Term
| Decentralized Organization |
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Definition
| Decision-making authority is spread throughout the organization rather than being confined to a few top executives. |
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Term
| Strongly Decentralized Organizations |
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Definition
| Lowest-level managers are empowered to make as many decisions as possible. |
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Term
| Advantages of Decentralized Organization |
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Definition
-Delegating to lower-level managers, so top managers can concentrate on bigger issues.
-Lower level managers making the decisions put the decision making in the hands of those who tend to have the most detailed and up-to date info about day-to-day operations.
-By eliminating layers of decision making and approvals, organizations can respond more quickly to customers and to changes in the operating environment.
-Granting decision-making authority helps train lower-level managers for higher-level positions.
-Empowering lower-level managers to make decisions can increase their motivation and job satisfaction. |
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Term
| Disadvantages of Decentralized Organizations |
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Definition
-Lower-level managers make decisions without fully understanding the big picture.
-It lower-level managers have objective that clash with the objective of the entire organization.
-Spending innovative ideas may be difficult. |
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Term
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Definition
| Manager has control over costs, but not over revenue or the use of investment funds. |
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Term
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Definition
Accounting
Finance
General Administration
Legal
Personnel |
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Term
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Definition
| Managers have control over both costs and revenue, but not over the use of investment funds. |
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Term
Profit Center Managers
(Cost Center) |
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Definition
| These managers are often evaluated by comparing actual profit to targeted or budgeted profit. |
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Term
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Definition
| Managers have control over cost revenue, and investments in operating assets. |
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Term
| Investment Center Managers |
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Definition
| These managers are often evaluated using return on investment (ROI) or residual income measures. |
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Term
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Definition
| Net Operating Income / Average Operating Assets |
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Term
| The higher a business segment's return on investment... |
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Definition
| The greater the profit earned per dollar invested in the segment's operating assets. |
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Term
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Definition
| Income before interest and taxes and is sometimes referred to as EBIT (earnings before interest and taxes) |
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Term
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Definition
| Includes cash, accounts receivable, inventory, plant and equipment, and all other assets held for operating purposes. |
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Term
| Examples that are NOT included in Operating Assets |
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Definition
Land held for future use
an investment in another company
a building rented to someone else |
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Term
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Definition
| Acquistion Cost - Accumulated Depreciation |
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Term
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Definition
| Most companies use this to calculate average operating assets. |
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Term
| Drawbacks of using Net Book Value |
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Definition
| An asset's net book value decreases over time as the accumulated depreciation increases. This decreases the denominator in the ROI calculation, thus increasing ROI. |
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Term
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Definition
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Term
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Definition
| Net Operating Income / Sales |
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Term
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Definition
| Sales / Average Operating Assets |
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Term
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Definition
| Improved by increasing selling prices, reducing operating expenses, or increasing unit sales. Increasing unit sales also increases the margin because of operating leverage. |
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Term
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Definition
-Managers may not know how to increase ROI
-A balanced scorecard can provide concrete guidance to managers, making it more likely that their actions are consistent with the company's strategy and reducing the liklihood that they will boost short-run performance at the expense of long-term performance.
-A manager who is evaluated based on ROI may reject investment opportunities that are profitable for the whole company but would have a negative impact on the manager's performance evaluation. |
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Term
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Definition
| An approach to measuring an investment center's performance. It is the net operating that an investment center earns above the minimum required return on its operating assets. |
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Term
| Disadvantages of Residual Income Approach |
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Definition
| This approach can't be used to compare the performance of divisions of different sizes. Larger divisions often have more residual income than smaller divisions, not necessarily because they are better managed but simply because they are bigger. |
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Term
| Why Companies would switch to Residual Income Approach |
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Definition
| The residual income approach encourages managers to make investments that are profitable for the entire company but that would be rejected by managers who are evaluated using the ROI formula. |
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Term
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Definition
| Net Operating Income - (Average Operating Assets x Minimum Required Rate of Return) |
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Term
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Definition
| An adaption of residual income that has been adopted by many companies. |
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Term
| Economic Value Added Objective |
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Definition
| To maximize the total amount of residual income or EVA, not to maximize ROI. |
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Term
| What will a manager who is evaluated based on ROI do to a project whose rate of return is below the division's current ROI? |
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Definition
| A manager should reject the project, even if the rate of return on the project is above the company's minimum required rate of return. |
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Term
| Operating Performance Measures |
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Definition
| While financial measures pick up the results of what people in the organization do, they do not measure what drives organizational performance. |
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Term
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Definition
| The amount of time from when a customer order is received to when the completed order is shipped. |
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Term
| What could be necessary for a companies survival? |
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Definition
| Cutting the delivery cycle time may give a company a key competitive advantage. |
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Term
Throughput Time
(Manufacturing Cycle) |
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Definition
| The amount of time required to turn raw materials into completed products. |
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Term
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Definition
Process Time
Inspection Time
Move Time
Queue Time |
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Term
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Definition
| The amount of time work is actually done on the product. |
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Term
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Definition
| Only one of the four activities of Throughout Time that actually adds value to the product. |
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Term
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Definition
| The amount of time spent ensuring that the product is not defective. |
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Term
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Definition
| The time required to move materials or partially completed products from workstation to workstation. |
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Term
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Definition
| The amount of time a product spends waiting to be worked on, to be moved, to be inspected, or to be shipped. |
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Term
| Manufacturing Cycle Efficiency (MCE) |
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Definition
| A calculation that puts a better perspective on Throughput Time. |
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Term
| Manufacturing Cycle Efficiency (MCE) |
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Definition
| This calculation is an effort to eliminate the non-value-added activities of inspecting, moving, and queuing. Some companies have reduced their throughput time to only a fraction of previous levels. This helps to reduce delivery time. |
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Term
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Definition
| Consists of an integrated set of performance measures that are derived from and support a company's strategy. |
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Term
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Definition
| Essentially a theory about how to achieve the organization's goals. |
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Term
| Example of Balanced Scorecard |
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Definition
| Offer an Operational Excellence customer value proposition that has three key components - low ticket prices, convenience, and reliability. |
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Term
| Performance Measures used in balanced scorecards tend to fall in the four groups: |
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Definition
1. Financial
2. Customer
3. Internal Business Processes
4. Learning and Growth |
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Term
Financial
(Balanced Scorecard) |
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Definition
-Appear at the top of the performance measures. Most companies exist to provide financial rewards to owners.
-Even non-profit orgs. must generate enough financial resources to stay in operation.
-These are not sufficient in themselves--they should be integrated with nonfinancial measures in a well-desined balance scorecard. |
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Term
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Definition
| Lag indicators that report on the results of the past. |
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Term
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Definition
| Who is ordinarily responsible for the financial performance measures--not lower-level managers. |
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Term
| Internal business Processes |
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Definition
| What the company does in an attempt to satisfy customers. |
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Term
| Why is Improving Business Processes necessary? |
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Definition
| To improve customer satisfaction |
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Term
| Why is Improving Customer Satisfaction is necessary? |
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Definition
| To improve financial results. |
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Term
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Definition
| The emphasis of Balanced Scorecard |
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Term
| Managers should carefully select performance measures for their own company's balanced scorecard, keeping these points in mind: |
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Definition
1. The performance measures should allow the strategy of the company.
2. The performance measures should be understandable and controllable to a significant extent by those being evaluated.
3. The scorecard should not have too many performance measures. This can lead to a lack of focus and confusion. |
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Term
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Definition
| This should consist of items the individual can personally influence that relate directly to the performance measures on the overall balanced scorecard. The performance measure on this should not be overly influenced by actions taken by other in the company or by events that are outside of the individual's control. |
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Term
| If a scorecard is correctly constructed then, |
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Definition
| The performance measures should be linked together on a cause-and-effect basis. Each link can then be read as a hypothesis in the form "If we improve this performance measure, then this other performance measure should also improve". |
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Term
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Definition
| How the company can take concrete actions to attain its desired outcomes. |
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Term
| Advantages of Balanced Scorecard |
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Definition
-It continually test the theories underlying management's strategy.
-Managers focus on trends in the performance measures over time. The emphasis is on progress and improvement rather than on meeting any specific standard.
-Without this feedback, the organization may drift on indefinitely with ineffective strategy based on faulty assumptions. |
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Term
| Robert Kaplan and David Norton |
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Definition
| The originators of the balanced scorecard concept point out, "Compansation is such a powerful lever that you have to be pretty confident that you have the right measures and have good data for the measures before making the link". |
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