Bus 424 third lecture presentation

Bus 424 third lecture presentation - 3. Design and...

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Unformatted text preview: 3. Design and evaluation of MCS 3. and Strategy and Agenda How to design MCS Approaches to implement MCS Strategy implementation Evaluation the success of a strategy 1. 2. 3. 4. Bus 424 third lecture presentation 1 Designing control systems – Two basic questions: » What is desired ? What » What is likely to happen ? What – If what is likely is different from what is desired, then If two basic MCS-design questions must be addressed: two » What controls should be used ? What » How tightly should each be applied ? How Bus 424 third lecture presentation 2 What is desired ? Start from objectives and strategies » They should be important guides to the actions that are expected, especially if they are specific. specific e.g., “Become a leader in the industry ” vs. vs. “15% ROI and 20% sales growth.” Identify the key actions (KA) Identify key » i.e., actions that must be performed to provide the greatest probability of success. Identify the key results (KR) Identify key » i.e., the few key areas where things must go right for the business to flourish. Bus 424 third lecture presentation 3 What is likely ? Three questions: » Do employees understand what they are expected to do (key key actions) or to accomplish (key results)? actions lack of direction » Are they properly motivated? lack of motivation » Are they able to fulfil their desired roles? personal limitations The discrepancy between what is desired and what is likely will The what what determine the choice and the tightness of the management control choice tightness systems. systems. Bus 424 third lecture presentation 4 Control system change As firms grow, their controls evolve usually As towards: towards: » Increased formalization of procedures for action accountability purposes for and/or » Development of more elaborate Development information systems information for resultsBcontrol purposes. for us 424 third lecture presentation 5 – Approaches to implement Management Control Approaches Systems Systems Business Strategy Strategic Uncertainties Interactive CS Bus 424 third lecture presentation Critical Perf. Variables Diagnostic CS 6 Diagnostic control system – Setting and negotiating goals » Desired directions and level of achievement – Aligning performance measures » Accountability – Designing incentives » Contingent upon performance (goal) – Reviewing exception reports » Strategy implementation is on track – Following up significant exceptions » Quick action to adjust according to plan Bus 424 third lecture presentation 7 Risk of using DCS – – – Measuring wrong variables Building slack into targets (set easy goals) Gaming the systems: smoothing, biasing, illegal Gaming acts acts Bus 424 third lecture presentation 8 Interactive Control System Formal information systems in which top Formal management personally involve themselves in the decision activities – Strategic uncertainties: Strategic » emerging threats and opportunity » Critical analysis » Discussions and recommendation Bus 424 third lecture presentation 9 ICS for learning in organizations Top management vision Business Strategy Learning Debate and dialogue Signaling ICS Strategic Uncertainties Choice Bus 424 third lecture presentation 10 CPV vs. Strategic uncertainties CPV SU Recurring Qs What must we do well to What changes in assumptions What What achieve our intended strategy strategy could alter the way we achieve our vision for the future Testing and identifying new strategy Testing Focus Driven by Search for Implementing intended strategy strategy Goal achievement Top management vision Efficiency and effectiveness Disruptive change Bus 424 third lecture presentation 11 Implementing a Strategy • There are two main competitive strategies: – cost leadership – differentiation • Once a firm chooses which strategy to follow • SWOT Analysis • Focus on execution Bus 424 third lecture presentation 12 SWOT Analysis Identification of critical success factors (CSFs) tied to Identification strategy—for example: strategy—for – Product innovation Product – Quality – Skill development • Identification of quantitative measures for the Identification specified CSFs—for example: specified – – – Number of design changes or new patents Number of defects or number of returns Number of training hours or amount of skill performance Number improvement improvement Bus 424 third lecture presentation 13 SWOT Analysis SWOT (continued) (continued) The SWOT analysis has four areas: – S – strengths/internal – W – weaknesses/internal – O – opportunities/external Look at product lines, management, R&D, manufacturing, marketing, and strategy Look at barriers to entry, intensity of rivalry among competitors, substitute goods, and customer/supplier bargaining power 14 – T – threats/external Bus 424 third lecture presentation Execution The CSFs a manager executes depend on the chosen The strategy strategy – Cost leadership: operational performance and quality – Differentiation: customer satisfaction and innovation Differentiated firms must pay close attention to Differentiated marketing and product development marketing – Management accountants assist by gathering, analyzing, Management and reporting on relevant information and Can be improved through benchmarking and total Can quality improvement (e.g., Malcolm Baldrige Quality Award) Bus 424 third lecture presentation 15 Evaluation of the successful implementation of a strategy •Strategic profitability analysis: to assess how successful the company with regards to its strategic positioning •Separate performance in terms of company’s specific factors and industry-wide factors. •Three components of analyses: Growth, Product Differentiation, Cost Leadership Bus 424 third lecture presentation 16 • Growth Component: Change in operating income attributable solely to an increase in the quantity of output sold. It measures the difference between the change in revenues and the change in cost. Growth Component • Revenue effect=Change in unit sold x Original output price • Cost effect: [(Original I/O ratio x Current actual output) - Original input] x original input price • Growth component=Revenue effect - Cost effect Bus 424 third lecture presentation 17 • Product Differentiation (Price Recovery component): Company’s ability to charge premium price • Revenue effect=(Current output price - Original output price) x current units sold • Cost effect: (Current input price - Original input price) x (Original I/O ratio x current actual output) • Product differentiation=Revenue effect - Cost effect Bus 424 third lecture presentation 18 •Cost Leadership: Cost reduction due to using fewer inputs, better mix, and less capacity •Cost leadership: [Current actual input - (Original I/O ratio x current actual output)] x current input price Bus 424 third lecture presentation 19 •Example: Units produced and sold Selling price per unit Units of RM used Cost per unit of RM Total assets Total equity (variable cost) 2006 2,000 $10 5,000 $2.20 10,000 7,000 2007 2,300 $12 4,500 $2.40 11,000 7,500 Bus 424 third lecture presentation 20 Other information: The market growth rate in the industry is 10% General increase in the market price of the output industry is 15% Analyze the change in profit in terms of growth, product differentiation, and cost leadership. Show the change in operating income attributable to industrywide factors and company-specific factors Bus 424 third lecture presentation 21 ...
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