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Final

Crib Final double sided ch.11-14

3 Pages
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Department
Financial Accounting
Course Code
MGAD40H3
Professor
Prof.Jan Klakurka

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Ch. 10 Using Diagnostic and Interactive Control Systems
Maximize ROM and effective strategy implementation
Diagnostic Control Systems
- monthly statements -> find deviations, initiate actions
Diagnostic control systems: formal info systems managers use to monitor outcome and correct deviations from
preset standards of performance
Common diagnostic control systems: bal scorecards, exp centre budgets, project monitoring sys, brand rev/mkt share
monitor sys, HR sys, std cost-acctg sys
Why Use Control Sys Diagnostically?
Implement Strategy: Variance info about critical performance variables
Conserving Attention: management by exception
Using Diagnostic Control Systems Effectively
Sufficient attention to five areas:
1. Setting and Negotiating Goals - set infrequently once per year
- monitor progress thru quick scan of reports
- desired direction and level of achievement
2. Aligning Performance Measures- span of accountability defined by measures
- reflect strategic goals and priorities
- balanced scorecard to align measures correctly
3. Designing Incentives- max ROM by motivate goal achievement
- merit increases contingent upon performance reported in diagnostic
system
- extrinsic so mngrs dont have to watch subordinates working toward
goals
4. Reviewing Exception Reports- quick, efficient review, increasing ROM
- large sig exceptions
5. Following Up Significant Exceptions- remedial steps to rectify problems for subordinates by the time
managers pick up rpt
Risks in Using Diagnostic Control Systems
Measuring Wrong Variables
Building Slack into Targets: increase prob of meet goal with easy targets
Gaming the System: achieve what measured on, not leading to advancing strategy
Smoothing: alter timing and recording of transactions to show better performance
Biasing: managers report only good news or downplay bad news
Illegal acts: violate laws or policies to increase measures and performance
Interactive Control Systems: predicted chgs adjust action plans for threats
- everyone watches what their boss watches
Interactive control systems: formal info sys managers use to personally involve themselves in decision activities
of subordinates
Business strategy: reflects how business create value for customer and differentiates g/s from competitors
Strategic uncertainties: mgmt vision for future, how business evolving in mktplace
- subordinates suggest action plans that respond to changing circumstances, in anticipation of inevitable questions
from bosses
- forces organizational learning, emerging strategy indirect result of bottom-up action plans and experimentation
Emerging patterns of action: employees experiment and replicate small successes in attempt to create value
Design Features of Interactive Control Systems
Examples: profit plan, proj mgmt, brand rev budgets, intelligence sys, HR sys
System eligibility conditions:
1.information contained in system simple to understand
2.provide info about strategic uncertainties
3.used by managers at multiple levels of organization
4.generate new action plans
Choosing Which System to Use Interactively
1. Technological Dependence
Interactive Project Mgmt Systems
- more business dependent on specific tech base, more critical managers to protect competitive advantage by
focusing attention on new ways of applying tech
- focus on emerging tech and potential effects on strategy
Interactive Brand-Revenue Systems
- low dependence not locked into any one product or concept
- respond to chging customer needs through new products or marketing programs
2. Regulation
Interactive Intelligence Systems
- attention to public sentiment in regulated industries (pharma, utilities etc.)
- understand social, political, and technical environment
3. Complexity of Value Creation
Interactive Profit- Planning Systems
- product innovation in multiple markets monitor tradeoffs across product lines and mkts
Interactive Brand-Revenue Budget Systems
- mature consumer brands (stable understood value chains) have few complex tradeoffs
- focus attention on simpler input and output measures (brand vol, mkt share etc.)
4. Ease of Tactical Response
Interactive Brand-Rev Systems
- rapid feedback about effects of pricing, promotion, packaging tactics
- emulating competitor tactics easy
Interactive Project-Mgmt/Profit-Planning Sys
- plan horizons longer, hard to copy tactics
Choosing How Many Control Systems to Use Interactively
(n) controls systems => one interactively, (n-1) diagnostically
1.Economic: mgmt attention scarce, opportunity costs high b/c interactive req constant attention
2.Cognitive : avoid info overload and complexity, superficial analysis, lack of perspective, potential
paralysis
3.Strategic: signal what is important, focus communication on devices
Interactive Control Systems and Formal Incentives
- reward innovative efforts and contribution through subjective assessment
1.Make efforts visible to superiors (info sharing, upward communication learning process)
2.Reduce information biasing (share both good and bad news)
3.Sound understanding of business environment (learn bus to allocate rewards fairly)
- disproportionate investment of time up and down hierarchy for subjective rewards
Contingencies
- add contingency buffers to protect key diagnostic targets
- provide cushion that allows managers to reforecast profits during year, ensuring key targets not jeopardized
Return on Mgmt
ROM = Amt of Productive Organizational Energy released / Amt of Mgmt Time and Attention Invested
- managers must understand what to do personally and delegated to staff
Ch.11 Aligning Performance Goals and Incentives
Purpose of Performance Goals
- communicates bus direction to subordinates
- each measure (rev growth, store openings, exp reduction, price vs comp) communicates diff set of priorities
- enhance ROM
- subordinates infer strategic direction top mngrs wish to follow
- frees up top mgmt attention to focus on other things
- signal preferences: where ppl should dedicate their time
- disciplined approach to mgmt working through others
- communicate prospects of the business with stockholders and analysts
Critical Performance Variables
- factors must be achieved for intended strategy to succeed
1. work deductively to identify performance drivers
Performance drivers: variables (1) influence prob of strategy successful implementation (2)provide largest
potential for marginal gain over time
2. identify critical performance variables from list of performance drivers
Any performance variable that could cause strategy to fail
Selecting Performance Measures
Measure: quantitative value that can be scaled and used for purposes of comparison
-financial measures: monetary terms
- nonfinancial measures: quantitative data outside formal accounting system
Three tests to determine if measure is suitable to support performance goal:
1.Align with strategy: measures tell what important
2.Measured effectively : obj, complete, responsiveness
3.Measure Linked with Value : output measures (lagging) show econ value created, input and
process measures valid in managers understand cause-and-effect relationships
Nature of Measures (2)
Objective measure: independently verified, little ambiguity
- subjective measures rely on supervisor supervision
Complete measure: captures all relevant attributes of achievement i.e. share price
Responsive measure: reflect actions manager can directly influence i.e. profit, ROE
- increase responsiveness, lower-level employees measured on activities within span on control
- poor measures bring gaming, smoothing, biasing
How Many Measures for Each Employee: no more than seven to nine performance goals
Benchmark Comparisons
- mngrs must know which firms set standard for most effective utilization of resources; benchmarking
- with mult production/distn sites, benchmark best internal practices
- collect data and compare performance across units
Motivating Effort
Level of Difficulty: max creativity and initiative when under reasonable pressure to perform
Decide Who Sets Goals: depend on mngr beliefs about where relevant info located in organization
-> top, little consultation vs. throughout, participative
- assumptions managers make about human behaviour
->lazy agents min effort if goal setting OR their input increase commitment and motivation
Multiple Purposes of Performance Goals
Motivation, stretch performance levels
Planning and coordination to ensure:
1.Adequate levels of resources
2.Workflow coordination among interdependent units
early warning signals to i.d. shortfalls
ex post evaluation of accomplishment
- factoring out unforeseen or uncontrollable events
Aligning Incentives
1. “Intrinsic motivation
- goals legitimate, willing exert effort
- believe in mission institution is pursuing (first-best solution)
- emphasize positive ideals to make ppl proud, involve subordinates in goal setting
2. “Extrinsic motivation
- formal incentive: payment or reward -> balance financial vs nonfinancial
1.bonus pool: pot of money for corp level performance
2.allocation formula: indiv vs bus vs corp performance; no ambiguity, set infrequently
3.types and mix of incentives: public recognition; ST vs LT
-> gifts, deferred cash, stock, stock options
Ch. 12 Identifying Strategic Risk
Strategic Risk: unexpected events or that significantly reduces the ability of managers to implement their
intended business strategy
Operations Risk
-Breakdown in core operating, manufacturing, or processing capability
- Impedes flow of high-quality products and services
-Basic business strategy affect firm exposure to operations risk
-Consequences triggered by employee error
Applying Inputs -> Process -> Outputs Model
-Technology failure lead to inefficiencies and breakdowns
-Key process standardized and controlled to assure safety and quality
-Use in critical parts of value chain to id pts where system errors damage key operations or impair
important assets
-Use TQM based on best practice, benchmarking, engineering studies
Asset Impairment Risk
-Resource owned to generate future cash flows
-Losing significant portion of current value
-Reduction in likelihood of receiving future cash flows
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Description
Ch. 10 Using Diagnostic and Interactive Control Systems Contingencies Maximize ROM and effective strategy implementation - add contingency buffers to protect key diagnostic targets Diagnostic Control Systems - provide cushion that allows managers to reforecast profits during year, ensuring key targets not jeopardized - monthly statements -> find deviations, initiate actions Return on Mgmt Diagnostic control systems: formal info systems managers use to monitor outcome and correct deviations from ROM = Amt of Productive Organizational Energy released Amt of Mgmt Time and Attention Invested - managers must understand what to do personally and delegated to staff preset standards of performance Common diagnostic control systems: bal scorecards, exp centre budgets, project monitoring sys, brand revmkt share Aligning Performance Goals and Incentives monitor sys, HR sys, std cost-acctg sys Purpose of Performance Goals Why Use Control Sys Diagnostically? - communicates bus direction to subordinates Implement Strategy: Variance info about critical performance variables - each measure (rev growth, store openings, exp reduction, price vs comp) communicates diff set of priorities - enhance ROM Conserving Attention: management by exception Using Diagnostic Control Systems Effectively - subordinates infer strategic direction top mngrs wish to follow Sufficient attention to five areas: - frees up top mgmt attention to focus on other things - signal preferences: where ppl should dedicate their time 1. Setting and Negotiating Goals - set infrequently once per year - monitor progress thru quick scan of reports - disciplined approach to mgmt working through others - desired direction and level of achievement - communicate prospects of the business with stockholders and analysts 2. Aligning Performance Measures - span of accountability defined by measures Critical Performance Variables - reflect strategic goals and priorities - factors must be achieved for intended strategy to succeed 1. work deductively to identify performance drivers - balanced scorecard to align measures correctly 3. Designing Incentives - max ROM by motivate goal achievement Performance drivers: variables (1) influence prob of strategy successful implementation (2)provide largest - merit increases contingent upon performance reported in diagnosticotential for marginal gain over time 2. identify critical performance variables from list of performance drivers system - extrinsic so mngrs dont have to watch subordinates working toward Any performance variable that could cause strategy to fail goals Selecting Performance Measures 4. Reviewing Exception Reports - quick, efficient review, increasing ROM Measure: quantitative value that can be scaled and used for purposes of comparison - large sig exceptions -financial measures: monetary terms 5. Following Up Significant Exceptions - remedial steps to rectify problems for subordinates by the time - nonfinancial measures: quantitative data outside formal accounting system managers pick up rpt Three tests to determine if measure is suitable to support performance goal: Risks in Using Diagnostic Control Systems Measuring Wrong Variables 1. Align with strategy: measures tell what important Building Slack into Targets: increase prob of meet goal with easy targets Gaming the System: achieve what measured on, not leading to advancing strategy 2. Measured effectively : obj, complete, responsiveness Smoothing: alter timing and recording of transactions to show better performance Biasing: managers report only good news or downplay bad news 3. Measure Linked with Value: output measures (lagging) show econ value created, input and Illegal acts: violate laws or policies to increase measures and performance process measures valid in managers understand cause-and-effect relationships Interactive Control Systems: predicted chgs adjust action plans for threats Nature of Measures (2) - everyone watches what their boss watches Objective measure: independently verified, little ambiguity Interactive control systems: formal info sys managers use to personally involve themselves in decision activi- subjective measures rely on supervisor supervision of subordinates Complete measure: captures all relevant attributes of achievement i.e. share price Business strategy: reflects how business create value for customer and differentiates gs from competitors Responsive measure: reflect actions manager can directly influence i.e. profit, ROE Strategic uncertainties: mgmt vision for future, how business evolving in mktplace - subordinates suggest action plans that respond to changing circumstances, in anticipation of inevitable questionsease responsiveness, lower-level employees measured on activities within span on control - poor measures bring gaming, smoothing, biasing from bosses How Many Measures for Each Employee: no more than seven to nine performance goals - forces organizational learning, emerging strategy indirect result of bottom-up action plans and experimentation Benchmark Comparisons Emerging patterns of action: employees experiment and replicate small successesin attempt to create value - mngrs must know which firms set standard for most effective utilization of resources; benchmarking Design Features of Interactive Control Systems - with mult productiondistn sites, benchmark best internal practices Examples: profit plan, proj mgmt, brand rev budgets, intelligence sys, HR sys
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