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Week 9 Performance Measures

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... Canadian Tire, and that you want to develop a BSC for Canadian Tire ... ( What is the strategy of Canadian Tire?) Financial. Customer. Internal processes ... – PowerPoint PPT presentation

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Title: Week 9 Performance Measures


1
Week 9 - Performance Measures
  • Chapter 24 - Performance Measurement,
    Compensation, and Multinational Considerations

2
Learning Objectives
  • 1. Measure performance from a financial and
    non-financial perspective
  • 2. Design an accounting-based performance measure
  • 3. Analyze profitability using the DuPont method.
  • 4. Use the residual-income measure and recognize
    its advantages.
  • 5. Describe the economic value added method.
  • 6. Distinguish between current cost and
    historical cost asset measurement

3
Learning Objectives, Continued
  • 7. Indicate the difficulties that arise when
    comparing the performance of divisions operating
    in different countries.
  • 8. Recognize the role of salaries and incentives
    in compensation arrangements.
  • 9. Describe the management accountants role in
    helping organizations provide better incentives.
  • 10. Back-of-the-chapter exercises and problems
  • 11. Customer relationship management
  • 12. Analysis practice, Case 12, Jones Company
  • 13. Case Web1, Brights Lodging and Travel

4
Balanced Scorecard, translate strategy into
operational terms
  • Financial
  • Customer Internal Processes
  • Learning and Growth

5
Balanced Scorecard, Continued
  • External financial perspective
  • - bottom -line financial performance, return on
    capital, earnings per share growth
  • Customer perspective
  • - performance in target customer, market segments
  • Internal business process perspective
  • - focuses on those processes that will increase
    value to customers and lowers costs for improving
    financial performance
  • Learning and growth perspective
  • - people, systems, and organizational procedures

6
Balanced Scorecard, Example
  • Consider that you are the CEO of Canadian Tire,
    and that you want to develop a BSC for Canadian
    Tire Stores. What would the BSC look like? (What
    is the strategy of Canadian Tire?)
  • Financial
  • Customer
  • Internal processes
  • Growth and learning

7
Accounting-Based Performance Measurement
  • Steps to Take in Designing a System
  • Step 1 Choose variable(s) that represent top
    managements financial goal(s)
  • Step 2 Choose definitions of the items included
    in the variables in Step 1
  • Step 3 Choose measures for the items included in
    the variables in Step 1
  • Step 4 Choose a target against which to gauge
    performance
  • Step 5 Choose the timing of feedback

Pages 825 - 826
8
Return on Investment (ROI)
Income Investment
  • Return on Investment
  • popular approach to incorporate the investment
    base into the performance measure
  • includes all the major ingredients of
    profitability (revenues, costs and investment)
  • can break out the basic formula as follows
    (sometimes called the DuPont formula) to measure
    investment turnover and profitability

Return on Investment
Revenues Investment
Income Revenues
x

Profitability
Turnover
Pages 827 - 828
9
Residual Income (RI)
  • Residual Income
  • Income - (Required Rate of return x
    Investment)
  • required rate of return is also called the
    imputed cost of capital
  • favoured by some firms as managers will focus on
    maximizing an absolute dollar amount (dollars of
    residual income) rather than a percentage (ROI)
  • maximizing a may result in suboptimal
    performance
  • managers earning high ROIs may reject projects
    that earn more than the companys required rate
    of return
  • managers earning low ROI may accept projects
    that earn less than the companys required rate
    of return

Pages 828 - 829
10
Economic Value Added (EVA)
Economic Value Added
Weighted-average cost of capital
After- tax Operating Income
Total assets
Current liabilities

-
x
-
  • EVA uses the weighted-average cost of capital
    (WACC) as the minimum required rate of return
  • WACC represents the after-tax cost of capital
    from all debt and equity sources
  • many companies also make adjustments to the
    accounting definition of operating income such as
    capitalizing (and amortizing) RD, restructuring
    costs, and leases

Pages 829 - 831
11
Alternative Measures of Performance
  • When calculating ROI and RI, can consider
    investment as being
  • total assets available
  • total assets employed
  • working capital plus long-term assets
  • stockholders equity
  • When considering long-term assets, firms value
    these assets based on
  • current costs
  • gross book value (historical cost)
  • net book value (historical cost - accumulated
    amortization)
  • replacement cost (cost to replace productive
    capacity)

Pages 834 - 837
12
Distinction Between Managers and Units
  • Must distinguish between the performance of the
    manager and the performance of the organizational
    sub-unit or division (what the manager can
    control)
  • Company may put the strongest manager in the
    weakest division to change its fortunes
  • Recognize the role of salaries and incentives in
    compensation arrangements
  • Be aware of moral hazard situations where an
    employee prefers to exert less effort than the
    effort desired by the owners because the
    employees efforts cannot be accurately measured
    and monitored
  • Benchmarking or relative performance evaluation
    may be used to filter out the effect of common
    uncontrollable factors

Pages 839 - 843
13
Creating Incentives versus Imposing Risk
  • Incentives are used to motivate employees to do
    what is best for the organization. To work well
    employees should have sufficient control.
    Success should not be based on extrinsic factors
  • Risk is the probably that remuneration will vary.
    Risk is influenced by many factors, and when
    there are factors beyond the control of
    employees, remuneration should not be tied to
    those factors.

14
The Management Accountants Role
  • Provide technical assistance in designing the
    incentive system.
  • - knowledge of the different techniques
  • - understanding of the effect that organizational
    performance has on the techniques.
  • - understanding of the motivational consequences
    of the techniques.
  • Implement benchmarking.

15
Performance Measures at the Individual Level
  • Most employees have multiple roles which need to
    be considered when measuring performance.
  • Team-based compensation arrangements reflect the
    need for cooperation

16
Executive Compensation Packages
  • Base salary
  • Fringe benefits
  • Annual incentives
  • Long-term incentives

17
Employees, Executives Act on Incentives
  • Sales
  • Profits
  • Customer satisfaction
  • Costs
  • Production, output
  • Making good decisions
  • Ownership
  • Common share performance

18
Incentives With a Long-Term Job Security
  • Assume salary increases over time, annual
    performance reviews, and termination for
    deficient performance.
  • Employees with make the best decisions in order
    to keep from being terminated because they do not
    want to lose a valuable asset.
  • Employee will not only focus on short term, but
    will also consider long term as employee will
    still be with the firm and therefore accountable

19
Back-of-the-Chapter Exercises and Problems
  • Exercises 24-18, Problems 24-30, 24-34

20
Customer Relationship Management (CRM)
  • CRM systems automate and increase the efficiency
    and effectiveness of front offices - interaction
    with customers
  • Customer facing applications ensure staff on
    frontlines have easy access to customer
    histories, interactions and transactions

21
CRM - Customer data warehouse
  • All customer information
  • From all touch points -- web, telephone, e-mail,
    face-to-face, point-of-sale
  • In-bound and out-bound
  • History of customer purchases

22
CRMs are Important
  • 1. Customers are the most valuable asset
  • 2. Allows an organization to coordinate among
    touch points
  • 3. The internet and information technology allow
    a greater proportion of customer interaction to
    be captured.

23
CRM Software
  • Examples, Siebel, Clarify
  • Allow for the collection and analyze of customer
    data
  • Integrate all touch points
  • Determine customer spending and other patterns

24
CRM examples
  • Grocerygateway.com
  • Amozon.com

25
Analysis Practice
  • Case 12, Jones Company

26
Case, Web1, Brights Lodging and Travel
  • The case will be reviewed in class
  • After each paragraph or exhibit a student will
    identify possible issues
  • Then the root issue or issues will be determined
    through analysis

27
The End
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