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Final Notes BU247.docx

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Greg Clark

Measuring & Managing Customer Relationships Reporting and Displaying Customer Profitability -Whale curve – a plot of cumulative profitability versus the percentage of customers, where customers are ranked from the most profitable to the least profitable. In a typical whale curve, the most profitable 20 percent of customers generate between 150 and 300 percent of the company’s profits. The unprofitable customers incur losses that cumulatively bring the company’s profits down to 100 percent -The opportunity for a company to identify its unprofitable customers and then transform them into profitable ones is perhaps the most powerful benefit that a company’s managers can receive from an ABC system Customer Costs in Service Companies -Service companies must focus on customer costs and profitability because the variation in demand for organizational resources is much more customer driven than in manufacturing organizations -A manufacturing company producing standard products can calculate the cost of producing the products without regard to how their customer can use them; the manufacturing costs are customer independent -Only the costs of marketing, selling, order handling, delivery, and service of the products might be customer specific Process Improvements -Managers should first examine their internal operations to see where they can improve their own processes to lower the costs of serving customers Activity-Based Pricing -Activity-based pricing establishes a base price for producing the delivering a standard quantity for each standard product -Activity-based pricing, prices orders, not products Managing Relationships -Companies can afford to be more tolerant of newly acquired unprofitable customers than they can of unprofitable customers they have served for 10 or more years The Pricing Waterfall -Before confronting a customer with an explicit price increase, the company should examine the many ways it has already reduced the effective price the customer actually pays -Companies fail to see all of the revenue leaks from list price because they record the discounts and allowances in different systems and make the revenue deductions at different times of the year Salesperson Incentives -Salesperson incentives and compensation arrangements encourage salespeople to close deals and generate revenues Life-Cycle Profitability -Many service companies invest considerable resources in marketing campaigns to attract new customers -The service companies make such investments because they want to become the lifetime provider to these customers as they obtain good jobs and become successful in their careers -The critical parameters for calculating customer lifetime value are: -Initial acquisition cost -Profits or losses earned each year -Any additional costs incurred to retain the customer each year -The duration of the relationship Measuring Customer Satisfaction -The company, or an independent market research company, sends a survey to a recent purchaser or user of the company’s products and services -Companies generally use three approaches: mail surveys, telephone interviews, and personal interviews Measuring Customer Loyalty -Loyal customers are valuable for several reasons: 1. Loyal customers have a greater likelihood to repurchase, and the costs to retain them are generally much lower than the cost to acquire an entirely new customer 2. Loyal customers can persuade others, through word of mouth, to become new customers 3. Loyal customers are less likely to defect when a competitor offers a similar product at the same or slightly lower price 4. Loyal customers are often willing to pay a price premium to retain a known and trusted relationship with a key supplier 5. Loyal customers are willing to collaborate with the supplier to improve performance and develop new products -Five stage hierarchy: -Satisfied customers -Loyal customers -Committed customers -Apostle customers -Customer “owners” Measuring Customers - The Net Promoter Score -Customers often remain with their current supplier because of inertia, high switching costs, or the current lack of an alternative supplier -There is a scale from 1-10 for customer’s willingness to recommend -Based on this scale, many companies now calculate a net promoter score (NPS) defined as the percentage of customers who are promoters (score of 9 or 10) less the percentage that are detractors (score of 1 through 6) Net Promoter Score = % of customer promoters (9/10) - % of customer detractors (1-6) Measuring & Managing Life-Cycle Costs Managing Products Over Their Life Cycle -Companies that continually bring new products to the market quickly must also be concerned about the environmental impact from their innovation, as customers discard their now obsolete products -We refer to total-life-cycle costing (TLCC) as the approach companies now use to understand and manage all costs incurred in product design and development, through manufacturing, marketing, distribution, maintenance, service, and, finally, disposal -Known as “from the cradle to the grave” -Innovation process is expensive Research, Development, and Engineering Stage 1. Market research – emerging customers’ needs are assessed and ideas are generated for new products 2. Product design – scientists and engineers develop the technical specifications of products 3. Product development – the company creates features critical to customer satisfaction and designs prototypes, production processes, and any special tooling required Manufacturing Stage -Spend money on materials, labour, machinery, and indirect costs – to produce and distribute the product Post Sale Service and Disposal Stage -The actual service stage begins once the first unit of a product is in the hands of the customer -Three sub stages: 1. Rapid growth from the first time the product is shipped through the growth stage of its sales 2. Transition from the peak of sales to the peak in the service cycle 3. Maturity from the peak in the service cycle to the time of the last shipment made to a customer; disposal occurs at the end of a product`s life and lasts until the customer retires the final unit of a product Target Costing -Important management accounting method for cost reduction during the design stage of a product’s life cycle and one that can explicitly help to manage total-life-cycle costs -Target costing strives to actively reduce a product’s cost during its RD&E stage rather than wait until the product has been released into production to start the cost reduction, or kaizen process -Target costing strives to minimize the cost of ownership of a product over its useful life -The target cost is defined as the difference between the target selling price and the target profit margin -The value engineering process examines the design of each component to determine whether it is possible to reduce costs while maintaining functionality and performance -Throughout the entire process, cross-functional product teams made up of individuals representing the entire value chain – both inside and outside the organization – guide the process -Initial life-cycle of the product is high -Learning-curve – employee gets used to the product overtime and it increases efficiency in the manufacturing cycle stage -Suppliers play a critical role in making target costing work – often the company asks its suppliers to participate in finding ways to reduce the cost of specific components or an entire subassembly or module -Supply chain management develops cooperative, mutually beneficial, long-term relationships between buyers and suppliers -Value index – the ratio of the value to the customer and the percentage of total cost devoted to each component Concerns about Target Costing 1. Lack of understanding of the target costing concept – Without a clear understanding of the benefits many senior executives reject the idea 2. Poor implementation of the teamwork concept – Many organizations must enhance cross-functional teamwork, trust, and cooperation to succeed at target costing 3. Employee burnout – People experience burnout from the pressure and become far less effective in their jobs 4. Overly long development time – Development time may increase because of repeated value engineering cycles to reduce costs, ultimately leading to the product coming late to the market Breakeven Time: A Comprehensive Metric for New Product Development -Breakeven time (BET) measures the length of time from the project’s beginning until the product has been introduced and generated enough profit to pay back the investment originally made in its development -It allows people from different disciplines to come together at the start of every product development project to estimate the time and money they require to perform their tasks, and the impact of their efforts on the success of the entire project Behavioural & Organizational Issues in Management Accounting & Control Systems What are Management Accounting and Control Systems? -Management accounting and control system (MACS) – a system that generates and uses information that helps decision makers assess whether an organization is achieving its objectives. Technical Considerations of MACS 1. Accurate 2. Timely 3. Consistent 4. Flexible – MACS designers must allow employees to use the system’s available information in a flexible manner so that they can customize its application for local decisions Behavioural Considerations of MACS 1. Embedding the organization’s ethical code of conduct into MACS design 2. Using a mix of short- and long-term qualitative and quantitative performance measures (or the Balanced Scorecard Approach) 3. Empowering employees to be involved in decision making and MACS design 4. Developing an appropriate incentive system to reward performance The Human Resource Management Model of Motivation -Scientific management school – management believed that employees should follow highly detailed prescribed procedure and that behaviour should be monitored and controlled -Human relations movement – employees wanted respect, discretion over their jobs and a feeling that they contributed something valuable to their organization -Human resources model of motivation – introduces a high level of employee responsibility for and participation in decisions in the work environment The Organizations’ Ethical Code of Conduct and MACS Design -To incorporate ethical principles, system designers might attempt to ensure the following: 1. That the organization has formulated, implemented, and communicated to all employees a comprehensive code of ethics. 2. That all employees understand the organization’s code of ethics and the boundary system that constrain behaviour 3. That a system in which employees have confidence exists to detect and report violations o the organization’s code of ethics 9 Options to Deal with Unethical Issues 1. Point out the discrepancy to a superior and refuse to act unethically. 2. Point out the discrepancy to a superior and act unethically. 3. Take the discrepancy to a mediator in the organization if one exists 4. Work with respected leaders in the organization to change the discrepancy 5. Go outside the organization to publicly resolve the issue 6. Go outside the organization anonymously to resolve the issue 7. Resign and go public to resolve the issue 8. Resign and remain silent 9. Do nothing and hope that the problem will dissolve -Number 4 is said to work the best The Elements of an Effective Ethical Control System 1. A statement of the organization’s values and code of ethics written in practical terms 2. A clear statement of the employee’s ethical responsibilities for every job description 3. Adequate training to help employees identify ethical and how to deal with them 4. Evidence that senior management expects organization members to adhere to its code of ethics 5. Evidence that employees can make ethical decisions or report violations of the organization 6. An ongoing internal audit of the efficacy of the organization’s ethical control system Decision Model for Resolving Ethical Issues 1. Determine the facts – what, who, where, when, how 2. Define the ethical issue -List the significant stakeholders -Define the ethical issues 3. Identify major principles, rules, values 4. Specify the alternatives 5. Compare values and alternatives 6. Assess the consequences 7. Make your decision Motivation and Congruence -When designing jobs and specific tasks, system designers should consider the following three dimensions of motivation: -Direction, or the tasks on which an employee focuses attention -Intensity, or the level of effort the employee expends -Persistence, or the duration of time that an employee will stay with a task or job -Careful attention to motivation is a key step for the organization and its employees to align their respective goals; this alignment is known as achieving goal congruence -Gaming the performance indicator – altering actions in an attempt to manipulate a performance indicator through job-related tasks -Employee self-control is when employees monitor and regulate their own behaviour and perform to their highest levels -Diagnostic control systems – feedback systems that monitor organizational outcomes and correct any deviations -Interactive control systems force a dialogue among all organizational participants about the data coming out of the system and what action to take Task Control -The process of finding ways to control human behaviour so that a job is completed in a pre-specified manner -
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