UNIVERSITY OF PAVIA
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Performance Management Ch. 8 – The Strategy Implementa9on Mechanism Chiara Demar9ni [email protected] Master in Interna+onal Business and Economics !
Defini9on !
Strategy implementa9on encompasses the transla9on of strategic objec9ves into opera9onal objec9ves VALUE SHARING
STRATEGY IMPLEMENTATION
STRATEGY FORMULATION
The strategy implementa9on mechanism entails all the tools for an effec9ve opera9onaliza9on of organisa9onal strategic goals. PERFORMANCE MEASUREMENT
To effec9vely implement strategy, firms have to balance coordina9on and control. REWARDING SCHEME
STRATEGY EXECUTION
C. Demar9ni – Performance Management 2 Strategy implementa9on mechanisms Budge9ng Non-­‐financial performance measurement systems Target seLng Budge9ng iden9fies the opera9onal ac9vi9es through which the whole organisa9on can achieve its financial goals Non-­‐financial indicators clarifies which metrics are fundamental for organisa9onal the firm long-­‐
term viability Target performance informs the person responsible for each of the measures what is the desired level for a certain performance. 3 C. Demar9ni – Performance Management !
Responsibility Centre !
The organisa9onal structure allowing for the assignment and accountability for opera9onal ac9vi9es, non-­‐financial indicators and targeted performance is the responsibility centre VALUE SHARING
STRATEGY IMPLEMENTATION
STRATEGY FORMULATION
The Responsibility Centre is an “organiza9on unit that is headed by a manager who is responsible for its ac9vi9es” PERFORMANCE MEASUREMENT
REWARDING SCHEME
STRATEGY EXECUTION
COST CENTRE REVENUE CENTRE PROFIT CENTRE C. Demar9ni – Performance Management INVESTMENT CENTRE 4 Budgetary control !
Budgetary control involves both “planning translated into monetary terms” and “control: trying to shape the future” VALUE SHARING
STRATEGY IMPLEMENTATION
STRATEGY FORMULATION
Control on agent PERFORMANCE MEASUREMENT
Budgetary constraints REWARDING SCHEME
STRATEGY EXECUTION
C. Demar9ni – Performance Management Limit to the devia9ons from planned objec9ves Budgetary control benefits !
FORECASTING, i.e. the development of an economic forecast for the next period AUTHORIZING, i.e. the authorisa9on for the expenditure of money PLANNING, i.e. the quan9fica9on of commands to managers for execu9ng par9cular tasks which they are responsible for MEASURING, i.e. the seLng of a standard for controlling the legality of managers’ ac9ons and the degree of achievement of the set targets MOTIVATING, i.e. the assignment to managers of challenging, but achievable, tasks to be performed VALUE SHARING
COMMITMENT, i.e. managers’ par9cipa9on in budge9ng enhances their willingness to achieve targets STRATEGY IMPLEMENTATION
STRATEGY FORMULATION
REWARDING SCHEME
PERFORMANCE MEASUREMENT
DELEGATING COORDINATING, i.e. subordinates’ par9cipa9on in budge9ng increases the communica9on with superiors, and thus interdepartmental interac9on COMMUNICATING, i.e. budge9ng enhances the informa9on flows, systems and networks that ind together the overall M
performance C. Dbemar9ni – Performance anagement management STRATEGY EXECUTION
Budgetary control costs !
RIGIDITY Reduc9on in COOPERATION SHORT-­‐TERMISM VALUE SHARING
STRATEGY IMPLEMENTATION
GAMING STRATEGY FORMULATION
PERFORMANCE MEASUREMENT
REWARDING SCHEME
EMPLOYEE DEMOTIVATION STRATEGY EXECUTION
C. Demar9ni – Performance Management Master Budget !
Master budget is a budget that summarises and integrates all the individual budgets within an organiza9on. OPERATIONAL BUDGET •  Sales Budget •  Schedule of Expected Cash Receipts from •  Produc9on Budget Customers •  Direct Material Purchases •  Schedule of Expected Budget Cash Payments to •  Direct Labor Budget Suppliers •  Overhead Budget •  Cash Budget •  Selling and Administra9ve •  Budgeted Income Expenses Budget Statement •  Cost of Goods •  Budgeted Balance Sheet 8 Manufactured B
udget C. Demar9ni – Performance Management VALUE SHARING
STRATEGY IMPLEMENTATION
STRATEGY FORMULATION
REWARDING SCHEME
FINANCIAL BUDGET PERFORMANCE MEASUREMENT
STRATEGY EXECUTION
Master Budget Structure !
SALES BUDGET ENDING INVENTORY BUDGET DIRECT MATERIAL BUDGET SELLING & ADMINISTRATIVE EXPENSE BUDGET PRODUCTION BUDGET DIRECT LABOUR BUDGET MANUFACTURING OVERHEAD BUDGET COST OF MANUFACTURED GOODS BUDGET CASH BUDGET BUDGETED INCOME STATEMENT BUDGETED BALANCE SHEET 9 Sales Budget !
Total exp sales = 100,000 Jan % of annual sales Expected sales in unit Expected price Total budgeted revenues … Dec Year 5% 20% 100% 5,000 20,000 100,000 10 10 10 50,000 200,000 1,000,000 C. Demar9ni – Performance Management 10 Produc9on Budget !
Jan … Dec Year Budgeted sales in unit 5,000 + 20,000 + 100,000 + Desired ending inventory 1,000 = 4,000 = 13,000 = Total needs 6,000 -­‐ 24,000 -­‐ 113,000 -­‐ Beginning inventory 500 = 2,000 = 7,800 = Required produc9on 5,500 22,000 115,200 C. Demar9ni – Performance Management 11 Direct Material Budget !
Jan Dec Year 5,500 * 22,000 * 115,200 * 0.6 0.6 0.6 Raw material needed 3,300 + 13,200 + 69,120 + Expected inventory 1,200 = 4,500 = 45,000 = Total needs 4,500 -­‐ 17,700 -­‐ 114,120 -­‐ Beginning inventory 1,100 = 3,400 = 27,800 = Raw material to purchase 4,400 * 14,300 * 86,320 * Cost per unit 0.67 = 0.67 = 0.67 = Total cost for raw material 2,948 9,581 57,834.40 Required produc9on Raw material needed per unit … C. Demar9ni – Performance Management 12 Direct Labour Budget !
Jan Required produc9on Direct labour 9me per unit Total hours Direct labour cost/hour Direct labour cost … Dec Year 5,500 * 22,000 * 115,200 * 0.2 = 0.2 = 0.2 = 1,100 * 4,400 * 23,040 * 23 23 23 = 25,300 101,200 529,920 C. Demar9ni – Performance Management 13 Manufacturing Overhead Budget !
Jan … Dec Year Required produc9on Overhead manufacturing rate Variable overhead Insurance Amor9za9on … Total fixed overhead Total manufascturing overhead -­‐ Prepaid property tax -­‐ Prepaid insurance -­‐ Amor9za9on Cash ourlows for manufacturing overhead C. Demar9ni – Performance Management 14 Cost of Manufactured Goods Budget Jan … Dec !
Year Produc9on cost per unit Direct materials Direct labour Manufacturing overhead Unit product cost Budgeted finished goods inventory: Ending finished goods inventory in units Unit product cost Ending finished goods inventory (in €) Budgeted cost of goods sold Beginning finished goods inventory + Costs of goods manufactured -­‐ Ending inventory Budgeted cost of goods old (in €) – Performance Management C. Dsemar9ni 15 Selling and Administra9ve Budget Jan … Dec !
Year Budgeted sales * Variable selling & admin expense/unit = Variable selling & admin expenses + Bad debts + Warehouse rental = Total selling and administra9ve expenses -­‐ Bed debt expenses = Cash ourlows from S&A budget C. Demar9ni – Performance Management 16 Jan Cash Balance, beginning Add receipts: … Dec Year Cash Budget !
Collec9ons from customers Total cash available before financing Less disbursements: Direct materials Direct labour Manufacturing overhead Selling and administra9ve expenses Tax remiwance Tax payable Prepaid insurance Prepaid property and business tax Capital asset purchases Dividend payment Total disbursements Excess (deficiency) of cash over disbursements C. aDvailable emar9ni – Performance Management 17 Cash Budget !
C. Demar9ni – Performance Management 18 Cash Budget !
Jan … Dec Year Excess (deficiency) of cash available over disbursements Financing: Borrowing (at the beginning of the month) Repayment (at the end of the month) Interest expense (paid monthly) Total financing Cash balance, ending Running total C. Demar9ni – Performance Management 19 Income Statement !
Jan … Dec Year Sales Cost of goods sold Gross Margin Less: Selling & administra9ve expenses Net opera9ng income Less: Interest expense Net income before taxes Income taxes Net Income C. Demar9ni – Performance Management 20 Retained Earnings Statement !
Jan … Dec Year Retained earnings Retained earnings beginning of year Plus: Net Income Sub-­‐total Less: Dividends declared Retained earnings end of year C. Demar9ni – Performance Management 21 Jan Balance Sheet
Assets Cash
Accounts Receivable
… Dec Year Financial Statement !
Inventory: Raw Materials
Inventory: Finished goods
Prepaid Insurance
Prepaid Property and Business Tax
Capital assets (net)
Total Assets
Liabilities & Shareholder's Equity
Bank Loan Payable
Accounts payable
Income taxes payable
Shareholders' Equity
Capital stock
Retained earnings
Total Shareholders' equity
C. Demar9ni – Performance Management Total Liabilities & Shareholders'
Equity
22 Balance Sheet !
C. Demar9ni – Performance Management 23 Non Financial Performance Measures !
Non-­‐financial performance indicators play a central role in strategy implementa9on since they reflect the organisa+onal value drivers Non-­‐financial indicators highlight the extent to which strategy and opera9ons are aligned Budge9ng Non-­‐financial performance measurement systems Target seLng As managers’ +me and aCen+on is a scarce resource, they will choose to focus their awen9on toward those indicators which are more easily achievable C. Demar9ni – Performance Management 24 Target seLng !
Target seLng refers to the “legisla9ve” ac9vity of seDng performance standards Most of the literature on target seLng is related to the budgetary control element Budge9ng Non-­‐financial performance measurement systems Target seLng The target seLng literature mainly concerns issues psychological in nature, in that managers should feel targets as “9ght but achievable” C. Demar9ni – Performance Management 25 Target seLng !
Approaches to target seLng Budge9ng Non-­‐financial performance measurement systems Target seLng Management should be assigned with ‘Olympian Managers should feel targets’, i.e. very difficult targets as “+ght but targets that could be achievable” achieved by brilliant managers only C. Demar9ni – Performance Management 26 Commitment, target achievability and organiza9onal performance !
Budge9ng Non-­‐financial performance measurement systems Target seLng C. Demar9ni – Performance Management 27 Regularly discuss and agree ac9on plan. Design an ac9on plan with a provision of projects Budge9ng Review stakeholders expecta9ons Map organiza9on
al success TARGET-­‐SETTING WHEEL Priori9ze objec9ves Set targets Non-­‐financial performance measurement systems Analyse data Target seLng !
Clarify and select strategic objec9ves Collect data Opera9onali
ze (few, clear and effec9ve performance measures) C. Demar9ni – Performance Management 28