Theory Case Studies

Case 1:- Usha Product Ltd. has three division Professional services, Consumer Products (CP) and Industrial Products. Each of these divisions contributes equally to total company sales, but the characteristics of business are different for different divisions. Consumer Product (CP) division is the oldest of three. It is involved in designing, manufacturing and marketing a line of household products, manly used in kitchen. Each division is a profit centre and criterion for performance evaluation is ROI. There has been a general discontent among managers that the ROI of CP division is highest among all divisions because of the older assets employed in the CP division. Management has decided to implement a detailed Balance Score Card initially for CP division. Assist the management in this task. Solution: To create a BSC we have the following steps (1) Define Vision for the company? (2) Which strategy should we follow and which areas will we focus on? (3) What do we have to be good in each perspective? (4) What should we measure in each perspective? (5) How do we evaluate our score card? (6) What action should be initiated to reach our targets? (7) How do we follow up, update & maintain our score card? The BSC deals with four perspectives: (1) Financial perspective:The company can apply the EVA approach instead of the ROI approach since the EVA approach will take into account the current value of the assets rather than the historical value. The assets used in the CP division may be upgrade or replaced to ensure proper calculation of ROI. The three division which are contributing equally may be evaluated on the absolute amount of the profit by division earned rather then % of profitability. For the financial perspective of the three divisions proper evaluation technique of profit should be designed.

(2) Customer Perspective:The quality of products offered by the three division must be evaluated. Evaluation of customer satisfaction evaluation of the customer relationship management, evaluation of the credit policies of the three division must be undertaken to find if they are functioning effectively. (3) Internal Business process perspective:Division CP is involved in Designing Household products mainly used in the kitchen, which need proper business processes for effective designing, manufacturing and marketing. The company can conduct a business process audit for the three division to ensure compliance of process standards. There should be proper grading of the services and product of the three division. The company should install and implement the ISO standard required in this type of business. (4) Innovation, Learning and growth perspective:The professional services division will need a higher degree of learning as compared to the other two. The consumer products & industrial products division will require a great degree of innovation and latest technology which may be imported or implemented through R & D. The consumer products division must be prepared to ascertain that the objectives should be measured which will ensure that they get done, which will then get rewarded and finally these measures will really count. Case 2:- Management of M/s. Deepak Engineering is looking into the problem of maintenance costs. The function of maintenance is to ensure that the plant and equipment are in good working condition. This is partly the responsibility of the maintenance department which incurs costs when it carries out repairs or does other maintenance work, as well as production department supervisors, who can influence the amount of maintenance by how well they take care of their equipment. Company controller is considering the following three method in which the maintenance costs can be charged to Production Department/ sections:Method 1: Do not charge any maintenance cost to production department/ sections. Method 2: Apportion total maintenance costs on the basis of volume of activity in that department or section. Method 3: Charge each department or section for the maintenance work at a production hourly rate for each hour that the maintenance people work in that practical department or section Each of this method give different message to production people. In each of these methods, which is the different message as to how the production supervisor shold view their responsibility for maintenance? State and explain you logic.

Solution: METHOD 1: DO NOT CHARGE ANY MAINTAINCE COST TO THE PRODUCTION DEPARTMENT SECTIONS. (1) The Production Supervisors will not be efficient in taking care of their Equipment and maximum Maintenance and Repairs Cost will be incurred by the company. (2) Since the department does not have to bear any Maintenance Cost the Supervisors may be irresponsible and inattentive to Equipment handling. (3) Even the workers of the Department will be careless and may take proper care of the Equipment. (4) The Maintenance and Repairs Cost to the Company will be considerably higher since they are not allocated to the departments. METHOD 2: APPORTIONING MAINTENANCE COST ON THE BASIS OF VOLUME OF ACTIVITY TO ALL DEPARTMENTS. (1) Since Maintenance and Repairs Cost are allocated to all Departments it will be under Control. (2) Since Maintenance and Repairs Costs are allocated on the Volume of each Department Basis, the supervisors may reduce Actual Volume or may not find it profitable to increase Volumes of their Departments, which will affect the production, hence sales of the Company. (3) If Maintenance and Repairs Cost is allocated then there should be some link between Equipment usage and Production Volume for all Departments. (4) All Equipment used should be of a Productive nature and must result in Production Volume and Activity. (5) If certain Common Equipment is used then the Usage should be properly Analyzed and Recorded. (6) Such a method should not result in overuse of Equipment in an Inefficient Manner. METHOD 3: GHARGING EACH DEPARTMENT ON HOURLY RATE BASIS. (1) This Method is ideal since even an expenses Centre like Maintenance and Repairs can be converted into a Profit Centre. (2) All Production Departments will be Efficient using the Equipment. (3) Even the maintenance and Repairs Division will be efficient and they would be forced to control costs since they have to charge the production centre on an Hourly basis. (4) The Quality of Maintenance and Repairs will improve since the Production Departments receiving this Service will want good quality and better service since they are paying for it. (5) The production Supervisors will be closely related to maintenance and repairs staff to devise better Methods of utilizing the Equipment in a much more efficient manner.

(6) Unwanted Wastage, Idle Time and production inefficiencies will be reduced considerably.

Of the 3 methods, Method no. 3 is ideal while Method no. 1 is least suitable.
Case 3:- Part of a multinational group, Soniya Shoe Company (SSC), established its own facilities in India over 75 years ago and enjoyed an excellent record-high market share for its diverse range of shoes, growth and profits. SC markets its products through company owned shops and its own personnel. Organization structure is functional. Since 2001, profitability, market share are slipping. Pressure from cheap Chinese shoes and also premium shoes like Nike has made the company think< of organizational restructuring and introducing Commensurate Control System to regain its position. Although SSC outsources, 30% of products, it is seen as a production oriented company. SSC wants to adopt measures to reduce costs, strengthen marketing and be in a position to produce and meet unexpected and unusual customer demands. How should the company reorganize to achieve Goal Congruence? Define Performance Metric? Solution: (a) To achieve Goal Congruence the Company can do the following: 1) Convert the Organizational Structure from Functional units to business units. 2) Convert the Business Units to profit Centers by applying the BCG Matrix to identify which of the Stores will fit in the category of Cash Cows, Star Products or Dogs. 3) Each of these products will then define the strategy of either to Build, Harvest, Hold and Divest 4) Evaluate Individual Stores of the Company about their Area, Economy, and Number of Units etc. and have system of project Performance Evaluation. 5) Some of the Stores can be offered as Franchisee outlets to the Store Managers who can be converted into Owners of their own stores which generally brings out the best in Creative and Motivated Groups of People. 6) Utilize Cash Flow by Decentralizing the Stores into Profit Centers such that they are responsible for their own Decisions and they have the authority to take sourcing Decisions. 7) The Company should invest in R and D to introduce Cheaper Shoes as well as Premium Shoes to tackle the Competition from cheap Chinese Shoes like Nike etc. 8) The company could also look at opening different segments for differently Priced shoes such as the cheap variety which can be sold through different outlets such that it does not dilute the Brand Value of the Company. 9) Similarly the Premium Shoes can be sold at High End Stores in 5 star Hotels or shopping malls by collaborating with other premium brands.

10) Improve the Quality of the products through Extensive Marketing and Market Research so as to capture recent Fashion Trends to various Segments like Schools, college youngsters, Working Professionals, Ladies Footwear, and Party wear etc. 11) The company can reorganize the stores into Stand-Alone stores which operate on their own with complete Authority and Responsibility and they can Charge these Stores with the cost of the Product plus Profit which is closer to the Competitive Market price of such shoes. 12) Achieve Goal Congruence by a high end Logistic System, linking he outlets for taking care of Shortfall in Production or surplus in Demand. 13) The working capital requirement will reduce drastically since Stores Managers would be involved in Proper Stocking of required products by their customers. 14) Performance Metric is Profitability Measures used to evaluate Profit Centers. First, there is the Measure of Management Performance and then there is the Measure Performance and then there is the Measure of Economic Performance. 15) The different types of Profitability Measures are Contribution Margin Method, Direct Profit Method, Controllable Profit Method, and Net Income before Tax method and net income after Tax Method. (b) The company can create a detailed BSC which will help to implement and measure strategy. The following steps are conducted in the Preparation of a BSC Steps to create a BSC (1) Define Vision for the Company (2) Which Strategies should we follow and which Areas will we focus on? (3) What do we have, to be good in each Perspective? (4) What should we measure in each Perspective? (5) How do we evaluate our Score Card? (6) What Actions should be initiated to reach our targets? (7) How do we Follow up, Update and maintain our Score Card? The BSC is a performance measurement tool which helps to implement strategy as follows (1) What gets measured gets done. (2) What gets done gets rewarded. (3) What gets rewarded really counts.

(4) What gets counted gets measured. The BSC deals with 4 Perspectives: (1) Financial Perspective: Invest in New outlets (stores). Invest in Working Capital (stock), Net profit %, ROA/ROI, EVA (2) Customer perspective: Market Share, Customer Service, CRM, Customer Handling, Returns and Rejections, Customer needs, Different Transactions Methods like Cash, Credit Cards, and Debit Cards etc, Loyalty Bonus Cards, Discounts Coupons etc. (3) Internal Business Process Perspective: Changing the organization from functional basis to Business Units (profit centres) Transfer Price Applications from Production to sales, Proper Logistics Management, Proper Inventory Management etc. (4) Innovation Learning and Growth Perspective: Increase variety of shoes, Introduce cheap shoes and premium shoes, Design products using the value system i.e. better Value at same cost or same value at lesser cost, Extensive Branding exercise to change the image of the company from being an old established company to a Modern Fashion Conscious Brand.

 Forecasting Demand and sourcing for new avenues for sales like sports shoes, ladies footwear etc. The BSC can be prepared as follows Objective 1) FP: Expand stores 2) CP: Customer service 3) IBPP: Upgrading processes 4) ILGP: New Products Measure Generate funds Feedback forms R and D Market Survey Target Store locations Buyers New Variety Youth Segment Initiatives Franchisee outlets Discount coupons Logistics System Sponsoring College Events

Case 4:- A closely held small sized company Shayna Ltd. Is involved in selling its own brand of coffee in Central and Northern India. Fierce competition is experienced from large players like Nestle as well as regional and niche players. Major company shareholder are Managing Director who directly looks after sales and marketing, and Company secretary who is responsible for purchase of raw material (in the form of coffee beans) from sources located throughout the world. All manufacturing activities including packing are carried out at three factory location each headed by a V.P. Each factory is profit centre. Performance is measured on the basis of gross profit made by each factory. For the entire company manufacturing expenses are about 30% of sales. Purchasing is very crucial and involves understanding of world market trends, marking communities for purchase contracts for above 50 variables; Raw material is bought in advance in lots for delivery to factory at various dates according to sales forecast. Whenever actual requirement is different than the forecast level, difference in raw material supply is made by purchasing department by sales/purchase of raw material in the market. Purchasing main aims a record of quantity and price for each lot of raw material and charges factory, according to the cost of lot delivered. Raw material expenses constitute 51% of sales. Purchasing department expense (3% of sales) is directly charged to head office. How should manufacturing, marketing & purchasing be recognized as responsibility centres to induce goal congruence within the organization and what should be the performance metric for each responsibility center? Solution: 1) The Three factories have been organised as profit centres but they can be reorganized as responsibility centres. 2) The major responsibility centre are purchasing, strong, manufacturing, sales and marketing.

3) The major shareholder are the managing director and the company secretary who look after sales and marketing and Purchase of raw material, but the factories are run by the 3 vice president hence top management does not have too much control over the activities of the factories. 4) There may be reduction in the quality of decision making since the managing director at the company secretary may be more qualified to take major decisions on operating the company. 5) Arguments arise over the TP, allotting of common expenses like the purchasing departmental expense which is being charged directly to the head office, credit for revenue generated jointly by the factories. 6) There may be unfair competition between the factories as they compete against each other, and they may take decisions that increase their own profits but may result in a loss for other factories. The factories may not forward sales leads, take over personnel or equipments and may take production decision which increases the cost for other factories. 7) There may be additional cost involved since divisionalisation imposes Additional cost because of staff and record keeping required. 8) The vice president is only in charge of factories but has no authority or capability in taking sourcing decisions. 9) There may be too much focus on short term profitability since factory managers may reduce cont on R & D, training and maintenance. 10) Currently the factories are evaluated on gross profit where manufacturing expense are 30% and raw material cost are 51% of sales. Hence a gross profit of each factory will approx. be 19% which will not vary too much in each factory. The disadvantage of this method is that it does not take into account fixed cost as well as cost incurred by the head office which can be controllable or non-controllable. 11) The performance metric can be chin method to the direct profit method or the controllable profit method or income before tax method or income after tax method. Case 5:- Manejay Ltd. Engagedin diversified activities consisting of nine independent profit centre decided to sell one of its division- profit center to a group of its Managers. Narrate the changes that are needed in control systems, practices and procedures, giving the reasons.

Solution: There is no guiding principle declared that certain types of units are inherently profits centres and others are not. Management decisions as to whether a give units should be profits centre is based on the amount of influence(even if not control) the units managers exercise over the activities that affect the bottom line. Marketing A marketing activity can be turned into profit century charging it with the cost of the production sold. this transfers price provide the marketing managers with the relevant information to make a optimum revenue /cost trade offs, and the standard practice of measuring a profits centres managers by centre profitability provides a cheque on how well these trade offs. Have been made the transfer priced charged to the profit cater should be based on the standard cost. Rather than the actual cost. Of the product being sold. Using the standard cost has is separated .the marketing cost performance from that the manufacturing cost performance. When should a marketing activity be given profit responsibility? when the marketing managers is in the best position to make the principle cost revenue trade off .this often occurs where different conditions exist in different geographical areas for example a foreign marketing activity ,in such an activity ,it may be difficult to control centrally such decision as how to market product. How to set the price, how much to sends on sales promotions, when to spends it ,and on which media ,how to train salespeople or dealers ,where and when to established new dealers. Manufacturing The manufacturing activity is usually an expenses centre, with management being judged on performance versus costs and overhead dudgets.this measure can cause problems however since it does not necessarily indicate how the manager is performing all aspect of his job. Example A manager may skimp on quality control, shipping products of inferior quality in order to obtain standards cost credit. A managers may be reluctant to interrupt production schedule in order to produce a rush corroder to accommodate a customer. Managers who are measured against standards may lack the incentive to manufacture products that are difficult to produce-or to improve the standards themselves. some authors maintain that manufacturing units should not be meet into profits centres unless they sell a large pertain of their outputs to outside customers. the regards the units that sell primarily to other business units as profit centre.

 Service and supports units Unit for maintained ,information ,technology ,transformations engendering ,consulting , customer service and similar supports activities can all be made into profits center,these may operate out of headquarters and service corporate division ,or they may fulfil similar function within business units .they charge customer for service rendered ,with the finical objective of generating enough business so that their revenues equal their expenses .the prevalence of such practices is shown (the firms charge based on usage probably treat these units as profit centres ) usually ,the units receiving these service have the option of procuring them from an outside vender ,provide the can offer service of equal quality at a lower price. Case 6: GBM Ltd. Currently engaged in manufacturing of medium engineering products, takes over a company engaged in telecom sector. Design an integrated management control system for GBM Ltd., assuming other company has merged into GBM Ltd.
Solution:

Any organization, however well aligned its structure is to the chosen strategy, cannot effectively implement its strategy without a consistent management control system. While organizations structures defines the reporting relationships & the responsibilities & the authorities of different managers, it need an appropriately designed control system to function effectively. Now we will discuss planning & control requirements of different corporate strategies for GBM Ltd., Different corporate strategies imply the following differences in the context in which control system need to be designed: As firms become more diversified , corporate level mangegers may not have significant knowledge of, or experience in, the activities of the companys various business units.If so, corporate level managers for highly diversified firm cannot expect to control the different businesses on the basis of intimate knowledge of their activities, and performance tends to be carried out at arms length. Single-industry & related diversified firms posses corporatewide core competancies on which the strategies of most of the business units are based. Communication channels & transfer of competanciesacross business units, therefore, are critical in such firms. In contrast, there are low levels of interdependence among the business units of unrelated diversified firms. This implies that as firms become more diversified, it may be desireable to change the balance in control systems from an emphasis on fostering cooperation to an emphasis on encouraging encouraging entrepreneurial spirit.

Specific tendancies ,in design of control systems corresponding to variations in corporate strategies for GBM Ltd., are given below.. Strategic Planning : Given the low level of interdependence, conglomerates of GBM Ltd, tend to use vertical strategic planning systems- that is, business units prepare strategic plans & submit them to senior management to review & approve. Because of the high level of interdependencies, strategic plannig systems for releted diversified & single industry firms tend to be both vertical & horizontal. The horizontal dimension might be incorporated into strategic planning process in a number of different ways. First, a group executives might be given the responsibilities to develop strategic plans for the group as a whole that explicitly identifies synergies across individual individual business units within the group. Second, strategic plans of individual business unit could have an interdependence section, in which the general manager of the business unit identifies the focal linkages with other business units & how those linkages will be exploited. Third, the corporate office could require joint strategic plans for intredependent business units. Finally, strategic plans of individual business units could be circulated to managers of similar business units to critique & review. Budgeting : In a single- industry firm, the chief executive officer may know the firms operations intimately & corporate & business unit managers tend to have more frequent contact. Thus, chief executive of single industry firms may be able to control the operations of suborddinates through informal & personaly oriented mechanism, such as frequent personal interactions. If so, this lessons the need to rely as heavily on the budgeting system as the tool for control. On the other hand in conglomerates like GBM Ltd,it is nearly impossible for the chief executive to rely on informal interpersonal interactions as a control tool: much of the communication & control has tobe achieved through the formal budgeting system. This implies the following budgeting system characteristics in GBM Ltd: Business unit managers have somewhat greater influence in developing their budgets since they ,not the corporate office, possess most of the information about their respective product or market environments. Greater emphasis is often placed on meeting the budget since the chief executive has no other informal controls available. Transfer Pricing : Transfer of goods & services between units are more frequent in single industry & related diversified firms than in the conglomerates like GBM Ltd. The usual transfer pricing policy in a conglomerate is to give sourcing flexibility to business units & use arms length market prices, However, in a single-industry or a related diversified firm, synergies may be important, & business units may not be given the freedom to make sourcing decision.

Incentive Compensation : The incentive compensation policy tends to differ across corporate strategies in the following ways: Use of formulas: Conglomerates, in general are more likely to use formulas to determine business unit managers bonuses: that is , they may base a larger portion of the bonus on quantitative, financial measures, such as X percent bonus on actual economic value added (EVA) in excess of budgeted EVA. These formula-based bonus plans are employed because senior management typically is not familiar with what goes on in a variety of disperate businesses. Profitability measures : In case of unrelated diversified firms, the incentive bonus of the business unit managers tends to be determined primarily by the profitability of that unit, rather than the profitability of the firm. Thus by this way we can design the inegrated management control system for GBM Ltd., assuming the other company has merged into GBM Ltd.