider the
probability that, and the extent to which, B would treat the more flammable
liquid with more care. And, A also must consider the probability that B will
think that A will provide either type of liquid. One possibility is that if B
were to believe that he or she had been provided with the safer liquid, B
would lower his or her guard so much that the safer liquid-agent pairing
places B at greater risk overall. Thus, because of the strategic interactions,
greater residual risk can be associated with seemingly less ominous threats.
6. How can auditors use SSA to improve their ability to detect fraud over
and above that provided by the performance of forensic auditing
procedures?
Questions of this variety hint at an either/or fallacy. Auditors can use
B U S I N E S S
M E A S U R E M E N T
C A S E
D E V E L O P M E N T
A N D
R E S E A R C H
P R O G R A M
strategic agent A wants to endanger strategic agent B. Agent A can ask B
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strategic-systems thinking to assess the extent to which forensic audit
procedures are warranted and, when warranted, to specify the nature of
forensic procedures, and to interpret the results of performing such
procedures. In particular, auditors using the SSA approach may inquire of
several competent sources outside the auditee and consider whether a given
business strategy is likely to succeed within a given business climate. By
examining how well financial statement assertions reconcile with evidence
rooted in external sources, SSA provides auditors with an invaluable way to
validate assertions from a triangulation perspective. In our view, the chance
that fraud will go undetected is higher when auditors look exclusively or
even largely within the audited organization and especially when they
believe that some assertions present higher than acceptable audit risk, they
can tailor forensic procedures to address these risks in particular.
7. Does SSA fixate on efficiency to the point of doing away with most
understanding of the auditee to form business-knowledge-laden
expectations about financial statement measures so that the auditors’
ongoing comparison of expectations to observations have diagnostic value.
Not coincidentally, the act of formulating expectations after studying
plausible relationships between financial and nonfinancial data and
B U S I N E S S
comparing these expectations to recorded amounts is, by definition, a
C A S E
crucial that students understand how SSA involves acquiring a deep
M E A S U R E M E N T
Actually, auditors employing SSA conduct numerous substantive tests. It is
D E V E L O P M E N T
A N D
substantive tests?
R E S E A R C H
themselves. If, after engaging in triangulation, auditors employing SSA
P R O G R A M
anchor their mental models of the organization on the financial statements
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substantive test using the standard auditing characterization of analytical
procedures.23
When auditors who do not adhere to SSA think of analytical procedures,
they probably envision using prior year financial statement information as
a starting point for what current year financial statement information ought
to look like. If current year financial statements differ, the reductionist
auditor will search for an explanation. Conversely, the strategic-systems
auditor’s deep understanding of the audited organization provides a strong
basis to recognize whether, and the degree to which, they should anchor on
prior year results. A key takeaway is that since much of what strategic-
B U S I N E S S
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systems auditors do is perform complex analytical procedures that are
guided by extensive study of the auditee organization’s business processes
and interconnectedness with other organizations, the strategic-systems
audit heavily relies on substantive testing.
The question asked has some merit, however, because SSA exists today in
part because of a general uneasiness over the diagnosticity of performing,
in a blanket-like fashion, substantive tests of account balance details.
Under SSA, significantly fewer substantive tests of account balance details
might be performed because the strategic-systems auditor strives to conduct
diagnostic detailed testing in a surgical fashion.
8. I understand how SSA emphasizes complex analytical procedures and I
see where auditing standards describe analytical procedures as being a
substantive test. But aren’t most substantive tests of details different in that
they mostly relate to detection risk?
It seems that the SSA complex
analytical procedures are more focused on RMM.
23 See SAS 56.
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Students sometimes confuse the order in which auditing standards list risks
with the point in time during the audit that these risks are addressed. The
reality, of course, is that nearly all audit procedures are multiple-purpose
procedures in the sense that they have the potential to inform the auditor
about RMM and about the likely effectiveness of tests designed to detect
misstatements.
We question whether these risks are separable.
For
example, if an auditor were to conduct a traditional test of details of
accounts receivable, he or she might learn, by studying a returned
confirmation, that an auditee’s customers were double billed. The fact that
a double billing was not prevented or detected by the audited organization’s
accounting controls simultaneously reflects on RMM and informs the
suppose that an auditor were to examine a sample of transactions and find
no indication of misstatements due to improper cutoff. Does this good
news provide the auditor with information about inherent risk, control risk,
or detection risk? A Bayesian auditor, who would update his or her beliefs
in accordance with the laws of probability, would say that all three risks are
affected. But the Bayesian auditor probably would be confused if someone
were to argue that little to no interdependencies exist across the three risks
commonly included in the simplistic, algebraic form of the audit
B U S I N E S S
risk model.
R E S E A R C H
risk, control risk, or detection risk? How about all of the above? Finally,
A N D
assertion for inventory provide the auditor with information about inherent
D E V E L O P M E N T
them crumble under slight pressure. Does this bad news about the valuation
C A S E
when physically examining an inventory of diamonds finds that most of
M E A S U R E M E N T
the extent of misstatement. As another example, suppose that an auditor,
P R O G R A M
auditor about the nature of additional procedures that could help diagnose
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Concluding Comments
In this chapter we have discussed the antecedents to SSA and presented a
bird’s eye view of the SSA approach that supplements discussion in the
original Bell, et al. (1997) monograph, Auditing Organizations Through a
Strategic-Systems Lens: The KPMG Business Measurement Process. We
also have more fully explicated the nature and value of the auditor’s mental
model under SSA and described the systems-thinking ideas that provide a
theoretical foundation for SSA.
Our goal for this chapter has been to communicate to instructors the need
more transparent and to delineate some of the benefits that accrue from an
understanding of SSA. The eight cases contained in this volume are
excellent vehicles for helping students to obtain such an understanding. In
Chapter 2, “A Guide to Selecting SSA Cases,” we provide a series of
windows into the individual cases as a means of further reducing any
remaining barriers to case adoption.
B U S I N E S S
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C A S E
D E V E L O P M E N T
A N D
R E S E A R C H
P R O G R A M
for students to understand SSA. Our dual approach has been to make SSA
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Timothy B. Bell
KPMG LLP
Mark E. Peecher
B U S I N E S S
M E A S U R E M E N T
C A S E
D E V E L O P M E N T
A N D
R E S E A R C H
Ira Solomon
University of Illinois at Urbana-Champaign
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S
ince at least the mid-1920s,
business faculties have relied on cases to help students improve their
understanding of management behavior and business organizations.1 Wellestablished case series exist at several highly regarded business schools such
as Darden, Harvard, and Stanford. These case series exist in part because
when students actively immerse themselves in case analysis and synthesis,
they hone their critical thinking and communication skills as well as broaden
This chapter is designed to help instructors identify sets of cases that will
facilitate achieving learning objectives for their classes. We begin by
discussing industry coverage and each case’s main learning objectives as
well as the strategic context of each case. Thereafter, we provide an
overview of the primary tools (e.g., PEST analysis, SWOT analysis)
suggested by the various case authors to guide students’ strategic analysis
of the organizations on which the cases are founded. The remainder of the
chapter summarizes the primary business risks, business processes, and
related critical success factors (CSFs) and key performance indicators
(KPIs) emphasized within and across the cases.
1 See Corey, E. R., Case Method Teaching HBS Case No. 9-581-058 (Harvard Business School Press, 1998) p.3.
2 For discussions of how active, cooperative, and discovery learning enhances business education see, for
example, Learning with cases HBS Case No. 9-589-080 (Harvard Business School Press, 1989); and
Christensen, C., D.A. Garvin, and A. Sweet, Education for judgment: The artistry of discussion leadership
(Harvard Business School Press, 1992).
R E S E A R C H
A N D
applying fairly abstract management principles to real-world issues.2
D E V E L O P M E N T
advantages of active, inductive learning for developing skills such as
C A S E
in business education is unsurprising given their surface realism and the
M E A S U R E M E N T
and discuss and debate proposed solutions. The enduring popularity of cases
B U S I N E S S
students question assumptions, compare and contrast factual interpretations,
P R O G R A M
their knowledge about phenomena that permeate businesses. Motivated
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Before discussing industry coverage, it should be noted that several of the
cases in this volume have been used successfully in undergraduate and
graduate auditing classes as well as in MBA courses on strategy or strategic
management. It also is noteworthy that cases (and accompanying teaching
notes) share important attributes. For example, each case discusses an
organization’s strategy and its relation to the organization’s strategic
position within its economic environment. Each case also discusses the
relations between the organization’s strategy and its core business
processes, CSFs, KPIs, business risks, and strategic controls. Instructors
who fully exploit the educational value of these cases will encourage
students to evaluate the nature and implications of linkages among these
B U S I N E S S
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elements as opposed to merely documenting their existence.
Summary of Cases
Industry Coverage
The eight cases contained in this volume feature organizations from six
different industries.
Several of the cases emphasize interrelationships
between industries. Table 1 summarizes the eight cases according to the
featured organizations and the industries of emphasis. In the table, bronze
represents a heavy emphasis, gray represents moderate emphasis, and white
indicates little to no emphasis. For example, in the Wells Fargo case column
there are two bronze rectangles and one gray rectangle. A major theme in
the Wells Fargo case is how a financial services organization is trying to
establish a leadership position in business-to-business (B2B) e-commerce.
The Wells Fargo case weaves retailers into this theme in two ways. One,
several of the B2B e-commerce services under development at Wells Fargo
target retail organizations. Two, one reason that a bank such as Wells Fargo
would be interested in B2B e-commerce is that industry experts predict that
financial services are subject to new competition from nonbanks, including
retailers (e.g., Nordstrom).
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As the color-coding in Table 1 suggests, considerable industry overlap
exists across the eight cases. Several interesting relationships among case
companies underlie this industry overlap. Consequently, instructors can
easily identify subsets of cases complementing or reinforcing one another.
To illustrate: Reiter supplies automotive organizations including
DaimlerChrysler, which is the parent company of Mercedes-Benz U.S.
International (MBUSI); CVS/Pharmacy distributes prescription drugs,
many of which arrive on the market only after intensive research and
development and FDA approval, which are business processes covered in
the IDEC case. As further examples, HMO organizations such as Trigon
influence the pricing and distribution of products developed by
institutions that perceive a need to pursue new (albeit vastly different) value
propositions; CVS and Loblaw easily could compete or cooperate on
seasonal and grocery items; and click-and-mortar information technology
Table 1
Organizations and Industry Membership Represented in Cases
Wells
CVSa IDECb Loblaw LSLc MBUSId Rietere Trigonf Fargo
Medium
B U S I N E S S
a
CVS/Pharmacy (CVS); bIDEC Pharmaceuticals Corporation (IDEC); c Lincoln Savings and Loan (LSL);
dMercedes-Benz U.S. International (MBUSI); eRieter Automotive North America, Inc. (Rieter); fTrigon Healthcare, Inc.
M E A S U R E M E N T
Heavy
C A S E
Automotive
Financial Services
Healthcare
Information Technology
Real Estate
Retailers
D E V E L O P M E N T
A N D
issues confront CVS, Loblaw, and Wells Fargo.
R E S E A R C H
by organizations such as CVS; LSL and Wells Fargo are financial services
P R O G R A M
organizations such as IDEC and these products are distributed to consumers
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Instructors can use any combination of cases or select individual cases that
are well suited for specialized courses or specific modules within courses
on issues such as B2B e-commerce or disintermediation (Wells Fargo),
valuation in the new economy or alliance management (IDEC), strategic
management for healthcare related organizations (CVS, IDEC, Trigon),
hybrid-business strategies (Loblaw), and business ethics (LSL).
Learning Objectives and Strategic Context
Table 2 presents the primary learning objectives and management issues
Table 2
Summary of Learning Objectives and Strategic Context
CVS/Pharmacy (CVS)
Learning Objectives
Introduce students to how the drugstore
industry creates value and the relative
competitive position of industry leaders CVS
and Walgreens.
Issues Emphasized
The case discusses relative strategic benefits and
business process implications of alternative
growth strategies. Generally speaking, CVS
grows by acquisition and Walgreens grows by
internal expansion. The case highlights complex
relationships among organizations that supply,
buy from, and collaborate/compete with
drugstores, including health management
organizations (HMOs) and pharmacy benefit
management companies (PBMs).
IDEC Pharmaceuticals Corporation (IDEC)
Learning Objectives
Issues Emphasized
Introduce students to the biopharmaceutical and
related industries and to IDEC. Enable students
to explain how biopharmaceutical organizations
create value and the opportunities and risks these
organizations confront.
IDEC is considering how to leverage its
successful
in-house
development
and
®
deployment (via alliances) of Rituxan and
other promising new drugs. The company finds
itself at an inflection point where it has moved
from a state of significant cash burn to
significant cash accumulation. IDEC hopes for
better bargaining power in future alliances with
major biotech organizations (e.g., Genentech).
Eventually, IDEC may want to internally handle
its production and distribution needs.
Introduce students to strategic alliances in
business, including their motivations, risks, and
rewards. Enable students to understand the role
of bargaining power in alliances.
B U S I N E S S
M E A S U R E M E N T
C A S E
D E V E L O P M E N T
A N D
R E S E A R C H
P R O G R A M
emphasized in each case.
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Table 2
Summary of Learning Objectives and Strategic Context (cont’d)
Loblaw Companies Ltd. (Loblaw)
Learning Objectives
Introduce students to strategies and value
propositions pursued by organizations operating
within the mature retail grocery industry and to
competitive advantages of efficient supply chain
management within such a mature industry.
Issues Emphasized
The case discusses how a well-established
grocery store chain adopts a hybrid costleadership and differentiation strategy to
respond to a changing industry (e.g., Internet
grocers) and market entry by retail giants (e.g.,
Wal-Mart).
Lincoln Savings & Loan (LSL)
Mercedes-Benz U.S. International (MBUSI)
Learning Objectives
Issues Emphasized
Introduce students to the sport-utility vehicle
(SUV) sector of the automotive industry.
Provide students with an understanding of
activities within the assembly process and supply
chain management process for a prestige
automotive organization.
A multi-national organization responds to
cultural differences and the challenge of
integrating and coordinating information and
production technologies with suppliers.
R E S E A R C H
A N D
B U S I N E S S
The organization is attempting to manage a
backlog of customer orders on what at the
time was one of the hottest SUVs on the
market.
D E V E L O P M E N T
Ethical considerations emerge from a
combination of an ambitious, aggressive
management team and opportunities to commit
and conceal fraud in order to keep regulators
from shutting down the organization.
Introduce the role of ethics when
management attempts to achieve profits by
aggressive and potentially illegal means.
C A S E
A series of regulatory shifts threatens the valuecreating potential of interest-rate management
activities of a savings and loan and other forces
threaten its attempt to generate value in new
ways (i.e., by acquiring and developing
real estate).
Introduce the basics of conducting—and
what can be learned by conducting—a
strategic analysis and business process
analysis for a financial services organization
whose historic value propositions are of
questionable sustainability.
P R O G R A M
Issues Emphasized
M E A S U R E M E N T
Learning Objectives
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Table 2
Summary of Learning Objectives and Strategic Context (cont’d)
Rieter Automotive North America, Inc. (Rieter)
Learning Objectives
Issues Emphasized
Provide students with an opportunity to
understand links between and among strategy
and business processes for an organization that
develops, designs, and manufactures acoustical
and thermal components and interior systems for
automobile assemblers and manufacturers.
Historically, original equipment manufacturers
(OEMs) within the automotive industry
designed their own acoustical and thermal
components and interior systems. Recently,
design responsibilities have shifted to suppliers,
bringing business process implications. Design
capability now is a key supplier selection
criterion used by automobile manufacturers.
Judgments of the optimal investment in product
design must take into consideration the lifecycle of products, which lasts about three years.
Learning Objectives
Issues Emphasized
Provide students with an opportunity to apply
strategic-systems thinking to Virginia’s largest
managed health-care organization (HMO) that
is growing by acquisition within this highly
competitive industry.
Competitive pressures in the 1990s prompted
numerous healthcare organizations to change from
nonprofit
into
for-profit
organizations
(demutualization). Pressures challenge healthcare
organizations to grow to secure greater benefits
from branding and economies of scale.
Organizations that fail to grow risk being
acquired. The case’s featured organization faces a
challenge from a competing suitor to an
acquisition target organization.
The case
emphasizes decisions associated with the growthby-acquisition strategy.
Wells Fargo
Learning Objectives
Issues Emphasized
Introduce students to how emerging business- tobusiness (B2B) e-commerce is changing the
business landscape faced by financial-service
organizations.
A large regional bank known for technology
leadership ponders the sustainability of bankingrelated value propositions because nonbanks
now can provide many banking services. The
bank resolves to lever its reputation for
technology leadership in financial services to
penetrate the B2B e-commerce market. Issues
on the design and development of products that
facilitate B2B as well as the role of alliances
within B2B emerge.
B U S I N E S S
M E A S U R E M E N T
C A S E
D E V E L O P M E N T
A N D
R E S E A R C H
P R O G R A M
Trigon Healthcare, Inc. (Trigon)
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All eight cases ask students to conduct a strategic analysis, helping them to
understand how the organization fits within its larger economic system.
Questions addressed by students during strategic analysis focus on the
relations among the organization’s products and services, key external
forces and agents that influence the organization, and the organization’s
strengths and weaknesses for maintaining competitive advantage. After
performing a strategic analysis, students have a basic mental model of the
organization that allows them to understand why the organization must
execute certain business processes very well to sustain its value proposition.
For example, using the IDEC case students will learn about a relatively
consuming FDA approval process) and about IDEC in particular (e.g.,
about its portfolio of alliance partners). Students learn how to identify and
assess the impact of uncertainties inherent in a strategic change like the one
IDEC is contemplating. Uncertainties arise because vertical integration
will require investment in production facilities and distribution processes—
core competencies not yet well developed within IDEC.
Also, a
management refocus on the development of new core competencies could
jeopardize continued excellence in the core competencies that made IDEC
successful in the first place, such as alliances resource management, drug
B U S I N E S S
approval, and research and development.
R E S E A R C H
and that, even for successful drugs, they face an expensive and time-
A N D
general (e.g., that biotech organizations generally have high cash burn rates
D E V E L O P M E N T
realizing this goal, students learn about the biotechnology industry in
C A S E
vertically integrated within 5 to 10 years. To assess the prospects of
M E A S U R E M E N T
expanding its production and distribution capabilities to become more
P R O G R A M
small, but profitable biopharmaceutical organization that is considering
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Although each case has accompanying teaching notes with discussion
questions asking students to complete a strategic analysis, the teaching
notes emphasize different analytical frameworks, reflecting author
preferences and differences in case foci.
Table 3 summarizes the
approaches or frameworks used in the case teaching notes as well as the
orientation provided by the different approaches or frameworks. This
summary provides a sense of the ease with which instructors can apply the
various approaches or frameworks by referring to the teaching notes. All of
the cases lend themselves to approaches or frameworks that are not
emphasized in the teaching notes (e.g., you could apply PEST Analysis,
Porter’s Five Forces, Resource-Based View, SWOT Analysis, or Treacy and
As shown in Table 3, all of the teaching notes cover the entity-level business
model (ELBM), which is an integral part of SSA. Like PEST analysis and
Porter’s Five Forces model, for example, an ELBM considers the influence
of environmental forces on the organization. The ELBM goes beyond the
other models, however, by explicitly linking factors such as environmental
ELBM helps auditors (and students) deal with blurring organizational
suppliers, a Japanese tool-and-die organization (Ogihara America
B U S I N E S S
M E A S U R E M E N T
D E V E L O P M E N T
forces to the organization’s various business processes. This element of the
C A S E
A N D
R E S E A R C H
P R O G R A M
Wiersema’s model to the CVS case).
boundaries. An example is the MBUSI case. MBUSI, an assembler of a
prestigious SUV in Alabama (USA) whose parent organization is
DaimlerChrysler headquartered in Germany, provides one of its primary
Corporation), with proprietary production equipment. From a financialaccounting entity perspective, MBUSI retains ownership of the equipment,
but from an SSA perspective, MBUSI’s assembly process depends as much
on Ogihara as on MBUSI. If Ogihara were to shut down, the just-in-time
(JIT) assembly process at MBUSI would be affected. One reason the
ELBM requires this link is because auditors employing SSA seek to
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formulate sufficiently reliable mental models of the auditee and other
organizations to permit a comprehensive business-measurement
perspective.
In the absence of a SSA approach, obtaining such a
perspective would become impracticable because organizations that
constitute separate entities for financial reporting purposes influence each
other’s business processes.
Table 3
Strategic Analysis Frameworks Used in Teaching Notes
IDEC Loblaw
Wells
LSL MBUSI Rieter Trigon Fargo
R E S E A R C H
A N D
B U S I N E S S
a Developing an Entity-Level Business Model (ELBM) requires one to identify and analyze the nature of
connections among an organization’s external forces, markets, business processes, products and services,
customers, and alliances (Bell, T., F. Marrs, I. Solomon, and H. Thomas, Auditing Organizations Through
a Strategic-Systems Lens. KPMG Peat Marwick LLP, 1997)).
b PEST analysis provides one with a general, broad brush perspective regarding an organization’s strategic
environment regarding political and legal, economic, social and cultural, and technological factors
(Johnson, G. and K. Scholes, Exploring Corporate Strategy, 5th Edition (Prentice Hall, 1999)).
c Porter’s Five Forces Model helps one assess the overall strategic position of an organization. It holds that
interactions among five forces determine the ability of organizations to earn rates of return in excess of
the cost of capital. The forces are potential entrants, buyers, suppliers, substitutes, and competitors
(Porter, M., Competitive Advantage (The Free Press, 1985)).
d The Resource-Based View focuses on organizations’ strengths and weaknesses and presumes that
heterogeneity exists across organizations and that the transfer or acquisition of new resources is costly.
Resources, then, are a source of competitive advantage (Wernerfelt, B., “A resource-based view of the
firm,” Strategic Management Journal 5 (1984) pp.171-180).
e SWOT analysis integrates organizational and environmental analyses by focusing on an organization’s
strengths, weaknesses, opportunities, and threats (Barney, J., Gaining and Sustaining Competitive
Advantage (Addison-Wesley Publishing Company, Boston, MA, 1997)).
f The Treacy and Wiersema Framework argues that successful organizations excel on at least one of three
dimensions: operational excellence, customer intimacy, and product leadership/innovation (Treacy &
Wiersema, The Discipline of Market Leaders, Pereus Books, Cambridge, MA, 1995)).
D E V E L O P M E N T
Medium
C A S E
Heavy
P R O G R A M
ELBMa
PEST Analysisb
Porter’s Five Forces Modelc
Resource-Based-Viewd
SWOT Analysise
Treacy and Wiersema’s Modelf
M E A S U R E M E N T
CVS
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Coverage of Business Processes
The cases differ in terms of the business processes emphasized primarily
because they focus on different organizations, each with their own
competitive position and strategy. Table 4 summarizes the emphases given to
various business processes across the cases, with bronze indicating a heavy
Table 4
Business Process Analyses Emphasized in Cases and Teaching Notes
B U S I N E S S
M E A S U R E M E N T
C A S E
D E V E L O P M E N T
A N D
R E S E A R C H
P R O G R A M
CVS
IDEC
Loblaw
LSL
MBUSI
Rieter Trigon
Strategic Management Processes
Business Objective
Refinement
Resource Management Processes
Acquisitions
Management
Alliance Resource
Management
Financial and Treasury
Management
Human Resources
Management
Information Technology
Management
Regulatory
Management
Core Business Processes
Assembly, Production,
and Distribution
Development or Selling
of Real Estate
Loan and Deposit
Management
Marketing to or Servicing
of Customers
Supply Chain
Management
Research, Design and
Development
Heavy
Medium
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emphasis, gray indicating a moderate emphasis, and white indicating little
to no emphasis. For example, the IDEC column has three bronze rectangles
reflecting the heavy emphasis on alliance-resource management, regulatory
management, and research, design and development processes. These three
business processes relate back to IDEC’s business model and objectives.
Specifically, IDEC must execute these three business processes well to
harvest and leverage profits from its drug pipeline. More generally, by
looking down rows in the table, one gets a sense for the business processes
emphasized in a given case. By looking across columns, one gets a sense
for how and to what extent the cases overlap in their emphases of business
(KPIs) related to the process. For business processes of primary importance
given each entity’s strategic objective, the cases provide industry and corecompetency-within-industry contexts for students to think critically about
interrelations among possible business risks, CSFs, and KPIs. A format
similar to that of Table 4 is used in Table 5 to summarize the emphases
placed on illustrative business risks, CSFs, and KPIs. Once again, bronze
denotes heavy emphasis, gray moderate emphasis, and white little to no
B U S I N E S S
emphasis.
R E S E A R C H
and finally, critical success factors (CSFs) and key performance indicators
A N D
used to monitor the process, risks and controls associated with the process,
D E V E L O P M E N T
between process objectives, inputs, activities, outputs, information systems
C A S E
When covering a business process, the cases generally focus on connections
M E A S U R E M E N T
Coverage of Business Risks
P R O G R A M
processes.
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Table 5
Illustrative Business Risks Emphasized in Cases and Teaching Notes
B U S I N E S S
M E A S U R E M E N T
C A S E
D E V E L O P M E N T
A N D
R E S E A R C H
P R O G R A M
CVS
IDEC Loblaw LSL MBUSI Rieter Trigon
Wells
Fargo
Risks Related to Strategic
Management Processes
Strategy Selection Risk
Resource Allocation Risk
Risks Related to Resource
Management Processes
Acquisition Management Risks
• branding risk
• due diligence risk
• growth flexibility risk
• integration risk
• target identification risk
Alliance Management Risks
• branding risk
• dispute risk
• partner performance risk
• profit-sharing risk
• proprietary knowledge risk
Facilities Management Risks
• market share risk
• real estate market risk
• site selection risk
• store integration risk
Human Resources Risks
• culture risk
• recruiting and retention risk
• unionization risk
Regulatory Management Risks
• compliance and sanctions risk
• market entry approval risk
• product approval risk
Risks Related to Core
Business Processes
Assembly and Production Risks
• cost-overrun risk
• culture risk
• information technology risk
• labor risk
• materials risk
• supplier business risk
• quality risk
Heavy
Medium
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Table 5
Illustrative Business Risks Emphasized in Cases and Teaching Notes (cont’d)
CVS
IDEC Loblaw LSL MBUSI Rieter Trigon
Wells
Fargo
R E S E A R C H
A N D
D E V E L O P M E N T
C A S E
M E A S U R E M E N T
Medium
B U S I N E S S
Heavy
P R O G R A M
Risks Related to Core
Business Processes (cont’d)
Development or Selling of
Real Estate Risks
• liquidity risk
• real estate market risk
• related-party risk
Loan and Deposit
Management Risks
• credit risk
• interest rate risk
• flow risk
Marketing to and Servicing of
Customers Risks
• customer identification risk
• customer income risk
• customer satisfaction risk
• disintermediation risk
• inflation risk
• information technology risk
• product liability risk
• service continuity risk
Supply Chain Management Risks
• contractual negotiations risk
• cost-of-supply risk
• inventory tracking risk
• product mix risk
• proprietary information risk
• supplier product-quality risk
• supplier timeliness risk
Research, Design and
Development Risks
• cross-disciplinary team risk
• financing risk
• human capital risk
• patent infringement risk
• product life-cycle risk
• proprietary information risk
• speed-to-market risk
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For example, Table 5 shows that the IDEC case emphasizes several types of
possible business risks associated with the typical alliance management
process. Recall that IDEC currently lacks the manufacturing infrastructure
to harvest maximum profits from the drugs that it develops and navigates
through the FDA approval process. IDEC relies on alliances for the bulk of
the manufacturing and distribution of its successful drug therapies.
Consequently, IDEC gives up a significant share of total profits from the
sales of these drugs. IDEC may be concerned about risks that chosen
alliance partners will not cooperate, will divulge trade secrets, etc. The case
provides the context for students to think critically about how a company
like IDEC could reduce such risks through contracting and other alliance
business risks related to alliance management are bronze. In contrast,
several business risks related to production are gray for IDEC because they
are covered only to a moderate degree. The white rectangles under the
IDEC column denote risks that do not play a central role in the IDEC case
or teaching note. These risks, however, may have been mentioned in the
case or teaching note without being emphasized. For all eight cases, note
that the business risks emphasized (Table 5) articulate with the business
processes emphasized (Table 4).
B U S I N E S S
M E A S U R E M E N T
C A S E
D E V E L O P M E N T
A N D
R E S E A R C H
P R O G R A M
relationship management activities. Under the IDEC column, therefore, the
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Coverage of CSFs and KPIs
All cases ask students to think critically about CSFs and KPIs. Identifying
CSFs helps management understand those key activities that, if not well
executed, will hinder the entity’s ability to attain its strategic and businessprocess objectives. CSF identification also helps management design and
develop a set of KPIs to measure the extent to which business-process
objectives have been achieved. Emphases within the cases on multiple
KPIs helps students to understand how using portfolios of measures can
help to mitigate bias and noise inherent in any one summary measure,
company like IDEC must identify suitable strategic partners who will deliver
branding, infuse them with cash, and honor alliance agreements (note the
bronze rectangles related to alliance management CSFs in Table 6).
The nature of the CSFs emphasized within and across the eight cases
presents potentially valuable learning opportunities. As an example, under
Research, Design, and Development, one CSF alludes to an early mover
advantage.
To illustrate some of the determinants of early mover
advantages, however, it may be wise to adopt multiple cases. In the IDEC
case, regulatory protection and a captive market offers early movers a
chance to reap enormous profits. In the Wells Fargo case, however, the
first-mover with respect design and development of Internet software
investment may only pave the way for copy-cat companies due to the
absence of any significant barriers to entry.
R E S E A R C H
A N D
objectives related to the alliance management process, a biopharmaceutical
D E V E L O P M E N T
Table 6 summarizes the diverse CSFs covered in the cases. To attain its
C A S E
organizational objectives have been attained.
M E A S U R E M E N T
managers with greater confidence in discerning the degree to which
B U S I N E S S
organization’s employees, and (arguably most importantly) provide
P R O G R A M
motivate an array of desirable accountabilities and behaviors among the
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Table 6
Illustrative Critical Success Factors (CSFs) Emphasized in Cases and Teaching Notes
IDEC
Wells
Loblaw LSL MBUSI Rieter Trigon Fargo
CSFs Related to Strategic
Management Processes
Identify sustainable value
propositions.
CSFs Related to Resource
Management Processes
Alliance Management CSFs
• Identify suitable strategic
partners.
• Provide incentives for
partners to fulfill obligations.
• Negotiate equitable profitsharing arrangements.
• Diversify to mitigate
partner-specific risks.
• Protect property rights.
Facilities Management CSFs
• Integrate operations of
acquired organizations.
• Integrate workforce associated
with acquired organizations.
• Maintain a desirable
portfolio of locations.
Human Resources CSFs
• Integrate workforce associated
with acquired organizations.
• Recruit and retain skilled
human capital.
CSFs Related to Core
Business Processes
Assembly and Production CSFs
• Assemble/produce at or
below targeted cost, subject
to attaining customer
satisfaction and brand
reputation objectives.
• Develop skilled human
assemblers/producers.
• Maintain brand reputation
and product quality.
Heavy
Medium
B U S I N E S S
M E A S U R E M E N T
C A S E
D E V E L O P M E N T
A N D
R E S E A R C H
P R O G R A M
CVS
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Table 6
Illustrative Critical Success Factors (CSFs) Emphasized in Cases and Teaching Notes (cont’d)
CVS
IDEC
Wells
Loblaw LSL MBUSI Rieter Trigon Fargo
R E S E A R C H
A N D
D E V E L O P M E N T
C A S E
M E A S U R E M E N T
Medium
B U S I N E S S
Heavy
P R O G R A M
CSFs Related to Core Business
Processes (cont’d)
Acquisition of
Organizations CSFs
• Identify acquisition targets.
• Perform due diligence.
• Perform post-acquisition
integration.
Marketing to and Servicing of
Customers CSFs
• Identify customer needs,
purchasing patterns, and
preferences.
• Manage costs subject to
quality of service constraint.
• Provide customers with
desirable locations.
• Provide customers with
desirable mix of products
and services.
• Train associates to provide
superior service.
Supply Chain
Management CSFs
• Identify and retain desirable
suppliers.
• Negotiate contracts with
favorable pricing and
delivery terms.
• Create favorable incentives
for suppliers to fulfill
obligations.
• Manage idle inventory and
supply chain costs.
Research, Design and Development
• Generate product or service
innovations that add value to
customers.
• Innovate quickly to secure
early mover advantage.
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Table 7 summarizes the KPIs emphasized within and across cases. For
example, to help students appreciate how IDEC could track how and how
well it identifies suitable alliance partners, the case discusses a number of
performance measures related to the alliance-management business process
(note the bronze rectangles for IDEC related to alliance management KPIs).
Some of the performance measures that the cases or teaching notes
emphasize are qualitative, nonfinancial measures. In the IDEC column, the
number and growth of alliances with highly branded organizations requires a
qualitative assessment of what constitutes highly branded. In Table 7 we use
italics to denote qualitative KPIs (nonitalicized KPIs are quantitative).
performance has to be measured quantitatively (despite receiving letter
grades and relying on movie reviews). Also, we believe that it is important
for students to recognize that many organizations (should) use portfolios of
well-articulated qualitative and quantitative (as well as financial and
nonfinancial) performance measures to enhance reliability and
permit
greater confidence when assessing performance.
B U S I N E S S
M E A S U R E M E N T
C A S E
D E V E L O P M E N T
A N D
R E S E A R C H
P R O G R A M
We make this distinction because students sometimes mistakenly think that
Students who study these cases will come to learn that the general rule of
thumb is that the value of a performance measure must be judged based on
the degree to which it provides a cost-effective and complementary
characterization of an organization’s performance. In the MBUSI case, as an
example, customer satisfaction, although qualitative and nonfinancial, is a
precursor to future quantitative and financial measures (e.g., number of
automobiles sold and revenue per-automobile sold in year t+1).3 More
generally, the cases reinforce the utility of business measurement for helping
organizations assess their success in pursuing strategic objectives by
mapping from such objectives to performance measure identification.
3 For additional discussion on the desirability of having strong interrelationships between strategy and
performance measures see, e.g., Kaplan, R. S. and D. P. Norton, The strategy focused organization:
How balanced scorecard companies thrive in the new business environment (Boston: Harvard Business
School Press, 2001).
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Table 7
Illustrative Key Performance Indicators (KPIs) Emphasized in Cases and Teaching Notes
CVS
Wells
IDEC Loblaw LSL MBUSI Rieter Trigon Fargo
R E S E A R C H
A N D
D E V E L O P M E N T
C A S E
M E A S U R E M E N T
Medium
B U S I N E S S
Heavy
P R O G R A M
KPIs Related to Strategic
Management Processes
Sustainable Growth
Framework KPIs
• return on equity
- return on sales
- asset turnover
- financial leverage
KPIs Related to ResourceManagement Processes
Alliance Management KPIs
• amounts and timing of cash
flows from agreements
• number and growth of
alliances with highly
branded organizations
• number of contracts per
alliance partner
• number of contractual
organizations
• success rate associated with
overtures to land a new
alliance partner
KPIs Related to Core
Business Processes
Assembly and Production KPIs
• actual versus standard costs
• customer satisfaction surveys
• hours and time spent on
rework relative to industry
average
• finished product defect rates
• input materials defect rates
• supplier produced inspection,
defect, and rework reports
• subjective assessment of
capability to produce next
generation products
• third-party ratings of
product quality
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Table 7
Illustrative Key Performance Indicators (KPIs) Emphasized in Cases and Teaching Notes
(cont’d)
B U S I N E S S
M E A S U R E M E N T
C A S E
D E V E L O P M E N T
A N D
R E S E A R C H
P R O G R A M
CVS
Wells
IDEC Loblaw LSL MBUSI Rieter Trigon Fargo
KPIs Related to Core
Business Processes (cont’d)
Acquisition of Organizations
• strategic resource fit
• customer demopgraphics,
growth and retention ratios
• information processing
measures (e.g., claims
processing time, downtime)
• operating productivity ratios
(e.g., calls per-sales-agent)
• post-acquisition operating
margin
Marketing to and Servicing of
Customers KPIs
• category manager
performance indices
• changes in sales
per square foot
• customer satisfaction surveys
• sales per square foot
• third-party ratings of
product quality
• working training session
feedback
Supply Chain Management
• actual versus planned
markdowns
• customer satisfaction
• inventory cross-deck
percentage
• lead time required for delivery
• market share by category
• percentage of correct
deliveries/orders
• percentage of on-time
arrivals/deliveries
• post-assembly performance
Research, Design and
Development KPIs
• growth rates in research and
design expenses as
percentage of sales
• number of employees in
design or research
• time to market
• success rates on new products
• system security (hacking
safeguards)
Heavy
Medium
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Notes on Teaching Notes
We cannot overstate the importance of acquiring and reviewing the teaching
notes that serve as companions for each of the cases in this volume.
Instructors who have used one or more of these cases have communicated
to us that the teaching notes were critical resources when deciding which
cases to adopt and when using the cases in class. The teaching notes
provide advice to instructors for helping students think critically at a
strategic-systems level as well as suggestions for adapting the cases to meet
different educational objectives. Some teaching notes also include valuable
The teaching notes all feature several discussion questions, thorough
suggested solutions, and several handouts to help students with case
assignments.
Finally, despite being self-contained, the teaching notes
typically include a list of resources for obtaining even more information
about the organizations or their industries.
The case teaching notes can be obtained from the Web site of the KPMG and
UIUC Business Measurement Case Development and Research Program
B U S I N E S S
M E A S U R E M E N T
C A S E
at http://www.cba.uiuc.edu/kpmg-uiuccases/cases/index.html.
R E S E A R C H
points, and ways to help students avoid or learn from common mistakes.
A N D
tips about good opening questions, lucid ways to communicate complex
D E V E L O P M E N T
worked well and not so well in their courses). Most teaching notes provide
P R O G R A M
tips that reflect the authors’ personal classroom experiences (what has
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Concluding Remarks
We have embraced in this chapter the old notion that a picture is worth a
thousand words. We have attempted to communicate how subsets of the
eight cases could meet an instructor’s educational goals by relying more
on graphical depictions than on words to convey key attributes of the
cases. Before closing, however, two final points are in order. First,
research provides reasons to believe that assigning multiple cases instead
of a single case will facilitate students’ acquisition and nascent
development of strategic-system thinking skills.4
Skill acquisition
coupled with timely feedback.5 Importantly, multiple attempts at skill
application plants the seed for skill generalization.6 Skill generalization
structural, not superficial, information stimulates the retrieval and
time.
application of such principles. Second, a number of additional cases and
teaching notes are now available and others will become available over
Please
connect
to
the
Program
Web
site
(URL
http://www.cba.uiuc.edu/kpmguiuccases/index.html) for the most current
information on case and teaching note availability, and to obtain
prospectuses for available cases.
B U S I N E S S
M E A S U R E M E N T
C A S E
D E V E L O P M E N T
R E S E A R C H
is the process of solidifying one’s understanding of principles such that
A N D
P R O G R A M
requires skill application, and skill application improves with practice
4 Although some adhere to the thesis that innate ability significantly constrains an individual’s potential to
acquire cognitive skills, psychology research suggests, on balance, that cognitive skills can be acquired
across a wide range of innate intelligence levels. See, e.g., Ericsson, K.A. and A.C. Lehmann, “Expert
and exceptional performance: Evidence of maximal adaptation to task constraints,” Annual Review of
Psychology (1996) 47, pp. 273-305.
5 See, e.g., Anderson, J. R.. Learning and Memory: An Integrated Approach (John Wiley & Sons, 2000).
6 See, e.g., VanLehn, K., “Cognitive skill acquisition,” Annual Review of Psychology (1996) 47, pp. 513539.
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C A S E S
B U S I N E S S
M E A S U R E M E N T
C A S E
D E V E L O P M E N T
A N D
http://www.cba.uiuc.edu/kpmg-uiuccases/cases/index.html
R E S E A R C H
C L I C K
P R O G R A M
C A S E S
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B U S I N E S S
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D E V E L O P M E N T
A N D
R E S E A R C H
P R O G R A M
R E F E R E N C E S
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R E F E R E N C E S
ABN AMRO, Inc., “Buy-Sell Recommendation: Wells Fargo,” (November
10,1998).
AICPA, Codification of Statements on Auditing Standards (AICPA, New
York, 2001).
AICPA, Exposure Draft: Consideration of Fraud in a Financial Statement
Audit (AICPA, New York, 2002).
Anderson, J. R., Learning and Memory: An Integrated Approach (John
Wiley & Sons, 2000).
Bell, T. B., and W. R. Knechel, “Empirical Analyses of Errors Discovered
in Audits of Property and Casualty Insurers,” Auditing: A Journal of
Practice & Theory (Spring 1994), pp. 84-100.
Bell, T. B., W. R. Knechel, J. L. Payne, and J. J. Willingham, “An
Empirical Investigation of the Relationship Between the
Computerization of Accounting Systems and the Incidence and Size of
Audit Differences,” Auditing: A Journal of Practice & Theory (Spring
1998), pp. 13-38.
R E S E A R C H
B U S I N E S S
“Big Banks: The Trial of Megabanks,” The Economist (October 31,1998).
A N D
Bell, T., F. Marrs, I. Solomon, and H. Thomas. Auditing Organizations
Through a Strategic-Systems Lens (KPMG Peat Marwick LLP,
Montvale, NJ, 1997).
D E V E L O P M E N T
Barney, J., Gaining and Sustaining Competitive Advantage (AddisonWesley Publishing Company, Boston, MA, 1997).
C A S E
“Banking Is Necessary—Banks Are Not,” Fortune (May11, 1998).
M E A S U R E M E N T
“Baked Beans and Bacon from a Hole in the Wall,” The Independent
(November 10, 1996).
P R O G R A M
“Arizona’s Economy,” University of Arizona Press (July 1987).
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R E F E R E N C E S
CNN Money, http://money.cnn.com.
CVS Corporation, Annual Report (1998).
Chan-A-Shing, “Merger and Acquisition Trends in the Managed
Healthcare Industry,” Unpublished Honors Thesis (University of North
Carolina, 1998).
“Chase, First Union, Wells Fargo to Form New Company to Drive Rapid
Growth in Electronic Billing,” Press Release (June 23,1999).
Christensen, C., D.A. Garvin, and A. Sweet, Education for Judgment: The
Artistry of Discussion Leadership (Harvard Business School Press,
Boston, MA, 1992).
“Citibank Gears Up Its Internet ‘Community,’” Bank Systems + Technology
(December 1998).
Congressional Budget Office, Trends in Health Care Spending by the
Private Sector (January 1998).
Corey, E. R., Case Method Teaching HBS Case No. 9-581-058 (Harvard
Business School Press, 1998), p.3.
“Corporates Gain New Access to Globe-Spanning Bank Wire,” Future
Banker (July 1999).
“Culture Club,” Newsweek (July 11,1994).
Davis, N., Chairman and CEO Remarks at the Trigon’s annual meeting
(April 29, 1998).
B U S I N E S S
M E A S U R E M E N T
C A S E
D E V E L O P M E N T
A N D
R E S E A R C H
P R O G R A M
“Chase Manhattan, Wells Fargo, First Union Setting Up Venture Called
‘The Exchange,’” American Banker (June 24, 1999).
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