2- 1  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young The Organization as a System of Activities Chapter 2

2- 2  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Introduction u Mike’s Custom Windows was a small regional supplier that traditionally competed on both quality and price. u Large chains were improving quality and lowering prices.

2- 3  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Introduction u Retailers were carrying large inventories. u They did not complain because the products purchased from the large chains provided high margins. u Three years of increasing losses convinced Mike’s organization that it had two choices. 1 Change the way it did business 2 Get out of the business

2- 4  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Introduction u Mike’s realized that it needed to refocus itself and to develop a competitive advantage that was sustainable. u Management realized that the firm had two major strengths: 1 Highly committed workforce 2 Detailed knowledge of the local business u After reading this chapter, you will…

2- 5  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Learning Objectives 1 Understand how organizations define objectives and use these objectives to define operating priorities. 2 Understand the insights gained when we think of the organization as a sequence of activities in a value chain.

2- 6  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Learning Objectives 3 Understand how performance measures help organization members manage the value chain. 4 Understand the process that organizations can use to reduce costs by focusing on activity performance.

2- 7  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Learning Objective 1 Understand how organizations define objectives and use these objectives to define operating priorities.

2- 8  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young The Nature of the Organization’s Objectives u Strategy is choosing target customers and deciding how to serve those customers. u Strategic choices are made within the context of the objectives that the organization’s principals have set. u Customers provide the organization’s primary focus.

2- 9  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young The Nature of the Organization’s Objectives u Decision makers design the operating systems or sequence of activities that the organization will use. u This sequence of activities is comprised of the linked set of activities (value chain) that is used to deliver goods or services to the target customers.

2- 10  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young The Nature of the Organization’s Objectives u What is a performance measurement system? u It is a system of integrated measures developed by organizations to assess the performance of the value chain.

2- 11  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young The Nature of the Organization’s Objectives u What is the primary objective of most profit-seeking organizations? u To provide its shareowners with a return on investment. u What are some of the needs of profit- seeking organizations? – shareholders who provide capital

2- 12  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young The Nature of the Organization’s Objectives – customers who provide the funds needed to continue operations – dedicated employees who design and manage the process that make and deliver their products to their target customers – organization partners who provide insights that these organizations need to achieve their objectives

2- 13  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young The Nature of the Organization’s Objectives u What is the primary objective of a not-for- profit organization? u To provide the greatest level of service to its target community or client for a given level of cost.

2- 14  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young The Nature of the Organization’s Objectives u What are some of the needs of not-for-profit organizations? – target communities whose needs they are trying to meet – dedicated employees – organization partners who include all the outside organizations or individuals that an organization deals with in order to achieve its objectives

2- 15  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young The Nature of the Organization’s Objectives u All organizations must design and operate processes that meet the laws and expectations of the broader community. u Who are stakeholders? u The people, group, or institutions who define an organization’s success or who can affect its ability to achieve its objectives.

2- 16  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young The Nature of the Organization’s Objectives Stakeholder Groups Organization Partners Customers Employees Owners or Principals General Community

2- 17  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Strategic Planning Elements Pool of Potential Customers Target Customers Customers’ Objectives Organization Objectives Process Design and Objectives

2- 18  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Strategic Planning Elements Process Design and Objectives PartnersEmployeesCommunity

2- 19  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young The Three Levels of Strategy Organizational Level Business Level Operational Level

2- 20  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young The Three Levels of Strategy u What is organization level strategy making? u It is the activity of choosing what business the organization is in. u An organization must have focus, so that it can learn to do the things it needs to do well to be successful. u Synergy occurs when a group of activities operating together accomplish more than they can individually.

2- 21  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young The Three Levels of Strategy u What is business level strategy making? u It is choosing the organization’s target customers and the broad approach it will take to meet their needs. u The organization must identify the customers whose requirements it is best able to meet. u The value proposition is what the organization promises its target customers.

2- 22  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young The Three Levels of Strategy u What is operational level strategy making? u It is the way the organization will pursue its business level strategy. u There are two characteristics of effective operational level strategy. 1 The strategy must deliver the organization’s value proposition. 2 The strategy must reflect the organization’s strengths.

2- 23  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Learning Objective 2 Understand the insights gained when we think of the organization as a sequence of activities in a value chain.

2- 24  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young The Organization as a Sequence of Activities or a Value Chain Administrative Activities Processing Activities Making Moving Storing Inspecting Internal Support Personnel Finance Legal Accounting Research

2- 25  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young The Organization as a Sequence of Activities or a Value Chain Production Activities Input Activities Product design Process design Purchasing Receiving Hiring Training Processing Activities

2- 26  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young The Organization as a Sequence of Activities or a Value Chain Sales and Post-sales Activities Output Activities Processing Activities Selling Shipping Service

2- 27  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young The Organization as a Sequence of Activities or a Value Chain u It is useful to think of an organization as a sequence of activities whose output is a good or service. u This sequence of activities is also known as a value chain. u Each step in the chain should contribute more to the ultimate value of the product that its cost.

2- 28  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young The Organization as a Sequence of Activities or a Value Chain u How are activities defined? u An activity is a unit of work, or task, with a specific goal. u Activities are important because they create costs. u What are the four broad classes of activities in the value chain?

2- 29  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young The Organization as a Sequence of Activities or a Value Chain 1 Customer management activities 2 Innovation activities 3 Operations activities 4 Service activities

2- 30  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Focusing the Value Chain u The firm’s target group of customers has specific expectations about the product’s price, quality, and service characteristics. u Price refers to the lifetime cost of the product to the customer and includes: – purchase price – operating costs – maintenance and disposition costs

2- 31  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Focusing the Value Chain u Quality refers to how well the product’s operating characteristics conform to what the organization promises customers. u Quality refers to conformance to specification and not to product service features.

2- 32  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Focusing the Value Chain u Service includes the product’s tangible features such as… – performance – taste – functionality

2- 33  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Focusing the Value Chain u Service also include the product’s intangible features such as the way customers are treated … – before the purchase decision – during the decision – after the decision

2- 34  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Focusing the Value Chain What the Customer Wants What the Customer is Promised What the Customer is Given Service Gap Quality Gap

2- 35  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Learning Objective 3 Understand how performance measures help organization members manage the value chain.

2- 36  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Organization and Process Control u Organization control is the activity of ensuring that the organization is on track toward achieving its objectives. u What are the four components of organization control? 1 Specifying objectives 2 Communicating objectives to organization members

2- 37  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Organization and Process Control 3 Monitoring performance relating to objectives 4 Acting on discrepancies between actual and target performance

2- 38  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Organization and Process Control u Process, or operations, control is the activity of assessing the ability of each unit in the value chain to meet the requirements of the organization’s target customers. u Process control … – measures and compares short-term performance to short-run targets or standards.

2- 39  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Performance Measurement and Management Accounting u Performance measurement can evaluate the performance of a single activity or the entire value chain. u What does an effective system of operations performance measurement includes? 1 Considers activities from the customer’s perspective

2- 40  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Performance Measurement and Management Accounting 2 Evaluates each activity using customer- validated measures of performance 3 Considers all facets of activity performance that affect customers and are therefore comprehensive 4 Provides feedback

2- 41  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Reflecting the Customer Perspective u The firm’s performance measures should communicate and summarize the things that are critical to the organization’s success in meeting the requirements of its target customers. u Organizations should systematically measure what their target customers want and value.

2- 42  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Reflecting the Customer Perspective u What are customer-validated performance measures? u These are measures that reflect customer requirements and help employees manage the value chain’s processes and activities. u Employees concentrate their attention on improving what matters to the customer.

2- 43  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Using the Customer’s Validation u Performance measures should be external, or customer validated, rather than internal to the organization. u They should reflect an understanding of the difference between the output and outcome of activities.

2- 44  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Using the Customer’s Validation u An input is what the organization puts into a process. u An output is a physical measure of activity. u An outcome is what the customer values as the result of the activity.

2- 45  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Using the Customer’s Validation Process are activities which transform resources into outputs Outcomes are how the customer values the result of the activity Inputs are resources used in activities Outputs are physical measures of activity

2- 46  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Reflecting Comprehensive Information u An effective program of performance measurement assesses all facets of relevant performance. u Relevant but unmeasured facets of performance must not be traded for performance on measured facets.

2- 47  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Providing Feedback u An effective performance measurement program will help the people who manage the value chain identify problems and suggest solutions.

2- 48  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Performance Measures as Aids in Operations Control u Control may be exercised by… u Ensuring compliance with standard operating procedures (task control). u Motivating people to be creative in meeting customer objectives (results control).

2- 49  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Performance Targets u How do organizations set process performance targets? – Some are based on estimated potential. – Some are based on improving performance. – Some are based on what the “best in the class” are doing. – Choose targets that meet or exceed customer expectations.

2- 50  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Performance Targets u Benchmarking is the process of studying and adapting the best practices of other organizations in order to improve the firm’s own performance.

2- 51  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Learning Objective 4 Understand the process that organizations can use to reduce costs by focusing on activity performance.

2- 52  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Cost as a Process Performance Measure u There are three types of process performance measures… – cost – quality – service u Historically, management accounting emphasized cost.

2- 53  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Cost as a Process Performance Measure u In the past, cost information supported a process called managing by the numbers. u What are some problems with managing by the numbers? – Ineffective – Assumes cost to be the only relevant measure of performance – Does not recognize the reasons for costs

2- 54  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Cost as a Process Performance Measure u What is life cycle costing? u It is a systematic consideration of product’s costs during the product’s lifetime: – Development costs and introduction costs – Production costs – Distribution costs – After-sales and take-back costs – Product abandonment costs

2- 55  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Understanding the Causes of Costs u Improving cost performance requires an examination of the need, efficiency, and effectiveness of existing activities and any new activities over the total life cycle of the product or service.

2- 56  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Identifying and Developing Information About Activities u Activity data helps identify problems, and in many cases suggests how to solve them. u Organizations can reduce costs by eliminating the need for activities. u Costs can also be reduced by improving the performance of existing activities. u Re-engineering describes the process of finding and eliminating activities.

2- 57  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Efficient and Inefficient Activities and Cost Performance u Efficient means that the performance of the activity consumes no excess resources. u Inefficient means that the performance of the activity requires more resources than necessary to produce the desired outcome. u Variances are the differences between planned and actual costs. u Variances do not suggest the causes of the costs.

2- 58  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Activity or Value Analysis u What is activity analysis? u It is an approach to operations control also know as value analysis or activity based management. u An activity is any discrete task that an organization undertakes to make or deliver a product or service.

2- 59  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Activity or Value Analysis u What are the steps in activity analysis? 1 Identify the process objectives. 2 Chart the activities used to complete the product or service. 3 Classify activities. 4 Continuously improve. 5 Whenever possible, eliminate activities.

2- 60  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young Conclusion u What did Mike do to change the way he did business? u Mike decided that the business needed to focus on flexibility and service. u Flexibility and service was to be its value proposition. u Flexibility meant more styles and sizes, and service meant prompt delivery.

2- 61  2001 Prentice Hall Business Publishing Management Accounting, 3rd ed., Atkinson, Banker, Kaplan, and Young End of Chapter 2