QUESTION PAPER OF YEAR 2010 Q1.

Framework Of Management control Ans: Management control is the process by which managers influence other members of the

organization to implement the organization‟s strategies. Management control process involves informal interactions between one manger and another manager and his or her subordinates. Informal communications occurs by means of memoranda, meetings, conversations, and even by facial expression. The informal interactions take place within a formal planning and control system. Such system includes the following activities: 1] Strategic planning, 2] Budget preparation, 3] Execution, 4] Evaluation of performance. Each activity leads to next in a regular cycle. 1] Strategic planning: it is process of deciding on the major programs that organization undertakes to implement its strategies and appropriate amount of resources that will be devoted to each. The output of the process called as strategic planning. This is the first step in management control cycle. 2] Budget planning: budget represent fine tuning of the strategic planning, incorporating most current

information. In budget, revenue and expenses are rearranged from programme to the responsibility centre, thus budget shows the expenses that each managers expected to occur. The process of budget preparation is essentially one of the negotiations between the managers of each responsibility centre and their superior. 3] Execution: managers execute the programme or part of the programme for which they are responsible and also report on what has happened in the course of fulfilling that responsibility. Reports on responsibility centre may show budgeted and actual information, financial and non-financial performance measures, internal & external information. 4] Evaluation of performance: the process of evaluation is comparison of actual expenses and those that should have been incurred under circumstances. If the circumstances assumed in the budget process are unchanged, the comparison between budgeted and actual amounts. If circumstances have changed, these

changes are taken into accounts. Ultimately, the analysis leads to praise or constructive criticism of the responsibility centre managers. Where management control is imposed, it functions within the framework established by the strategy. Normally these objectives (standards) are established for major subsystems within the organization, such as SBUs, projects, products, functions, and responsibility centers. Typical management control measures include ROI, residual income, cost, product quality, and so on. These control measures are essentially summations of operational control measures. Corrective action may involve very minor or very major changes in the strategy. Operational control systems are designed to ensure that day-to-day actions are consistent with established plans and objectives. It focuses on events in a recent period. Operational control systems are derived from the requirements of the management control system. Corrective action is taken where performance does not meet standards. This action may involve training, motivation, leadership, discipline, or termination. The differences between strategic and operational control are highlighted by reference to a general definition of management control: "Management control is the set of measurement, analysis, and action decisions required for the timely management of the continuing operation of a process". "Strategic planning is the process of deciding on the goals of the organization and the strategies for attaining these goals." Strategies are guidelines for deciding the appropriate actions for attaining the organization's goals. The essential difference between strategic planning and management control is that the strategic planning process is unsystematic. Strategic control occurs in two ways. First, strategic planning is itself a form of control. Second, strategic plans are converted into reality not only by their influence on the management control activity but also by the key decisions regarding allocation of resources. Second, while capital budgeting systems can respond to requests for resources that are consistent with the accepted strategic plan, the period between formal, comprehensive strategic planning exercises can give rise to unanticipated changes in the environment or unexpected internal crises.

account payable and pay roll sections in controller department. In discretionary expenses centers. the cost incurred depends on management‟s judgment as to the appropriate amount under the circumstances. These centers are usually located within departments that are discretionary expenses centers. These labels relates to two types of cost. 2. Expense centers are responsibility centers whose inputs are measured in monetary terms whose output are not. Discretionary costs are those for which no such engineered estimate is feasible.Q2.engineered and discretionary. factory‟s costs for direct labour. Such unit performs repetitive task for which standard cost can be developed. 4. Engineered expenses centers:. The optimum dollars amount of input required to produce one output can be determined. account receivable.it have following characteristics:The profit input can be measured in monetary terms. Diagram:Optimal relationship can be established Input Output Work Manufacture function (Dollar) Engineered expense centers (Physical) Engineered expense centers are usually found in manufacturing operation. There are two general types of expenses centers: . direct material. Engineered costs are those for which the „right‟ or „proper‟ amount can be estimated with reliability. 3. components supplier and utilities. For example. Their output can be measured in physical terms. 1. . warehouse distribution and similar units within the marketing organization may also be engineered expenses centers as certain responsibility centers within administrative and support departments for instance.

but it does not imply that valid engineered estimates can be made for each and every cost items. public relations and other activities. Rather it is simply the differences between the budgeted input and actual does not incorporate the value of output if actual expenses do not exceed the budget amount. The senior manager of each company may each to be convinced that their respective decision on staff size are correct but their is no objective to judge which is right. while another company of similar size and same industry may have staff 10 times as large. the level of service the company should provide to its customer and appropriate amount to spend for R&D. the manager has “ lived within .In engineered expenses centers output are multiplied by standard cost of each unit produce measured what the finished products should have cost. research and developments operation and most marketing activities. both decision may be equally good under the circumstances with the differences in the two companies. In discretionary centers. The term engineered expense center refers to responsibility centers in which engineered cost predominate. One company may have a similar small head quarter‟s staff. The output of these centers can not be measured in monetary terms. Diagram:Optimal relationship cannot be established Input Output Work R&D function (Dollar) (Physical) The term discretionary does not imply that managements judgment to optimum cost is capricious rather it reflects managements decision regarding certain policies. Discretionary expenses centers:Discretionary expenses centers include administrative and supports units. whether to match the marketing effort of competitors. Managers of engineered expenses center may be responsible for activities such as training and employee development that are not related to current production. the differences between budget and actual expenses are not a measure of efficiency.

Its volume is not a major concern. The drawbacks are first. Also managers will not only do their best to justify their current level of . This amount is adjusted foe inflation. This analysis established another new base. In contrast with incremental budgeting this alternative intensive review attempts to ascertain. at which point the annual budget review simply attempts to keep costs reasonably in line with this base until the next review take place. Zero base review is time consuming and they are likely to be traumatic for the managers whose operations are being reviewed. For the later. which they make a sufficiently strong case are usually provide. the discretionary expenses centers current level of expenditure is accepted and not reexamined during the budget preparation process and second. Incremental budgeting has two characteristics and two drawbacks. so that all are reviewed at least once every five years or so. This work done by discretionary expenses centers falls into two category. Budget preparation and performance evaluation Managements make budgetary decision for discretionary expenses centers that differ from those for engineered expenses centers. Such an analysis is often called zero base review. a formal process in which budgeter process to accomplish specific job. continuing and special. five year down line. anticipated change in the workload of continuing job. the resource actually required to carry out each activity within the expenses centers. Zero base review An alternative budgeting approach is to make through analysis of each discretionary expenses center on rolling schedule. Special work is a “one shot” project for example developing and installing a profit budgeting system in newly acquired division as per the discretionary expenses center budget is a management by objective. such as preparation of financial statement by controller office. manager of these center typically want to increase the level of services and tend to request additional resources. it decides whether the proposed operating budget represents the unit of performance efficiently. this is largely determined by the action of other responsibility centers. Incremental budgeting in this model discretionary expenses centers current level of expenses is taken as starting point. but since by definition the budget does not to predict the optimum amount of spending living within the budget does not necessarily indicate efficient performance. Continuing work is done consistently from year to year.the budget”. devolve that is form scratch. The marketing department‟s ability to generate sales.

This differences stems from the facts that in preparing the budget for discretionary expenses center. The main purpose is to control the cost by allowing manager to participate in planning. Spending more than that is cause for concern and spending less may indicate that planned work is won‟t be done. regarding zero base review as something to be put off indefinitely in favour of “ more pressing business” Cost variability Unlike cost engineered expenses center. Measurement of performance The primary job of discretionary expenses centers manager is to obtain the desired output spending and an amount that is “on budget “to do this satisfactory. Management tends to approve change that correspond anticipated change in sales. The objective become cost competitive by selling a standard actual cost against this standards. In dis cretionary centers as apposed to engineered expense centers. the financial performance report is not a means of evaluating the efficiency of manager. which are strongly affected by short run volume change costs in discretionary expenses center are comparatively insulated from such short term fluctuation. Type of financial control Financial control in a discretionary expenses center is quite different from than the engineered expenses center.spending. but also attempts to thwart the effort. Control over spending can be exercised by required the supervisors approval before the budget is overrun is permitted without additional approval. .

It is.During the review process. starting from the zero-base. ZBB allows top-level strategic goals to be implemented into the budgeting process by tying them to specific functional areas of the organization. and then adjusting some part of the budget downward for every other part that needs to be adjusted upward. every line item of the budget must be approved.Zero Based Budgeting It is an approach to planning and decision-making which reverses the working process of traditional budgeting. a time-consuming process that takes much longer than traditional. however.Q3. based on the assumption that the "baseline" is automatically approved. the practice of budgeting every dollar of income received. Budgets are then built around what is needed for the upcoming period. By contrast.FREE CASH FLOW A measure of financial performance calculated as operating cash flow minus capital expenditures. regardless of whether the budget is higher or lower than the previous one. Zero-based budgeting can lower costs by avoiding blanket increases or decreases to a prior period's budget. where costs can be first grouped. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required . cost-based budgeting. The practice also favors areas that achieve direct revenues or production. rather than only changes. no reference is made to the previous level of expenditure. in zero-based budgeting. departmental managers justify only variances versus past years. Because of its detail-oriented nature. 2. Zero based budgeting also refers to the identification of a task or tasks and then funding resources to complete the task independent of current resourcing. In traditional incremental budgeting (Historic Budgeting). Zero-based budgeting requires the budget request be re-evaluated thoroughly. with only a few functional areas reviewed at a time by managers or group leadership. This process is independent of whether the total budget or specific line items are increasing or decreasing.The term "zero-based budgeting" is sometimes used in personal finance to describe "zero-sum budgeting". zero-based budgeting may be a rolling process done over several years. Q1. their contributions are more easily justified than in departments such as client service and research and development. then measured against previous results and current expectations. Zero-based budgeting starts from a "zero base" and every function within an organization is analyzed for its needs and costs.A method of budgeting in which all expenses must be justified for each new period.

FCF is calculated as: It can also be calculated by taking operating cash flow and subtracting capital expenditures. it's tough to develop new products. would indicate that the firm has not generated enough revenue to cover its costs and investment activities. consisting of expenses. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. In that instance. A negative value. A positive value would indicate that the firm has cash left after expenses. make acquisitions.it could be a sign that the company may have some deeper problems. on the other hand. Free Cash Flow of the Firm is calculated as follows:A measure of financial performance that expresses the net amount of cash that is generated for the firm. Without cash. an investor should dig deeper to assess why this is happening . pay dividends and reduce debt. . Calculated as: taxes and changes in net working capital and investments. It's one of the many benchmarks used to compare and analyze financial health.to maintain or expand its asset base. This is a measurement of a company's profitability after all expenses and reinvestments.

Q. each of which is responsible for its own profitability. An SBU may be a business unit within a larger corporation. Feature of SBU‟s The main features are:      Location in the structure of the company. production preparation. These business units have to contain all the needs and corporate capabilities of the respective organization. In other words.4 Definition . financial and accounting processes and marketing influences. These are organizational units without legal personality. The entire portfolio of the concerned business has to be managed by allocation of managerial and capital resources for serving the overall interest of the entire organization.  SBU has divisionalized structure. Because strategic business units are more agile (and usually have independent missions and objectives). accounting and marketing. analysis of competition. SBUs typically have a discrete marketing plan. they allow the owning conglomerate to respond quickly to changing economic or market situations. . An autonomous division or organizational unit. This helps in developing a balance in the earnings. finance. and marketing campaign. technology and research activities. sales and the assets at a level which is controlled and acceptable for taking the right amount of risks. Corporations may be composed of multiple SBUs. a strategic business unit (SBU) is a profit center which focuses on product offering and market segment. or it may be a business unto itself. small enough to be flexible and large enough to exercise control over most of the factors affecting its long-term performance. They utilize formula "product-market". Type of activity performed by them is of crucial and decisive importance for the whole company. even though they may be part of a larger business entity. production. Functional and decision-making autonomy include: laboratory testing. which is determined by the size of production. Conditions for creating SBU‟s The main philosophical concept behind the formation of strategic business units is to serve a clear and defined market segment along with a clear and defined strategy. In business.

Have clearly definable set of competitors. Should have a Manager authorized and responsible for its operation. Easier planning of activities . customer groups and the overall experience of the company.    Improvement of strategic management Improvement of accounting operations. Be able to carry out integrative planning relatively independently of other SBUs. 2. Each Business Unit must meet the following criteria: 1.The strategic business unit (SBU) is created with the application of set criteria which consist of the competitors. This helps in strategically planning the overall business of the organization. Have a unique business mission. price models. independent from other SBUs. marketing and manufacturing. Be large enough to justify senior management attention but small enough to serve as auseful focus for resource allocation. This can be done because the SBU helps in segmenting the activities of the company in a strategic manner and the resources are thus allocated competitively. SBU‟s advantages. The main notion which rests behind the concept of strategic business units is to gain a competitive advantage in the populated marketplace. 5. Such products can also be amalgamated to form a single unit. This is also true for the company which has different product ranges and some of them have similar capabilities in terms of research and development. It is also sometimes seen that a number of different verticals present in the same organization having similar competitors and target customers are amalgamated to form a single SBU. 4. 3. The main advantages are:  SBU supports cooperation between the departments of the company which has a similar range of activities.

May be the cause of the unclear situation with regard to the management activities.     Difficulty with contact with higher management May cause of internal tension due to difficult access to internal and external sources of funding.SBU‟s disadvantages. Measures of judging performance of SBU‟s EVA Balance score cards .

. Objective of transfer pricing Profit center are responsible for product development. Transfer pricing refer to the amount used in accounting for any transfer of goods and services between responsibility centers. such cost do not include a profit element. MARKET BASED PRICES:Market price refers to a price in an intermediate market between independent buyer and seller. Different Methods To Arrive at Transfer Base Price 1.Q5. manufacturing and marketing each share in the revenue generated when the product is finally sold. Such a price typically includes a profit element because an independent company normally would not transfer goods or services to another independent company at cost or less. This is what a narrow definition and limit the term transfer price to the value placed on a transfer of goods or services in transaction in which at least one of the two parties involved in the profit center. it is understandable that the Transfer price is mainly transferring of goods and services from one unit to another where much important is not given to accounting basis but also to all other effect.e. The system should be simple to understand and easy to administer. it should provide unit with the relevant information it needs to determine the optimum trade- off between company cost and revenues 2. When there is competitive external market for the transferred product. market prices work well as transfer prices. the mechanism for allocating cost in an accounting system. 3. The term price as used here has the same meaning as it has when used in connection transaction between independent companies. Thus. the system should be designed so that decision that improve business unit profit will also improve company profits. It should help to measure the economic performance of the individual business units. It should induce goal congruence decision i. When transferred goods are recorded at market prices divisional performance is more likely to represent . from the objective. The transfer price should be designed so that it accomplishes the following objectives: 1. Therefore. 4.

COST BASED PRICES:When external markets do not exist or are not available to the company or when the information about external market prices is not readily available companies may decide to use some form of cost based transfer pricing system. Also. No divisions can benefit at the expense of another division. 3. 3. 2. It provides a varying price since cost per unit keeps changing as use of capacity changes. However. Market price may change often. if divisional managers fail to reach an agreement on price. . rather than whether the transfer results in profit-maximizing production and sourcing decisions. senior management‟s imposition of a transfer price defeats the motivation for using a negotiated transfer price in the first place. 2. Since the minimum transfer price for the selling division is the market price and the maximum price for buying division is also the market price the only possible transfer price is the market price. Divisional profits are therefore likely to be similar to the profits that would be calculated if the divisions were to be separate organizations. even though the transfer is in the best interests of the company. It mixes short run and long run costs. Divisional profits can be compared directly with the profitability of similar companies operating in the same type of business. The concept is based on the equation of variable cost plus arbitrary mark up to cover capacity related cost and a targeted profit margin. The selling division can sell all that it produces at the market price transferring internally at a lower price would make that division worse off. Internal selling expense may be less than would be incurred if the products were sold to outside. there is no reason to assume that the outcome of these transfer price negotiations will serve the best interests of the company or shareholders. It has three characteristics. If the goods cannot be brought from a division within the company the intermediate product would have to be purchased from the current market price from the outside market. However. 1.the real economic contribution of the division to total company profit. The market price can be used to resolve conflicts among the buying and selling division. Market price is optimal so long as the selling division is operating at full capacity. The transfer price could depend on which divisional manager is the better poker player. Negotiated Transfer Prices: Negotiated transfer pricing has the advantage of emulating a free market in which divisional managers buy and sell from each other in a manner that simulates arm‟s -length transactions. Under this method the transfer price is based on the total product cost. senior management might decide to impose a transfer price.

The concept of profit centers enables a company's executives and management to determine how best to focus its resources to maximize profitability. management may decide to allocate more resources to highly profitable areas. Not all units within an organization can be tracked as profit centers. the administration arm of a company. but does not directly generate revenues.Q6. . an investment center incurs costs. division. This is especially applicable to departments that provide an essential service within an organization. investment An investment center is different than a cost center. companies have to use a variety of metrics. an investment center is responsible for effectively using center assets. while reducing allocations to less profitable or lossmaking units. and as such. Profit centers are crucial in determining which units are the most and least profitable within an organization. its managers generally have decision-making authority related to product pricing and operating expenses. residual income and economic value added (EVA) to evaluate performance. unlike a profit center. Companies evaluate the performance of an investment center according to the revenues it brings in through investments An in capital center assets is compared sometimes to called the an overall investment expenses. and a unit that provides after-sales support in an organization. but do not generate their own revenues. which indirectly adds profit and is evaluated according to the money it takes to operate. Profit center Definition of 'Profit Center' A branch or division of a company that is accounted for on a standalone basis for the purposes of profit calculation. investment centers can utilize capital in order to purchase other assets. c. Because of this complexity. Moreover. Difference between investment center & profit center a. an investment center incurs no costs but does generate revenues. Some examples of these include the research department within a broker-dealer. In order to optimize profits. b. Definition of 'Investment Center' A business unit that can utilize capital to directly contribute to a company's profitability. including return on investment (ROI). A profit center is responsible for generating its own results and earnings.

cannot be changed in the short run. Types of Profitability Measures A profit center's economic performance is always measured by net income (i. The problem with this argument is that its premises are inaccurate. (3) Controllable Profit: headquarters expenses can be divided into two categories: controllable and non controllable. have been allocated to the profit center). The performance of the profit center manager. at least to a degree. A f o c u s o n t h e c o n t r i b u t i o n m a r gi n t e n d s t o d i r e c t a t t e n t i o n a w a y f r o m t h i s responsibility. There is no difference. the income remaining after all costs. an investment center provides services to profit centers e.d. for example. the former category includes expenses that are controllable. Further. even if an expense. profit will be what remains after the deduction of all . and some are entirely controllable. Presumably. investment center and profit center are synonymous. Expenses incurred at headquarters. such as administrative salaries. It incorporates all expenses either incurred by or directly traceable to the profit center. may be evaluated by five different measures of profitability: (1) contribution margin.. or (5) net income (1) Contribution Margin: Contribution margin reflects the spread between revenue and variable expenses. (3) controllable profit. including a fair share of the corporate overhead. by the business unit manager-information technology services. in fact. (4) income before income taxes. are not included in this calculation. regardless of whether or not these items are within the profit center manager's control. managers should focus their attention on maximizing contribution.e. if these costs are included in the measurement system. Measures of judging performance of profit centers. that is. almost all fixed expenses are at least partially controllable by the manager. A weakness of the direct profit measure is that it does not recognize the motivational benefit of charging headquarters costs. they can be changed at the discretion of the profit center manager. (2) direct profit. however. senior management wants the profit center to keep these discretionary expenses in line with amounts agreed on in the budgetf o r m u l a t i o n p r o c e s s . The principal argument in favor of using it to measure the performance of profit center managers is that since fixed expenses are beyond their control. (2) Direct Profit: This measure reflects a profit center's contribution to the general overhead and profit of the corporation. Many expense items are discretionary. however. the profit center manager is still responsible for controlling employees' efficiency and productivity.

however.e x p e n s e s t h a t m a y b e i n f l u e n c e d b y t h e p r o f i t c e n t e r manager. and human resource management are not controllable by profit center managers. In these situations. in which case there would be no advantage in incorporating income taxes. in which the effective income tax rate does vary among profit centers. Variances may be positive (under budget) or negative (over budget). their decisions on acquiring or disposing of equipment. accounting. foreign subsidiaries or business units w ith foreign operations may have differente f f e c t i ve i n c o m e t a x r a t e s . Rather. and their use of other generally accepted accounting procedures to distinguish gross income from taxable income. residual income (profit minus a deduction for capital costs). A variance is defined as the difference between the amount budgeted for a particular activity and the actual cost of carrying out that activity during a given period. First. Profits are seldom a viable measure at the cost center level. however. performance is most often measured by comparing actual costs against a budget. companies measure the performance of domestic profit centers according to the bottom line. it may be difficult to allocate corporate staff services in a manner that would properly reflect the amount of costs incurred by each profit center 5) Net Income: Here. I n o t h e r c a s e s . it may be desirable to allocate income tax expenses. it is not appropriate to judge profit center managers on the consequences of these decisions. (4) Income before Taxes n this measure. There are two arguments against such allocations. the amount of net income after income tax. There are situations. and (2) since many of the decisions that affect income taxes are made at headquarters. p r o f i t c e n t e r s m a y i n f l u e n c e i n c o m e t a x e s t h r o u gh t h e i r installment credit policies. Second. a major disadvantage of this measure is that because it excludes non controllable headquarters expenses it cannot be directly compared with either published data or trade association data reporting the profits of other companies in the industry. return on investment (profit divided by initial investment). . For example. There are two principal arguments against using this measure: (1)after tax income is often a constant percentage of the pretax income. these managers should not be held accountable for them. since the costs incurred by corporate staff departments such as finance.    profit percentage (profit divided by sales). Measures of judging performance of investment centers. all corporate overhead is allocated to profit centers based on the relative amount of expense each profit center incurs.

Under this approach. When viewed positively. these costs can then be converted into total cost estimates. budgeted results. are frequently misused as negative management tools--as means of finding fault or placing blame. Variances. This negative use stems. and an overly rigid separation of responsibility. on occasion. on the one hand. Many activities may fall between the cracks when responsibility is too strictly prescribed. With the application of appropriate budgetary guide-lines. in large part. The impact of various levels of service can be tested. when responsibility is firmly fixed. and changes in quantity (and.Performance data can be developed for management purposes independent of the budget and control accounts. Passing the buck is an all-too-pervasive tendency in many large organizations. Under such circumstances. responsibility cannot be delegated too far down in the organization. These techniques. on the other. and an assessment can be made of changes in the size of the client groups to be served. they can provide managers with significant means of improving future decisions. from a misunderstanding of the rationale of responsibility accounting. however. quality) of such units are measured as a basis for analyzing financial requirements. units of work are identified. a delicate balance must be maintained between the careful delineation of responsibility. Marginal costs for each additional increment of service provided can be determined through such an approach. This problem is particularly evident when two or more activities are interdependent. This approach is built on the assumption that certain fixed costs remain fairly constant regardless of the level of service provided and that certain variable costs change with the level of service or the size of the clientele group served. and other techniques of responsibility accounting are relatively neutral devices. however. This tendency is supposedly minimized. Nevertheless. This kind of performance reporting has been used in the justification of resource requests and in the assessment of cost and work progress where activities are fairly routine and repetitive. They can also assist in the delegation of decision responsibility to lower levels within an organization. but must be maintained at a level that will ensure cooperation among the units that must interact if the activities are to be carried out successfully .

These financial measures are inadequate. . Kaplan and Norton emphasize that 'learning' is more than 'training'. The Balanced Scorecard (BSC) is a performance management tool which began as a concept for measuring whether the smaller-scale operational activities of a company are aligned with its larger-scale objectives in terms of vision and strategy. for guiding and evaluating the journey that information age companies must make to create future value through investment in customers. employees. as well as that ease of communication among workers that allows them to readily get help on a problem when it is needed. it is becoming necessary for knowledge workers to be in a continuous learning mode. But financial measures tell the story of past events. It captures both the financial and non-financial aspects of a company's strategy and discusses the cause and effect relationship that drives business results. an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. and develop metrics. The Learning and Growth Perspective This perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. marketing and developmental inputs to these.By focusing not only on financial outcomes but also on the operational. collect data and analyze it relative to each of these perspectives: 1. and innovation. Human resources are the main resource. suppliers. The Organisation has to identify the infrastructure that must be built in order to create long term growth and improvement. however. processes. the Balanced Scorecard helps provide a more comprehensive view of a business. It is a proven tool to translate a company's strategy into action. it also includes things like mentors and tutors within the organization. In the current climate of rapid technological change."The balanced scorecard retains traditional financial measures. technology. The balanced scorecard approach provides a clear prescription as to what companies should measure in order to 'balance' the financial perspective. The objective is to build up mechanism to fill up the existing gaps in knowledge and processes and to be continually innovative. The balanced scorecard is a management system (not only a measurement system) that enables organizations to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results."The balanced scorecard suggests that we view the organization from four perspectives.Q7. In a knowledge economy. which in turn helps organizations act in their best long-term interests.

The Financial Perspective These measures do not disregard the traditional need for financial data. Major Dimension's affecting customer response and profitability are product and service attributes. two kinds of business processes may be identified: a) mission-oriented processes. These are leading indicators: if customers are not satisfied. This perspective allows the managers to know how well their business is running. and managers will do whatever necessary to provide it. In this context. often there is more than enough handling and processing of financial data. financial and no financial measures and internal & external measures. Key parameters in this perspective to be analyzed are customer satisfaction. In fact. The company must understand its value chain. A Balanced Scorecard must be balanced. The main focus of this perspective is on defining the critical business processes in which the organization seeks to excel. new customer acquisition and market share in targeted segments. With the implementation of a corporate database. the internal auditor may prove helpful to create and monitor the scorecard since he has access to company wide measure of performance. But the point is that the current emphasis on financials leads to the "unbalanced" situation with regard to other perspectives. The Customer Perspective Current business philosophy has shown an increasing realization of the importance of customer focus and customer satisfaction in any business. and whether its products and services conform to customer requirements. Timely and accurate financial data will always be a priority. and b) support 3. Performance measurement system: additional consideration A performance measurement system attempt to address the need of the different stakeholders of the organization by crating a blend of strategic measures: outcome and driver measures. it is hoped that more of the processing can be centralized and automated. even though the current financial picture may look good. In addition to the strategic management process. Outcome and driver measures . customer retention. 4. Poor performance from this perspective is thus a leading indicator of future decline. customer relations and image and reputation.2. It should be carefully analyzed by those who know these processes most intimately. they will eventually find other suppliers that will meet their needs. The Business Process Perspective This perspective refers to internal business processes.

that eventually impacted companies financial performance. Outcome and driver measures are inextricably linked.Because these measures are explicitly tied to an organization‟s strategies.Even through they recognize the importance of nonfinanacial measures. the measures in the scorecar d must be strategy . mistakenly believing that good internal measures are sufficient.Firm discovered. These measures typically are “lagging indicators”. they tell management what has happened. Financial and no financial measures Organization has developed very sophisticated system to measure financial performance.By focusing management attention on key aspect of the business driver measures affect behavior in the organisation. many organizations have failed to incorporate them into their executive –level performance reviews because these measures tend to be much less sophisticated than financial measures and senior management is less adept at using them. during the 1980s industries were being driven by changes in nonfinanacial areas. increased revenue). The organisation achieve goal congruence by linking overall financial and strategic objective with lower levels. If a business units desire is to improve time to market focusing on cycle time allows management to track how well this goal is being achieved. such as quality and customer satisfaction. which in turn encourages employees to improve this particular measures. Unfortunately as many U.S.Outcome measurements indicate the result of strategy(e. such as manufacturing yield. if outcome measures indicate there is a problem but the driver measures indicate the strategy is being implemented well there is a high chance that the strategy needs to be changed. Whereas outcome measures indicate only the final result driver measures can be used at a lower level and indicate incremental changes that will ultimately affect the outcome.g. With these measures all employee can understand how their action impact the company strategies. Too often companies sacrifice internal development for external results altogether.. By contrast driver measures are “leading indicators” they show the progress of key areas in implementing a strategy. Measurements drive change The most important aspect of the performance measurement system is its ability to measure outcome and diverse in a way that causes the organisation to act in accordance with its strategies. Internal and External measures Companies must strike a balance between external measures such as customer satisfaction and measures of internal business processes.

g. Better selection. there is no such thing a generic scorecard.g. These improvements in turn lead to improved customer loyalty which leads to enhanced sales. Objectives can further clarify a strategy so that the organization knows both what it needs to do how much. product quality) drive financial measures (e.Finally the scorecard emphasis the idea of cause and effect relationship among measures. and development of manufacturing employees (measured in term of “manufacturing yield”) lead to better product quality(measured in term of” first pass yield”) and better on time delivery (measured in term of “order cycle time”). as a tool to translate strategy into action. Rather. the individual measures in the scorecard must be linked together explicitly in a cause effect way. revenue) bellow figure present an example of how the measures link to each other in a cause and effect relationship. By explicitly presenting the cause and effect relationships among measures. Financial perspective Sales revenue growth .(measured in term of “sales growth”) The scorecard must not simply be a laundry list of measures. an organization will understand how nonfinanacial measures(e.– specific and therefore organization – specific and therefore organization-specific. Perspective Measures Innovation and learning perspective Manufacturing skills Internal business perspective First – pass yield order cycle time Customer perspective Customer satisfaction survey.The scorecard measures are linked from top to bottom and tied to specific targets throughout the entire organization. by explicitly presenting the cause and effect relationship. training. While a generic performance measurement framework exists.

Example Balanced Scorecard: Regional Airline Mission: Dedication to the highest quality of Customer Service delivered with a sense of warmth. point-to-point carrier in America. friendliness. and Company Spirit. individual pride. low-fare.z Theme: Efficiency Operating Objectives Measures Targets Initiatives Financial Profitability •Profitability •Fewer planes Lower costs •Increased revenue Increase Revenue •Market Value •Seat Revenue •Plane Lease cost •25% per year •20% per year •5% per year •Optimize routes •Standardize plans .Therefore balance scorecard is greater measure than performance appraisal.the only short haul. high-frequency. Vision: Continue building on our unique position -.

Customers Satisfaction •% change loyalty program Arrival Rating •Customer industry •98% management •Customer •First in •Quality Lowest Prices Internal •Fast ground Improve Turnaround Departure Time turnaround •On-Time •On Time Minutes •93% optimization program Ground •25 •Cycle time Learning •Ground crew alignment •% Ground crew •yr. 6 100% . 1 70% stockholders yr.Customer •Flight is on .•FAA On Time time On-time •Lowest prices flights •More More Customers Customers Ranking •No. 4 90% •Stock ownership plan Align •% Ground crew yr.

Ground Crews trained •Ground crew training .

networking. Second its membership benefits. appraisers.8 Service organization A service club or service organization is a voluntary non-profit organization where members meet regularly to perform charitable works either by direct hands-on efforts or by raising money for other organizations. funeral directors. or corporations as well as to individuals.Q. copywriters. firms. public relations professionals. recruiters. although organizations with such defined motives are more likely to identify themselves through their association. law firms. business those development of: accountants. In the United States. A service club is defined first by its service mission. Difference between professional service organization & normal service organization. such as social occasions. Manufacturing organization manufacturers integrate all elements of the manufacturing system to satisfy the needs and wants of its customers in a timely and effective manner. Professional service organization : Professional services is an industry of technical or unique functions performed by independent contractors or consultants whose occupation is the rendering of such services. service organizations perform many essential services for their community and other worthy causes. . business managers. the services are considered "professional" and the contract may run to partnerships. whereas a service sector tends to be wealthconsuming. some of these clubs usually also have a component club organization that is a tax exempt. actuaries. such as hospitals. researchers. They eliminate organizational barriers to permit improved communication and to provide high quality products and services. attorneys. and personal growth opportunities encourage involvement A service organization is not necessarily exclusive of ideological motives. real estate brokers. While not limited to licentiates (individuals holding professional licenses). manufacturing is a wealth-producing sector of an economy. Examples of professional services include consultants. translators and medical centers. Much like the historical religious organizations formed the basis for many of societal institutions. Emerging technologies have provided some new growth in advanced manufacturing employment opportunities in the Manufacturing Belt in the United States. Manufacturing provides important material support for national infrastructure and for national defense. architects. engineers.

the greater the economic impact the more the customer can be convinced to pay for a service. advertising professionals. and face different challenges. this is a natural fit for a value driven approach to pricing. Again. differentiated value at competitive advantage. is a daunting task. then delivering results that exceed expectations is the second. effectively managing human resources is the heart of the business. Then managing this team. Intellectual Property (IP) Management – The competitive advantage of a professional services firm is built on the strength of their people. whose members have an assortment of skills and experiences. So these firms have different needs. training and retention of world class service providers are critical. The solution is protection and management of the firm‟s intellectual property. knowledge-based services to clients. accountants. Such as lawyers. professional services firms sell knowledge and expertise – not tangible. architects. among others. This is the key to understanding the Economic Value Drivers of the sale. gain references and develop favorable word of mouth communication. they can be any organization or profession that offers customized. The successful professional services firm allocates people resources to those clients and activities that allow them to deliver superior. and consultants. Strong service histories enable the professional services firm to effectively demonstrate and document value delivered in monetary terms. across a national if not globalclient base. Service Delivery – If putting the right people in the right places is the top priority. physical products. there is turnover. Selection. Unlike other types of organizations. where each engagement is unique.The difference between professional service organization & normal service organization can be the professional service organization provides expert services to their clients. In sum. Pricing strategy for professional service organization Resource Allocation – In the professional service firm. but where there are people. financial advisers. Basically. engineers. Effective IP management . Successful professional services firms recognize from the get -go that they must build strong service histories to manage client perceptions. And in normal service organizations the services are provided voluntarily in the charitable form so that is the difference between normal & professional service organization. so a firm is at constant risk of losing its competitive advantage.

as in the Economic Value Drivers described above. any discussion of pricing would be incomplete without reference to competition. Competitive Dynamics – Of course. to get paid for meaningful di fferentiation and to drive down costs of delivery. and an unwillingness to charge for value delivered. experience from across many clients over many years has shown that most of the damage attributed to competitors is actually self inflicted. it is patently obvious. and they can be as important as the economic drivers to a professional services pricer. lack of effective sales incentives. Through unmanaged discounting. Value Exchange – Ultimately. the most effective professional services pricing managers are masters at managing the value exchange. And these words are used purposefully – the customer is forced to acknowledge and pay for value delivery. However.permits the firm to grow capabilities over time. other decision criteria are highly subjective. purchase decisions often are made on the basis of a complex stream of decision variables. Looking at it from the outside. weak value communication and negotiation strategies. it looks like competition. Emotive Drivers – Because of the intangible nature of professional services. many professional services firms have created the price sensitivity they see in their customers. While some of these decision variables lend themselves to rigorous analysis. These are called the Emotive Drivers of the purchase. The value exchange is the continuing process whereby the customer is forced to acknowledge and pay for value delivery. . From the inside.

Q. each SBU sets its own strategies to make the best use of its resources (its strategic advantages) given the environment it faces. Top management of the organization makes such decisions. strategy is a comprehensive plan providing objectives for SBUs. the former is concerned with the shape and balancing of growth and renewal rather than in market execution. defines the choice of product or service and market of individual business within the firm. At such a level.9 Corporate Level Strategy Corporate level strategy occupies the highest level of strategic decision-making and covers actions dealing with the objective of the firm. Such strategies operate within the overall strategies of the organization. competition. conceptual and less concrete than decisions at the business or functional level. acquisition and allocation of resources and coordination of strategies of various SBUs for optimal performance.‟ Corporate strategy is not the sum total of business strategies of the corporation but it deals with different subject matter. While the corporation is concerned with and has impact on business strategy. Thus. The fundamental concept in SBU is to identify the discrete independent product/market segments served by an organization. Business-level strategy is – applicable in those organizations. The corporate strategy sets the long-term objectives of the firm and the broad constraints and policies within which a SBU operates. . yarns. The nature of strategic decisions tends to be value-oriented. while business strategy. For example. where SBU concept is applied. a SBU is created for each such segment. For each product group. Since each product/market segment has a distinct environment. In other words. For example. allocation of re-sources among functional areas and coordination between them for making optimal contribution to the achievement of corporate-level objectives. business strategy relates to the „how‟ and corporate strategy to the „what‟. Andrews says that in an organization of any size or diversity. the nature of market in terms of customers. There-fore. The corporate level will help the SBU define its scope of operations and also limit or enhance the SBUs operations by the resources the corporate level assigns to it. and a variety of petrochemical products. corporate strategy usually applies to the whole enterprise. There is a difference between corporate-level and business-level strategies. it requires different strategies for its different product groups. and marketing channel differs. fibers. Reliance Industries Limited operates in textile fabrics. Corporate strategy defines the business in which a company will compete preferably in a way that focuses resources to convert distinctive competence into competitive advantage. less comprehensive. which have different businesses-and each business is treated as strategic business unit (SBU). Business-Level Strategy.

Small businesses contemplating diversification. as well as business-level decisions for the new business unit. price etc. When she diversifies. . manufacturing. corporate and business strategies work together and influence each other in an effort to make the business units and the corporation successful. promotion. The main identifier of each level is its sphere of influence within the organization. Small businesses engaged in a single industry already have made the only corporate-level strategic decision they have – which industry to join.. should it decide to diversify. Our start-up candy maker‟s corporate decision was to enter the confectionary market. on the other hand. There are three commonly recognized levels of strategy within any corporation. While the three levels are interrelated in many ways. which in turn influence her operational strategies concerning distribution. But it may also require a rethinking of the original candy making operation‟s business strategy. Her business decisions were based on how to compete. face a raft of additional corporate-strategy decisions. each must be separately considered to achieve the peak performance levels of which the business is capable. the addition of another unit necessitates business-level decisions for the new unit.The differences between corporate level strategy and business level strategy are noteworthy as each influences the performance of an organization.

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