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BUS 424 (8)
Chapter 11-12

BUS 424 Chapter 11-12: Lecture 8
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9 Pages
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Department
Business Administration
Course Code
BUS 424
Professor
Johnny Jermais

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BUS 424 Lecture 8 Approaches to Overcome Myopia 1. Reduce pressure for short-term profit o Reduce the weighting placed on the annual profit target and emphasize other longer-term performance indicators  Market share and technical break-through o Make the short-term profit targets easier to achieve  May trigger slackness of losing concentration on short-term results 2. Control investments with precaution reviews o Use financial result controls to reward improvements in short-term operating performance  Minimize operating expenses to maximize operating income  Today business  Managers are charged with making their businesses lean, efficient, and profitable in the competitive environment o Combination of nonfinancial and performance indicators and action controls  Developmental expenses  Tomorrow business  Managers are charged with developing new business opportunities that might replace the existing business in the future 3. Extend the measurement horizon (use long-term incentive) o Measurement congruence  The longer the period of measurement, the higher the correlation between accounting income and economic income 4. Measure changes in shareholder value directly o Measure economic income or shareholder value creation directly by estimating future cash flows and discounting them to the present value  Measurement precision and objectivity are significant to directly measure 5. Improve accounting profit measures o Provide a better matching of revenues and expenses  Adjust depreciable lives of fixed assets and adopt current value depreciation o Recognize profits more quickly  Charge depreciation for older assets o Capitalize expenditures related to long term investments o Reflect the company’s entire cost of capital  Include an imputed cost of equity on income statement o Improve the denominator of return-on-investment measures  Put all leases on the balance sheet 6. Measure a set of drivers of future financial performance o Use nonfinancial performance measures o Balanced scorecard  Includes financial measures that tell the results of actions already taken  Complements the financial measures with operational measures on customer satisfaction, internal processes, and the firm’s innovation and improvement activities Balanced Scorecard (BSC) - Vision o Mission – why we exist o Vision – what we want to be o Values – what is important to us - Strategy o Developing strategic goals for long term growth o Strategy map - Measures o Developing measures for strategic goals Steps to Build Balanced Scorecard 1. Corporate vision statement o Helps to answer  Why do we exist?  What do we want to be?  What is important to us? o Help managers to build a consensus around the organization’s vision and strategy  Ensure all the managers are in one accord about the vision and corresponding objectives o Ensure the vision is expressed as integrated objectives and measures 2. Determine the strategic objectives o Integrate business and financial plans, by allowing all BSC users to determine actions that drive targets o Aligns strategic initiatives  i.e. ensure budgets support strategies o Allocates resources  Improving the most critical processes  Eliminating non-strategic investments o Establishes milestones for each target and evaluates if the targets are achievable o Allows managers to communicate and educate  Top-down – to divisions, departments, and individuals  Bottom-up – to corporate headquarters o Sets goals by translating high level objectives to departments and individual levels o Links rewards to performance measures  Aligns strategy and employee performance 3. Develop the strategy map 4. Derive the key performance indicators (KPI) o Measurement that provides information on how far we have succeeded in achieving the strategic objectives Relevant to the Strategic Objective Does KPI have a linkage with the strategic objectives? Controllable Are the KPI achievements still under control? Actionable Can any action be taken to improve the performance? Simple Is the KPI easy to explain? Credible Is the KPI not easy to manipulate? Example on Corporate Strategy - Vision – to provide society with superior products and services by developing motivations and solutions that improve the quality of life and satisfy customer needs - Mission o Maximize shareholder value – financial perspective Strategic Goals Indicators Targets Actual Performance Trend Increase in new customers X% Y% Increase in new products X Z Increase revenue growth Sales volume X X Gross margin Total asset turnover Inventory turnover Improve Productivity Debtors turnover ROCE  Gross margin – an indicator of return on sales  Debtors turnover – determine how efficient our credit analysis and credit collection policies are  Inventory turnover – directly affects profits as excess inventory is unproductive  Total assets turnover ratio  If the ratio is lower than the industry average, it means that the company did not generate enough business o Provide high quality products at good price – customer perspective Strategic Goals Indicators Targets Actual Performance Trend Response time to customers X% Y% Increase CPV of Customer complaints (per 100,000 X% end-users consumer calls) Product return per 10,000 units X% Order lead time X hrs/m Number of distributors in “high sales X% capacity” Increase CPV of Number of training activities for X times distributors distributors on product safety and usage Number of printed advertising X copies materials o Provide open and stimulating environment to employees – internal and learning & growth perspective Strategic Actual Goals Indicators Targets Performance Trend New products launched per years X Y Increased New application of current products X X Number of staff suggestions submitted and innovation implemented Number of patents filed and granted Regulatory Number of safety incidents from new products Number of safety incidents from new products and social Number of environmental incidents from new processes processes Operational Manufacturing costs of new products X Y excellence Time from start of pilot production until fullX Z volume capability achieved Number of new products laun
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