Designing high-performance jobs

Tales of great strategies derailed by poor execution are all too common. That's because some organizations are designed to fail. For a company to achieve its potential, each employee's supply of organizational resources should equal the demand, and the same balance must apply to every business unit and to the company as a whole. To carry out his or her job, each employee has to know the answers to four basic questions: What resources do I control to accomplish my tasks? What measures will be used to evaluate my performance? Who do I need to interact with and influence to achieve my goals? And how much support can I expect when I reach out to others for help? The questions correspond to what the author calls the four basic spans of a job-control, accountability, influence, and support. Each span can be adjusted so that it is narrow or wide or somewhere in between. If you get the settings right, you can design a job in which a talented individual can successfully execute on your company's strategy. If you get the settings wrong, it will be difficult for an employee to be effective. The first step is to set the span of control to reflect the resources allocated to each position and unit that plays an important role in delivering customer value. This setting, like the others, is determined by how the business creates value for customers and differentiates its products and services. Next, you can dial in different levels of entrepreneurial behavior and creative tension by widening or narrowing spans of accountability and influence. Finally, you must adjust the span of support to ensure that the job or unit will get the informal help it needs.     

CONTRACTING FOR VALUE: EVA AND THE ECONOMICS OF ORGANIZATIONS

EVA becomes more difficult to apply the farther down in the company you go, especially in organizations with more traditional “functional” designs. Because centralized functions are not independent self-contained entities with direct control over their own revenues, costs, and capital, the performance measures used to evaluate them are necessarily incomplete; they reveal only part of the picture. For example, Marketing may increase sales and operating income—the measures on which it is evaluated—but at the same time drive excessive use of capital in the Manufacturing plants. Manufacturing may reduce unit cost through long production runs, thereby minimizing changeovers and setups, but create excess inventory in the process. Costreducing measures could also lead to declining quality and customer satisfaction, ultimately eroding the company's reputation. In short, each critical function influences results in other parts of the company, and focusing only on activities under a manager's direct control can result in myopic and misleading measures of performance. In organizing key processes as internal EVA Centers, joint costs and benefits shared by different corporate functions or business units can be built into financial measures in a way that encourages collaboration. As one example, a firm can attempt to replicate market forces internally by requiring each marketing region to contract for capacity with the internal manufacturing group. In a traditional management system, Marketing reserves (and relinquishes) manufacturing capacity at no cost; the consequence is excessive demand for resources. An internal pricing mechanism that requires Marketing to pay a fee for capacity will force its managers to assess trade-offs as if it were contracting with an outside party. Such a system effectively requires that functional managers take a more company-wide view of their responsibilities. By including the cost of capital, it forces managers to define costs more carefully. By including the impacts on other functions, it also forces a broader definition of costs. And by using multi-year contracts among different divisions, the framework extends the time horizon over which costs and benefits matter.     

Instructional case: Blue Ridge Revisited—Integrating ABC and OROS Quick® software

Blue Ridge Manufacturing Company produces customized towels for the US sports market. Recently, competitive pressures motivated the company to institute an activity-based costing (ABC) system for allocating manufacturing support costs to its major product lines. Management is pleased with the manufacturing cost information that the ABC system is providing and is beginning to use the ABC data to drive process improvements. To secure additional gains, management is now interested in conducting a customer profitability analysis. Currently, the company allocates its Selling, General, and Administrative (SG&A) costs to products and/or customers on the basis of sales volume (units). The question posed to you, in your role as a member of a team of managerial accountants, is whether the SG&A costs can be more accurately assigned to customer groups (“large,” “medium,” and “small,” as determined by sales volume). To this end, you have been asked to build and interpret the results of an ABC model that assigns SG&A costs to each of these three customer groups. Blue Ridge has recently implemented a new software system that includes an ABC module (called OROS Quick®), which you will use to build your cost assignment model and to respond to a number of managerial questions based on the cost analysis you perform.     

Getting the most out of all your customers

Companies spend billions of dollars on direct marketing, targeting individual customers with ever more accuracy. Yet despite the power of the myriad data-collecting and analytical tools at their disposal, they're still having trouble optimizing their direct-marketing investments. Many marketers try to minimize costs by pursuing only those customers who are cheap to find and cheap to keep. Others try to get the most customers they possibly can and keep all of them for as long as they can. But a customer need not be loyal to be highly profitable, and many loyal customers turn out to be highly unprofitable. Companies can get more out of direct marketing if they see it as a single system for generating profits than if they try to maximize performance measures at each stage of the process. This article describes a tool for doing just that. Called ARPRO (Allocating Resources for Profits), the tool is essentially a complex regression analysis that can estimate the impact of a company's direct-marketing investments on the profitability of its customer pool. With data that companies already gather, the tool can show managers how much to spend on acquisition versus retention and even what percentage of their funds they should allocate to the different direct-marketing channels. Using the model, companies can easily see that even small deviations from the optimal levels of customer profitability are expensive. Applying it to one catalog retailer showed, for instance, that a 10% reduction in marketing costs would lead to a 1.8 million dollar drop in long-term customer profits. Conversely, spending 69% less on marketing would actually increase average customer profitability at one B2B service provider by 42%. What's more, the tool can show that finding the optimal balance between investments in acquisition and retention can be more important than finding the optimum amount to invest overall.     

Pricing and the psychology of consumption

Most executives know how pricing influences the demand for a product, but few of them realize how it affects the consumption of a product. In fact, most companies don't even believe they can have an effect on whether customers use products they have already paid for. In this article, the authors argue that the relationship between pricing and consumption lies at the core of customer strategy. The extent to which a customer uses a product during a certain time period often determines whether he or she will buy the product again. So pricing tactics that encourage people to use the products they've paid for help companies build long-term relationships with customers. The link between pricing and consumption is clear: People are more likely to consume a product when they are aware of its cost. But for many executives, the idea that they should draw consumers' attention to the price that was paid for a product or service is counterintuitive. Companies have long sought to mask the costs of their goods and services in order to boost sales. And rightly so--if a company fails to make the initial sale, it won't have to worry about consumption. So to promote sales, health club managers encourage members to get the payment out of the way early; HMOs encourage automatic payroll deductions; and cruise lines bundle small, specific costs into a single, all-inclusive fee. The problem is, by masking how much a buyer has spent on a given product, these pricing tactics decrease the likelihood that the buyer will actually use it. This article offers some new approaches to pricing--how and when to charge for goods and services--that may boost consumption.     

基于作业成本法的高校学生培养成本计量研究

本文采用作业成本法的基本原理,将学校各单位之功能加以区别,依作业活动分摊各项成本。通过构建多阶段的作业成本模型,来辨别、测算各种教育投入要素成本,了解成本发生之原因,最终提供学校、政府、家长等社会各有关方面进行教育决策所需要的教育成本信息。     

The adoption of total cost of ownership for sourcing decisions––a structural equations analysis

This study investigates the adoption of total cost of ownership (TCO) analysis to improve sourcing decisions. TCO can be seen as an application of activity based costing (ABC) that quantifies the costs that are involved in acquiring and using purchased goods or services. TCO supports purchasing decision-makers in focusing on total value received and not simply price, and it extends ABC concepts and tools to an inter-organizational context. Based on ABC-adoption literature and focus-group discussions with senior purchasing executives, a model is developed to explain relationships among eight constructs hypothesized to explain TCO adoption: competitive pressure in customer markets, strategic purchasing orientation, top management support, functional management commitment, value analysis experience, adequacy of TCO information, success of TCO initiatives, and use of TCO-based review and reward systems. We test this model using multi-sample structural equation modeling on survey data collected from purchasing managers and plant maintenance managers. We find support for most of our hypotheses and, further, that the posited relationships are largely invariant across purchasing manager and plant maintenance manager perspectives.     

Proprietary Costs and the Disclosure of Information About Customers

In deciding how much information about their firms’ customers to disclose, managers face a trade off between the benefits of reducing information asymmetry with capital market participants and the costs of aiding competitors by revealing proprietary information. This paper investigates the determinants of managers’ choices to disclose information about their firms’ customers using a comprehensive data set of customer‐information disclosures over the period 1976–2006. We find robust evidence in support of the hypothesis that proprietary costs are an important factor in firms’ disclosure choices regarding information about large customers.     

How Fidelity invests in service professionals

If you're in the business of service delivery, investment in the training and development of your staff is one of the keys to your company's success. But what's the best way to design and implement your investment? In 1994, Fidelity Institutional Retirement Services Company (FIRSCo) needed to ensure that its rapidly expanding staff maintained the company's high levels of customer satisfaction. The solution, according to Ellyn McColgan, formerly an executive vice president of FIRSCo and now the president of Fidelity Investments Tax-Exempt Services Company, was to reach out to its service associates with a powerful new model for training and development called Service Delivery University. SDU is a virtual university with a content-based core curriculum and five colleges that focus on business concepts and skills. It is driven by three principles. First, all training must be directly aligned with the company's strategic and financial objectives and focused on customer needs. Second, service delivery is a profession and should be taught as such. And finally, professional development should be the primary responsibility of line managers rather than the human resources department. McColgan explains how FIRSCo overcame resistance to this sweeping change in employee education. (Time was one obstacle: each associate receives 80 hours of training per year.) In addition, the author discusses the fine art of measuring the success of a program like SDU. She finds that the company's investment has paid dividends to the staff, to the organization as a whole, and to FIRSCo's customers.     

STRATEGIC PERFORMANCE MEASUREMENT SYSTEMS: TRANSLATING STRATEGY INTO RESULTS

A large and growing number of companies worldwide are adopting strategic performance measurement (SPM) systems to help them execute their business strategies. SPM systems use some combination of financial, strategic, and operating measures to evaluate management's success in improving operating efficiency and adding value for shareholders. In many cases, the SPMs also provide the primary basis for rewarding top management, divisional operating managers, and, increasingly, rank‐and‐file employees. Some SPM systems are based entirely on a financial measure like economic value added (or EVA), which encourages managers to consider the opportunity cost of investor capital in making all operating and investment decisions. Other systems are based heavily on nonfinancial considerations, such as the balanced scorecard's emphasis on customer and employee satisfaction, operational excellence, and new product introduction. In this article, the author uses the findings of his recent survey of 113 North American and European companies to shed light on a number of questions: What are the most popular measures in such systems—are they primarily financial, nonfinancial, or amix of the two? To what extent is incentive compensation tied to such measures—and how far down in the organization are such measures (and incentives) extended? What are the most formidable challenges to implementing SPM systems in large corporations, with often diverse collections of businesses and tens if not hundreds of thousands of employees? Among the article's most notable conclusions, a majority of companies expect in the next three years to publish SPM targets and results in their annual reports. The most commonly cited financial SPMs will be cash flow, return on capital employed, and other variations of EVA. The most frequently cited nonfinancial SPMs are customer satisfaction, market share, and new product development. The greatest challenge in implementing SPMs is translating the vision and strategic objectives at the corporate level into performance measures that are relevant to activities at the business unit level, and securing buy‐in from business unit managers and employees.     

Corporate redemption and the seven deadly sins

Competitive purgatory is the sorry state of too many formerly proud U.S. corporations. They are languishing from the devastating effects of seven familiar sins: inconsistent product quality; slow response to the marketplace; lack of innovative, competitive products; uncompetitive cost structure; inadequate employee involvement; unresponsive customer service; and inefficient resource allocation. To make matters worse, the maladies are mostly management-induced, and the remedies most managers are employing-shifting strategy, reallocating resources, focusing on operations--are proving ineffective. The cures don't address the cause of the disease: negative, risk-averse, bureaucratic work environments that flourished in decades of easy growth but today are undermining competitive performance. What's needed is a total reinvention of the soft side of the organization to produce a work environment that stresses speed, Spartanism, innovation, and marketplace focus. First, top managers must decide what their company stands for and convince their employees of this uniqueness. Second, they must set standards that drive their business to worldclass levels and be tough about enforcing and raising them. Third, they must push constantly to ensure that enough innovations take place to change the company's future significantly. Three other factors are crucial: the right talent, an effective reward system, and CEOs who can drive the desired changes personally. Creating a dynamic work environment is not easy: it takes perseverance, flexibility, and commitment. But these efforts will pay off: how people tackle problems, work together, and think about their jobs are the activities that make a company great.     

Managing the right tension

Of all the competing objectives every company faces, three pairs stand out: profitability versus growth, the short term versus the long term, and the whole organization versus the units. In each case, progress on one front usually comes at the expense of progress on the other. The authors researched the performance of more than 1000 companies worldwide over the past two decades and found that most struggle to succeed across the three tensions. From 1983 to 2003, for example, only 32% of these companies more often than not achieved positive profitability and revenue growth at the same time. The problem, the authors discovered, is not so much that managers don't recognize the tensions--those are all too familiar to anyone who has ever run a business. Rather, it is that managers frequently don't focus on the tension that matters most to their company. Even when they do identify the right tension, they usually make the mistake of prioritizing a "lead" objective within it-for example, profitability over growth. As a result, companies often end up moving first in this direction, then in that, and then back again, never quite resolving the tension. The companies that performed best adopted a very different approach. Instead of setting a lead objective, they looked at how best to strengthen what the two sides of each tension have in common: For profitability and growth,the common bond is customer benefit; for the short term and the long, it is sustainable earnings; and for the whole and its parts, it is particular organizational resources and capabilities. The authors describe how companies can select the right tension, what traps they may fall into when they focus on one side over the other, and how to escape these traps by managing to the bonds between objectives.     

The sales force as an information transfer mechanism for new service development in the Thai insurance industry

New service development (NSD) is becoming increasingly important as the insurance industry in many countries opens up and becomes more competitive. This paper examines how customer views are integrated into the NSD process in the Thai insurance industry. The qualitative research was conducted using in-depth interviews with top officers, sales managers, senior vice-presidents of marketing and actuary managers in a number of leading life insurance and non-life insurance companies. The interviews investigated how NSD works in the Thai industry, focusing on how customer views enter the process. The results showed that the NSD process in Thailand is not oriented towards developing truly innovative products, but there is much NSD for adaptation of products from other markets. Sales agents act as a main information transfer mechanism, bringing in customer views through the sales managers, who play a role in NSD. Lack of cross-functional teamwork can cause failure in developing new products and services.     

What is a global manager?

To compete around the world, a company needs three strategic capabilities: global-scale efficiency, local responsiveness, and the ability to leverage learning worldwide. No single "global" manager can build these capabilities. Rather, groups of specialized managers must integrate assets, resources, and people in diverse operating units. Such managers are made, not born. And how to make them is--and must be--the foremost question for corporate managers. Drawing on their research with leading transnational corporations, Christopher Bartlett and Sumantra Ghoshal identify three types of global managers. They also illustrate the responsibilities each position involves through a close look at the careers of successful executives: Leif Johansson of Electrolux, Howard Gottlieb of NEC, and Wahib Zaki of Procter & Gamble. The first type is the global business or product-division manager who must build worldwide efficiency and competitiveness. These managers recognize cross-border opportunities and risks as well as link activities and capabilities around the world. The second is the country manager whose unit is the building block for worldwide operations. These managers are responsible for understanding and interpreting local markets, building local resources and capabilities, and contributing to--and participating in--the development of global strategy. Finally, there are worldwide functional specialists--the managers whose potential is least appreciated in many traditional multinational companies. To transfer expertise from one unit to another and leverage learning, these managers must scan the company for good ideas and best practice, cross-pollinate among units, and champion innovations with worldwide applications.     

Paying People to Lie: the Truth about the Budgeting Process

This paper analyzes the counterproductive effects associated with using budgets or targets in an organisation's performance measurement and compensation systems. Paying people on the basis of how their performance relates to a budget or target causes people to game the system and in doing so to destroy value in two main ways: (a) both superiors and subordinates lie in the formulation of budgets and, therefore, gut the budgeting process of the critical unbiased information that is required to coordinate the activities of disparate parts of an organisation, and (b) they game the realisation of the budgets or targets and in doing so destroy value for their organisations. Although most managers and analysts understand that budget gaming is widespread, few understand the huge costs it imposes on organisations and how to lower them. My purpose in this paper is to explain exactly how this happens and how managers and firms can stop this counter‐productive cycle. The key lies not in destroying the budgeting systems, but in changing the way organisations pay people. In particular to stop this highly counter‐productive behaviour we must stop using budgets or targets in the compensation formulas and promotion systems for employees and managers. This means taking all kinks, discontinuities and non‐linearities out of the pay‐for‐performance profile of each employee and manager. Such purely linear compensation formulas provide no incentives to lie, or to withhold and distort information, or to game the system. While the evidence on the costs of these systems is not extensive, I believe that solving the problems could easily result in large productivity and value increases – sometimes as much as 50–100% improvements in productivity. I believe the less intensive reliance on such budget/target systems is an important cause of the increased productivity of entrepreneurial and LBO firms. Moreover, eliminating budget/target‐induced gaming from the management system will eliminate one of the major forces leading to the general loss of integrity in organisations. People are taught to lie in these pervasive budgeting systems because if they tell the truth they often get punished and if they lie they get rewarded. Once taught to lie in this system people generally cannot help but extend that behaviour to all sorts of other relationships in the organisation.     

Is your company ready for one-to-one marketing?

One-to-one marketing, also known as relationship marketing, promises to increase the value of your customer base by establishing a learning relationship with each customer. The customer tells you of some need, and you customize your product or service to meet it. Every interaction and modification improves your ability to fit your product to the particular customer. Eventually, even if a competitor offers the same type of service, your customer won't be able to enjoy the same level of convenience without taking the time to teach your competitor the lessons your company has already learned. Although the theory behind one-to-one marketing is simple, implementation is complex. Too many companies have jumped on the one-to-one band-wagon without proper preparation--mistakenly understanding it as an excuse to badger customers with excessive telemarketing and direct mail campaigns. The authors offer practical advice for implementing a one-to-one marketing program correctly. They describe four key steps: identifying your customers, differentiating among them, interacting with them, and customizing your product or service to meet each customer's needs. And they provide activities and exercises, to be administered to employees and customers, that will help you identify your company's readiness to launch a one-to-one initiative. Although some managers dismiss the possibility of one-to-one marketing as an unattainable goal, even a modest program can produce substantial benefits. This tool kit will help you determine what type of program your company can implement now, what you need to do to position your company for a large-scale initiative, and how to set priorities.     

Manage marketing by the customer equity test

Managers have recently begun to think of good marketing as good conversation, as a process of drawing customers into progressively more satisfying relationships with a company. And just as the art of conversation follows two steps--first striking up a conversation with a likely partner and then maintaining the flow--so the new marketing naturally divides itself into the work of customer acquisition and the work of customer retention. But how can managers determine the optimal balance between spending on acquisition and spending on retention? Robert Blattberg and John Deighton use decision calculus to help managers answer that question. That is, they ask managers to approach the large, complex problem through several smaller, more manageable questions on the same topic. Then they use a formal model to turn those smaller judgments into an answer to the larger question. The ultimate goal, the authors say, is to grow the company's customer equity the sum of all the conversations-to its fullest potential. Recognizing that managers must constantly reassess the spending points determined by the decision-calculus model, the authors also provide a series of guidelines and suggestions to help frame the issues that affect acquisition, retention, and customer equity. When managers strive to grow customer equity rather than a brand's sales or profits, they put a primary indicator of the health of the business at the fore front of their strategic thinking: the quality of customer relationships.     

Activity-Based Pricing in a Monopoly

In this article, I study the interaction between cost accounting systems and pricing decisions in a setting where a monopolist sells a base product and related support services to customers whose preference for support services is known only to them. I consider two pricing mechanisms—activity‐based pricing (ABP) and traditional pricing—and two cost‐accounting systems—activity‐based costing (ABC) and traditional costing, for support services. Under traditional pricing, only the base product is priced, whereas support services are provided free because detailed cost‐driver volume information on the consumption of support services by each customer is unavailable. Under ABP, customers pay based on the quantities consumed of both the base product and the support services because detailed cost‐driver volume information is available for each customer. Likewise, under traditional costing for support services the firm makes pricing decisions on cost signals that are noisier than they are under ABC. I compare the equilibrium quantities of the base product and support services sold, the information rent paid to the customers, and the expected profits of the monopolist under all four combinations of cost‐driver volume and cost‐driver rate information. I show that ABP helps reduce control problems, such as moral hazard and adverse selection problems, for the supplier and increases the supplier's ability to engage in price discrimination. I show that firms are more likely to adopt ABP when their customer base is more diverse, their customer support costs are more uncertain, their costing system has lower measurement error, and the variable costs of providing customer support are higher. Firms adopt ABC when their cost‐driver rates for support services under traditional costing are noisier measures of actual costs relative to their cost‐driver rates under ABC and when the actual costs of support services are inherently uncertain. I also show that cost‐driver rate information and cost‐driver volume information for support services are complements. Although the prior literature views ABC and activity‐based management (ABM) as facilitating better decision making, I show that ABC and ABP (a form of ABM) are useful tools for addressing control problems in supply chains.     

Factors influencing the performance of activity based costing teams: a field study of ABC model development time in the automobile industry

This paper examines how the group dynamics of activity based costing (ABC) development teams and the level of organizational resources devoted to model development affect model complexity and development time. A theoretical framework is developed based on the organizational literature on teams. The framework is tested using objective data from 18 ABC projects in two automobile manufacturing firms and survey data from ABC team members. Results show that ABC team cohesion is the key determinant of the time it takes to develop the first ABC model. Further, ABC models become more complex in the presence of an external consultant and as the level of competition increases.     

Smart customers, dumb companies

Customers today are being bombarded with an overwhelming array of choices. To alleviate customer frustration, say Steven Cristol and Peter Sealey in Simplicity Marketing, companies should stop creating new brands and product extensions. Better to consolidate product and service functions by following a four R approach: replace, repackage, reposition, and replenish. That's an outmoded, dictatorial view of markets, says Christopher Locke. Far from being stymied by choices, customers are rapidly becoming smarter than the companies that pretend to serve them. In this networked economy, people are talking among themselves, and that changes everything. Locke predicts we'll see a growing number of well-defined micromarkets--groups of customers converging in real time around entertaining and knowledgeable voices--such as NPR's car guys and the Motley Fool investment site. "Micromedia" Web sites will replace traditional advertising because they'll provide credible user-supplied news about products and services. Locke contends that an open exchange of information solves the "problem" of choice much better than manipulative strategies like simplicity or even permission marketing. Companies can participate in micromarkets through what Locke dubs "gonzo marketing." If Ford, for example, discovers that a subset of its employees are organic gardeners, it may offer support to a big independent organic-gardening Web site with donations and employee volunteers. This marketing effort would be driven not by advertising managers but by people with genuine interest in each micromarket, so it would have credibility with customers. With gonzo marketing, both companies and their markets will benefit.