Strategy
Specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives
Product Differentiation
An organization’s ability to offer products or services perceived by its customers to be superior and unique relative to the products or services of its competitors
Cost Leadership
An organization’s ability to achieve lower costs relative to competitors through productivity and efficiency improvements, elimination of waste, and tight cost control
Reengineering
The fundamental rethinking and redesign of business processes to achieve improvements in critical measures of performance, such as cost, quality, service, speed, and customer satisfaction
Balanced Scorecard
Translates an organization’s mission and strategy into a set of performance measures that provides the framework for implementing its strategy
Strategy Map
A diagram that describes how an organization creates value by connecting strategic objectives in explicit cause-and-effect relationships with each other in the financial, customer, internal business process, and learning and growth perspectives
Unused Capacity
The amount of productive capacity available over and above the productive capacity employed to meet consumer demand in the current period
Engineered Costs
Result from a cause-and-effect relationship between the cost driver— output—and the (direct or indirect) resources used to produce that output. Engineered costs have a detailed, physically observable, and repetitive relationship with output
Discretionary Costs
Have two important features: (1) They arise from periodic (usually annual) decisions regarding the maximum amount to be incurred, and (2) they have no measurable cause-and-effect relationship between output and resources used
Downsizing (rightsizing)
An integrated approach of configuring processes, products, and people to match costs to the activities that need to be performed to operate effectively and efficiently in the present and future
Quality
The total features and characteristics of a product or a service made or performed according to specifications to satisfy customers at the time of purchase and during use
Design Quality
Refers to how closely the characteristics of a product or service meet the needs and wants of customers
Conformance Quality
The performance of a product or service relative to its design and product specifications
Costs of Quality
The costs incurred to prevent, or the costs arising as a result of, the production of a low- quality product
Prevention Costs
Costs incurred to preclude the production of products that do not conform to specifications
Appraisal Costs
Costs incurred to detect which of the individual units of products do not conform to specifications
Internal Failure Costs
Costs incurred on defective products before they are shipped to customers
Internal Failure Costs
Costs incurred on defective products before they are shipped to customers
External Failure Costs
Costs incurred on defective products after they have been shipped to customers
Control Chart
An important tool in SQC, is a graph of a series of successive observations of a particular step, procedure, or operation taken at regular intervals of time
Pareto Diagram
A chart that indicates how frequently each type of defect occurs, ordered from the most frequent to the least frequent
Cause-and-Effect Diagram
Identifies potential causes of defects using a diagram that resembles the bone structure of a fish (hence, cause-and-effect diagrams are also called fishbone diagrams)
Customer-Response Time
How long it takes from the time a customer places an order for a product or service to the time the product or service is delivered to the customer
Receipt Time
How long it takes the marketing department to specify to the manufacturing department the exact requirements in the customer’s order
Manufacturing Cycle (Lead) Time
How long it takes from the time an order is received by manufacturing to the time a finished good is produced
Delivery Time
How long it takes to deliver a completed order to a customer.
On-Time Performance
Delivery of a product or service by the time it is scheduled to be delivered
Time Driver
Any factor that causes a change in the speed of an activity when the factor changes
Bottleneck
Occurs in an operation when the work to be performed approaches or exceeds the capacity available to do it
Average Waiting Time
The average amount of time that an order waits in line before the machine is set up and the order is processed
Theory of Constraints
Describes methods to maximize operating income when faced with some bottleneck and some non-bottleneck operations
Throughput Margin
Revenues minus the direct material costs of the goods sold
Management Control System
A means of gathering and using information to aid and coordinate the planning and control decisions throughout an organization and to guide the behavior of its managers and other employees
Formal Management Control System
Includes explicit rules, procedures, performance measures, and incentive plans that guide the behavior of its managers and other employees
Informal Management Control System
Includes shared values, loyalties, and mutual commitments among members of the organization, company culture, and the unwritten norms about acceptable behavior for managers and other employees
Motivation
The desire to attain a selected goal (the goal-congruence aspect) combined with the resulting pursuit of that goal (the effort aspect)
Goal Congruence
Exists when individuals and groups work toward achieving the organization’s goals
Effort
The extent to which managers strive or endeavor in order to achieve a goal
Decentralization
The freedom for managers at lower levels of the organization to
make decisions
Autonomy
The degree of freedom to make decisions.
Suboptimal Decision Making
Occurs when a decision’s benefit to one subunit is more than offset by the costs to the organization as a whole
Cost Center
The manager is accountable for costs only
Revenue Center
The manager is accountable for revenues only
Profit Center
The manager is accountable for revenues and costs
Investment Center
The manager is accountable for investments, revenues, and costs
Transfer Price
The price one subunit charges for a product or service supplied to another subunit of the same organization
Intermediate Product
The product or service that is transferred between subunits of an organization
Market-Based Transfer Price
Top management may choose to use the price of a similar product or service publicly listed
Cost-Based Transfer Price
Top management may choose a transfer price based on the cost of producing the product in question
Hybrid Transfer Price
Hybrid transfer prices take into account both cost and market information
Investment
Refers to the resources or assets used to generate income
Return on Investment
An accounting measure of income divided by an accounting measure of investment = Income / Investment
Residual Income
An accounting measure of income minus a dollar amount for required return on an accounting measure of investment = Income - (Required rate of return * Investment)
Imputed Cost
A cost recognized in particular situations but not recorded in financial accounting systems because it is an opportunity cost
Economic Value Added
Equals after-tax operating income minus the (aftertax) weighted-average cost of capital multiplied by total assets minus current liabilities = After Tax Op. Inc. - [WACC x (Total Assets - Current Liabilities)]
Return on Sales
The income-to-revenues ratio (or sales ratio) = Income / Revenue
Current Cost
The cost of purchasing an asset today identical to the one currently held, or the cost of purchasing an asset that provides services like the one currently held if an identical asset cannot be purchased
Moral Hazard
Describes a situation in which an employee prefers to exert less effort (or to report distorted information) compared with the effort (or accurate information) desired by the owner, because the employee’s effort (or validity of the reported information) cannot be accurately monitored and enforced
Diagnostic Control Systems
Measures help diagnose whether a company is performing to expectations
Boundary System
Describe standards of behavior and codes of conduct expected of all employees, especially actions that are off-limits
Belief System
Articulates the mission, purpose, and core values of a company. They describe the accepted norms and patterns of behavior expected of all managers and other employees with respect to one another, shareholders, customers, and communities
Interactive Control System
Formal information systems that managers use to focus the company’s attention and learning on key strategic issues
Four perspectives of balanced scorecard
Financial perspective - This perspective evaluates the profitability of the strategy and the
creation of shareholder value
Customer perspective - This perspective identifies targeted customer and market segments and measures the company’s success in these segments
Internal-business-process perspective - This perspective focuses on internal operations that create value for customers that, in turn, help achieve financial performance
Learning-and-growth perspective - This perspective identifies the capabilities the organization must excel at to achieve superior internal processes that in turn create value for customers and shareholders
Financial Perspective Examples
Operating income from productivity gain
Operating income from growth
Revenue Growth
Gross margin percentage
Cost reductions in key areas
EVA
ROI
Customer Perspective Examples
Market share in particular segment
Number of new customers
Customer-satisfaction ratings
Customer-retention percentage
Time taken to fill customers' requests
Number of customer complaints
Internal Business Process Perspective Examples
Service response time
Yield
Order delivery time
On-time delivery
Number of major improvements in mfg and business processes
Percentage of processes with advanced controls
New product development times
Number of new products
Time taken to replace or repair defective parts
Hours of customer training for using the product
Learning-and-Growth Perspective Examples
Employee satisfaction ratings
Percentage of line workers empowered to manage processes
Percentage of employees trained in process and quality management
Percentage of manufacturing processes with real-time feedback
Employee education and skill level
Employee turnover rates
Percentage of compensation based on team and individual incentives
Information system availability
Four categories of the cost of quality
Prevention Costs - Incurred to preclude the production of defective products that do not conform to specifications
Appraisal Costs - Costs incurred to detect which of the individual units of products do not conform to specifications
Internal Failure Costs - Costs incurred on defective products before they are shipped to customers
External Failure Costs - Costs incurred on defective products after they are shipped to customers
Pareto Diagram
A chart that indicates how frequently each type of defect occurs, ordered from the most frequent to the least frequent
Cause-and-effect diagram
Identifies potential causes of defects using a diagram that resembles the bone structure of a fish (hence, cause-and-effect diagrams are also called fishbone diagrams)
Stages of Customer Response Time
Receipt Time - Customer places orders and it is taken to manufacturing
Waiting Time - Time between manufacturing's reception of the order and machine set up for order
Manufacturing Time - From the machine set up until the product becomes a finished good
Delivery Time - Finished good is produced and the order is delivered to the customer
Two main time drivers
1. Uncertainty about when customers will order products or services
2. Bottlenecks due to limited capacity
4 Steps to dealing with Theory of Constraints
1. Recognize that the bottleneck operation determines throughput margin of the entire system
2. Identify the bottleneck operation by identifying operations with large quantities of inventory waiting to be worked on
3. Keep the bottleneck operation busy and subordinate all nonbottleneck operations to the bottleneck operation
4. Take actions to increase the efficiency and capacity of the bottleneck operation as long as throughput margin exceeds the incremental costs of increasing efficiency and capacity
Time-related Financial measures
- Revenue losses or price discounts attributable to delays
- Carrying cost of inventories
- Throughput margin minus operating costs
Time-related Customer measures
- Customer-response time (the time it takes to fulfill a customer order)
- On-time performance (delivering a product or service by the scheduled time)
Time-related Internal Business Process measures
- Average manufacturing time for key products
- Manufacturing cycle efficiency for key processes
- Idle time at bottleneck operations
- Defective units produced at bottleneck operations
- Average reduction in setup time and processing time at bottleneck operations
Time-related Learning-and-Growth measures
- Employee satisfaction
- Number of employees trained in managing bottleneck operations
ROI Formula
Income/Investment = Income/Revenues x Revenues/Investment = Return on Sales x Investment Turnover
Residual Income formula
Income - (Required Rate of Return x Investment)
Economic Value Added formula
After-tax Operating Profit - [WACC x (Total Assets - Current Liabilities)]
Return on Sales formula
Income / Revenue
Total Assets Available
Includes all assets, regardless of their intended purpose
Total Assets Employed
Total assets available minus the sum of idle assets and assets purchased for future expansion
Financial perspective measure
Operating Income
Revenue Growth
Gross Margin %
Revenues from new products
ROI
EVA
Customer perspective examples
Market share
Customer-satisfaction ratings
Customer-retention ratio
Number of customer complaints
Internal Business Process measures (innovation)
Innovation
- Number of new products
- Number of new patents
- New product development time
Internal Business Process measures (operations)
- Yield
- Defect rate
- Setup time
Internal Business Process measures (post-sale service)
Time to repair or replace defective products
Hours of customer training
Learning and growth perspective
Employee education and skill level
Employee satisfaction ratings
Employee turnover rates
Info system availability
Prevention costs examples
Design engineering
Process engineering
Supplier evaluations
Quality training
Test of new materials
Appraisal cost examples
Inspection
Online product manufacturing and process inspection
Product testing
Internal failure costs examples
Spoilage
Rework
Scrap
Machine repairs
External failure costs examples
Customer support
Warranty repair costs
Liability claims
