Management organizational performance

MOP

SESSION 2 - RESPONSIBILITY

Responsibility centre :

• A part, segment or subunit of an organization whose manager is accountable for a specified set of activities

Responsibility accounting :

• A system that measures the plans (by budgets) and actions (by actual results) of each responsibility centre

Responsibilities often expressed in quantities :

• Inputs consumed
• Physical units of output generated
• Characteristics of production or service process
• Financial indicators

4 main types of responsibility centres :

• Cost centres
• Revenue centres
• Profit centres
• Investment centres

COST CENTRES

1. Standard cost centers

• E.g. manufacturing departments
• Causal relation between costs and outputs
• Control exercised by comparing standard costs and the cost actually incurred

2. Discretionary cost centres

• E.g R&D, marketing, and administrative department
• Outputs are hard to measure in monetary terms and weak link between costs and outputs
• Control often exercised through budgeted cost limits

REVENUE CENTRES

• E.g. Marketing/sales unit (I.e. sales manager) or fundraising manager in not-for-profits
• Managers held accountable for generating revenues
• No serious attempt to relate revenue to costs. Often managers do not set selling prices nor are they charged for goods they market
• Most hold managers accountable for expenses

PROFIT CENTRES

• Managers accountable for a measure of profit = for revenue and cost
• Most derive profits from revenues generated from goods or services provided to other entities in the organization (transfer pricing)
• Non-financial measures also necessary (e.g. customer satisfaction)

=> music festival in North-America = Bannaroo / apart from ticket sales, includes 16 other profit centers = concessions, merchandise, paid showers

INVESTMENT CENTRES

• Relevant for top managers
• Managers accountable for items in :

• Income statement : revenue, cost of goods sold
• Balance sheet

• that is, accountable for accounting profits and in vestments made to generate those returns : relate profit to capital employed
• ROI and RI as popular measures

ADVANTAGES AND RISKS OF DECENTRALIZATION

PYTAGORA MOBILE APP SOLUTION

3 divisions = profit centres

Evaluated on the profit they generate / since charge customers each type fo service separately and on an hourly basis, we can easily identify the revenues attribuable to each division.

TRIPLEX CASE = consulting division has the burden to sell projects and to bear the costs of this sales work

COMAX CASE = lack of coordination /

• Responsibilities : all divisions responsible for winning customers and managing costs

• Consulting : not interested in also selling implementation projects and charged with cost for selling as well
• Graphics : held responsible for sales - but does not sell themselves to external customers
• App development = seek more external customers / + risk diversification of Pytagora if App Development and Graphic go out on market = safeguard against competition

• Coordination = no mechanism in place to coordinate capacity utilization
• Reliance on results control ; action controls useful for coordination (meeting) and firm growth

• Apple store = Revenue centre / investment centre = non car ne maîtrisent pas réellement leur asset / sur quoi la main ? Produits ? Marketing ?
• Microsoft’s XBox / GE renewable energy = à minima profit et à maxima investment si ce sont des divisions vraiment autonomes
• R&D centre at Danone = cost centre mais pas standard
• Communications centre = cost centre dans tous les cas / si relié l’input à l’output alors standard mais difficile de tracer dans les départements communication/marketing
• Amazon’s logistic department = standard

RESPONSIBILITIES

• Consltugn ;

• Incentives
• When winning project
• When work for app

Graphic = cost center (have never sold themselves to external customers)

App development and graphic design seeking external customers

• Risk diversification

COORDINATION

• Planning (action control)
• Weekly meeting (people control)
• Outil de CRM (action control)

WRAP UP

1. Start-ups need to scale up and executives need to delegate responsibility
2. Somewhere, there might be unintended consequences of decentralization
3. The role of CEO in decentralized organizations ? Define and coordinate strategy = management by expiation
4. The new design is based on results control (return, profit) but need to add some action controls (planning?) and people controls as well (to motivate them to work as one)
5. How to sell service from one profit center to another (e.g. consulting too app development)… we will learn about next class

SESSION 3 : TRANSFER PRICING

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