Professional Documents
Culture Documents
SCMPE Notes by Vaibhav Bansal
SCMPE Notes by Vaibhav Bansal
Table of Contents
I. Firm infrastructure deals with how the firm is organised. It basically describes the activities pertaining
to legal, general management, administrative, accounting, finance, public relations, and quality assurance
in the organisation apart from who will perform these and how.
II. Technology development describes how the firm uses technology. Activities such as research and
development, IT management, and cybersecurity that build and maintain an organization's use of
technology.
III. Human resource management describes how people contribute to competitive advantage. Basically, it
deals with the management of human capital. Human resource functions such as hiring, training, building
and maintaining an organizational culture, and maintaining positive employee relationships.
IV. Procurement signifies purchasing, but not just limited to materials. Finding new external vendors,
maintaining vendor relationships, negotiating prices, and other activities related to bringing in the
necessary materials and resources used to build a product or service.
A Competitive advantage is the ability of an organization to outperform its competitors and make more profits than
its competitors do from an equivalent set of activities through superior performance. Gaining and maintaining a
competitive advantage over a period of time is challenging for organisations in the global economy with the speed of
competition and information exchange possible today.
Companies must search out “white space” in the industry, which usually means competing on either one of two fronts-
Porter’s 5 Forces:
Bargaining power of suppliers determines the cost and quality of input. Bargaining power is higher if a replacement
or alternate is not available.
Threat of substitute may cause a loss of revenue (top-line) or an increased cost of retention. Threat will be high if the
substitute is perfect in nature and cheaper. Substitute can be from different segment and different industry. Switching
cost and the perceived level of product differentiation are also relevant here.
New entrants to an industry bring new capacity, the desire to gain market share, and often substantial resources.
Hence, the threat of new entrants may damage market share if materialize. The degree of threat depends on the barrier
to entry coupled with the reaction from existing competitors that the entrant can expect, apart from perceived
profitability. The major sources of barriers to entry are economies of scale, product differentiation, capital
requirements, switching costs, access to distribution channels, government policy, etc.
Rivalry occurs because one or more competitors either feel the pressure or see the opportunity to improve their
position. Competitive moves by one firm generally have effects on its competitors and thus may incite retaliation or
Core Competency is a unique preposition that helps a firm stand out in the industry by providing value to its customers.
Core Competency leads to either cost leadership or product differentiation, which are the primary sources for a firm
to gain a competitive advantage.
Relevance – The competence must give your customer something that strongly influences him or her to choose your
product or service. If it does not, then it has no effect on your competitive position and is not a core competence.
Difficulty of imitation – The core competence should be difficult to imitate. This allows you to provide products that
are better than those of your competition. And because you're continually working to improve these skills, means that
you can sustain competitive position.
Breadth of application – It should be something that opens up a good number of potential markets. If it only opens
up a few small, niche markets, then success in these markets will not be enough to sustain significant growth
Cost of Quality
Prevention Cost
The costs incurred for preventing the poor quality of products and services may be termed as Prevention Costs.
These costs are incurred to avoid quality problems. They are planned and incurred before actual operation.
Example: Examples include the costs for: ❑ Quality engineering ❑ Quality training programs ❑ Quality
planning ❑ Quality reporting ❑ Quality audits ❑ Quality circles ❑ Field trails ❑ Design reviews❑ Process
engineering ❑ Supplier evaluation and selection ❑ Preventive equipment maintenance ❑ Testing of new
materials ❑ Education of suppliers
Appraisal Cost
These are costs associated with measuring and monitoring activities related to quality. Appraisal Cost incurred to
determine the degree of conformance to quality requirements (measuring, evaluating, or auditing). They are
associated with the supplier’s and customer’s evaluation of purchased materials, processes, products, and services
to ensure that they are as per the specifications.
Examples include the costs for: ❑ Field testing ❑ Inspecting and testing materials ❑ Packaging inspection ❑
Product acceptance ❑ Process acceptance ❑ Measurement (inspection and testing) equipment ❑ Outside
Certification
Internal Failure Cost associated with defects found before the customer receives the product or service. Internal
failure costs are incurred to remedy defects discovered before the product or service is delivered to the customer.
These costs occur when the product does not meet design quality standards.
Examples include the costs for: ❑ Scrap ❑ Rework ❑ Re-designing ❑ Re-testing ❑ Downtime
External failure costs are incurred to remediate defects discovered by customers. These costs occur when products
or services that fail to meet design quality standards are not detected until after transfer to the customer.
Examples include the costs for: ❑ Costs of recalls ❑ Lost sales due to poor product performance ❑ Returns and
allowances ❑ Warranties ❑ Repaid ❑ Product liability ❑ Customer dissatisfaction ❑ Lost market share ❑
Customer support
TQM aims to improve the quality of organizations outputs, including goods and services, through the continual
improvement of internal practices. TQM's objectives are to eradicate waste and increase efficiency. This is done by
ensuring that the production of the organization's product (or service) is appropriate the first time.
❑ Commitment: If a TQM culture is to be developed so that quality improvement becomes a normal part of
everyone’s job, a clear commitment from the top must be provided. Without this, all else fails. It is not sufficient to
delegate ‘quality’ issues to a single person since this will not provide an environment for changing attitudes and
breaking down the barriers to quality improvement. Such expectations must be made clear, along with the support
and training necessary for their achievement.
❑ Culture: Training lies at the centre of effecting a change in culture and attitudes. Management accountants too
often associate ‘creativity’ with ‘creative accounting’ and associated negative perceptions. This must be changed to
encourage individual contributions and to make ‘quality’ a normal part of everyone’s job.
❑ Continuous Improvement: Recognition that TQM is a ‘process’ not a ‘programme’ necessitates that we are
committed in the long term to the never-ending search for ways to do the job better. There will always be room for
improvement, however small.
❑ Co-operation: The application of Total Employee Involvement (TEI) principles is paramount. The on-the-job
experience of all employees must be fully utilized, and their involvement and co-operation must be sought in the
development of improvement strategies and associated performance measures.
❑ Customer Focus: The needs of the customer are the major driving thrust, not just the external customer (in receipt
of the final product or service) but the internal customer’s (colleagues who receive and supply goods, services, or
information). A perfect service with zero defects is acceptable at either internal or external levels. Too frequently, in
practice, TQM implementations focus entirely on the external customer to the exclusion of internal relationships;
they will not survive in the short term unless they foster the mutual respect necessary to preserve morale and
employee participation.
❑ Control: Documentation, procedures, and awareness of current best practices are essential if TQM
implementation is to function appropriately. The need for control mechanisms is frequently overlooked, in practice,
in the euphoria of customer service and employee empowerment. Unless procedures are in place, improvements
cannot be monitored, measured nor deficiencies corrected.
Upstream-Downstream Flow
A supply chain begins right from the supplier and finally ends with the end customer or consumer. In
the total chain, there are flows of material, information, and capital or finance. When the flow relates
to the supplier it is termed as upstream flow. If the flow is with consumers or customers, it is
called downstream flow.
(Author’s Note: In this, only this much concept is sufficient for SPOM).
Outsourcing is defined as the transfer of non-core business functions or activities to other external firms or
organizations that specialize in that type of work. The external agency is referred to as a "Third Party Service
Provider" as the set of business processes or the specific project is related to the arrangement between the client,
"The First Party" and the end user, or "The Second Party".
Pros of outsourcing include reduced cost of operations, improved productivity (opportunity to focus on core
functions), striving or driving for specialization, and flexibility (to scale up or down).
Shortcomings of outsourcing include cultural differences, security issues (reliability), and communication problems
(privacy or trade secrets). The following steps should be taken to ensure the success of outsourcing strategies– 1.
When it comes to outsourcing vendors, the bigger and older the better. 2. Outsourcing should be avoided for jobs
that are proprietary or require strict security. 3. It is best to start small and constantly monitor.
5 Principles of Kaizen
The kaizen is a Japanese word that means ‘Continuous Improvement’. Kaizen Costing is a cost reduction system
through small, continuous, and incremental improvements. It is based on the belief that nothing is ever perfect, so
improvements and reductions in cost are always possible. Kaizen goals are set based on actual results from a prior
period. The goal is to reduce the actual cost of the current period in the coming period/(s).
Step 2 – Ascertain the gap by comparing the goal to the actual cost.
Step 3 – Formulate and implement a cost reduction plan based on value analysis.
There are 5 Fundamental Kaizen Principles that are embedded in every Kaizen tool and in every
1. Know your customer – Understand them and their interests so that business can enhance their experience. (Aim
for creating customer value)
2. Let it Flow – Everyone in the organisations aims to create value and eliminate waste. (Aim for targeting zero waste)
3. Go to Gemba – Value is created where things actually happen - go there; go to the real place. Hence, the act of visiting
the shop floor in Lean and Kaizen. (Aim for following the action)
4. Empower People – Set the same goal for your teams and provide a system and tools to reach them. (Aim for
organizing your teams)
5. Be Transparent – Performance and improvement should be tangible and visible. (Aim for speaking with real data).
5S
5S is the foundation of the pillars of TPM (Total Productivity Maintenance). 5S is the name of a workplace organization
method that uses a list of five Japanese words: seiri, seiton, seiso, seiketsu, and shitsuke. they can be translated from
the Japanese as “sort”, “set in order”, “shine”, “standardize”, and “sustain”. It explains how a workspace should be
organized for efficiency and effectiveness by identifying and storing the items used, maintaining the area and items,
and sustaining the new order.
Sort (Seiri): Sort the material at the production floor or any other part of the production facility
Set in Order (Seiton): Set-in-order signifies the systemic arrangement by adherence to the 14th Principle of
Management enunciated by Henri Fayol in Administrative Theory of Management, i.e., Principle of order which
provides that there shall be place for everything and everything shall be in its place.
Shine (Seiso): Shine ensures there must be cleanliness ‘in and of’ everything. Obviously, if there are fewer items, then
there is less to clean.
Sustain (Shitsuke): In order to sustain the established standard, it is required to do, ▪ Daily Monitoring. ▪ Improving
ownership by allocating areas. ▪ Using ‘Red Tag Campaign’. ▪ Communicating visually through fixed point
photography. ▪ Structured communication. ▪ Continuous training of all employees. ▪ Periodic audits at all levels. ▪
Motivating staff through recognition.
Six Sigma
The premise of Six Sigma is that by measuring defects in a process, a company can develop ways to eliminate them and
practically achieve “zero defects”. Six Sigma can be used with a balanced scorecard by providing a more rigorous
measurement system based on statistics.
Six Sigma practices are based upon the following assertions – ▪ Continuous efforts to attain a stable and predictable
process, which result in no variance. ▪ Character of a process that can be measured, analysed, improved, and
controlled. ▪ Achieving sustained quality improvement through overall commitment from the entire organisation,
especially top-level management.
DMAIC DMADV
A just-in-time approach is a collection of ideas that streamline a company’s production process activities to such an
extent that waste of all kinds, viz., time, material, and labour, is systematically driven out of the process. JIT has a
decisive, positive impact on product costs.
▪ Hire and retain workers who are multi-skilled so that they are capable of performing a variety of operations,
including repairs and maintenance tasks. Thus, labour idle time gets reduced.
▪ Apply TQM to eliminate defects. As there are tight link stages in the production line and minimum inventories at
each stage, defects arising in one stage can hamper the other stages. JIT creates urgency for eliminating defects as
quickly as possible.
▪ Place emphasis on reducing set-up time, which makes production in smaller batches economical, and reducing
inventory levels. Thus, the company can respond to customer demand faster.
▪ Carefully selected suppliers capable of delivering high quality materials in a timely manner directly to the shop floor,
reducing the material receipt time
Cost control implies regulation of the cost of operation through the action of executives. It involves setting up the
targets (yardstick) for managers who are responsible for cost centers and comparing their performance against such
targets. Therefore, Cost Control involves continuous comparisons of actual with the standards or budgets to regulate
the former.
Cost reduction is the real and permanent reduction in the unit cost of goods manufactured or service rendered
without impairing the utility for the intended use. Therefore, cost reduction is continuous effort to reduce cost through
economics (standardization of product or component) and savings in costs of manufacture, administration, selling and
distribution. It believes in reducing to cost till the optimal level rather any specified level such as standards or budget.
Target Costing
Target costing can be described as a process that occurs in a competitive environment, in which cost reduction is an
important component of profitability. Target costing can be defined as “a structured approach to determining the cost
at which a proposed product with specified functionality and quality must be produced, to generate a desired level of
profitability at its anticipated selling price”.
SP – Profit = Cost
▪ It reinforces top-to-bottom commitment to process and product innovation, and is aimed at identifying issues to
be resolved, in order to achieve some competitive advantage.
▪ It uses management control systems to support and reinforce manufacturing strategies, and to identify market
opportunities that can be converted into real savings to achieve the best value rather than simply the lowest cost.
▪ A proactive approach to cost management ensures proper planning well ahead of actual production and
marketing.
▪ Implementation of target costing enhances employee awareness and empowerment. It also fosters partnership with
suppliers.
▪ Encourages the adoption of value- added activities with higher pay-off and elimination of non-value-added
activities to residual level.
▪ Target Costing takes a market-driven approach towards cost, in which value is defined not only by what
customers demand but also by what they are willing to pay for.
Cons:
▪The development process can be lengthened to a considerable extent only - since the design team may require
a number of design iterations before it can devise an acceptable low-cost product that meets the target cost, margin
criteria, and customers’ specifications. This occurrence is most common when the project manager is unwilling to “pull
the plug” on a design project that cannot meet its costing goals within a reasonable time frame.
▪ A large amount of mandatory cost-cutting can result in finger-pointing in various parts of the company;
especially if employees in one area feel they are being called on to provide a disproportionately large part of the
savings.
▪ Representatives from a number of departments on the design team can sometimes make it more difficult to reach
a consensus on the proper design because there are too many opinions regarding design issues.
▪ Effective implementation requires the development of detailed cost data. This can be really costly and may not
be profitable for the company when a detailed cost-benefit analysis is done.
▪ Use of target costing may reduce the quality of products due to the use of cheap components which may be of
inferior quality.
▪ Based upon innovation, also involves a great amount of forecasting and estimation. A substantial portion of
information is market-led, hence highly dynamic in nature.
Value Analysis is a planned, scientific approach to cost reduction which reviews the material composition of a product
and production design so that modifications and improvements can be made which do not reduce the value of the
product to the customer or to the user.
Value Engineering is the application of value analysis to new products. Value engineering relates closely to target
costing as it is cost avoidance or cost reduction before production. Value analysis is cost avoidance or cost reduction
of a product already in production; both adopt the same approach i.e. a complete audit of the product.
Each product has a life cycle, which may vary from a few days
to months to several years depending upon the aging process
of product. The product life cycle is a pattern of types of cost,
amount of expenditure, quantum and value of sales and
amount of profit over the stages from conceiving the idea till
the deletion of product from the product range. The life cycle
of any product consists of four phases, which are –
Introduction: Stage one is where the new product is launched in the market. As the product is novel, there is minimal
awareness and acceptance of it. Competition is almost negligible, and profits are non-existent. The length of the
introduction stage differs from product to product depending on various factors.
Strategies ▪ Attracting customers by raising awareness of the product through promotional activities. ▪ Inducing
customers to try and buy the product. ▪ Strengthening or expanding channel and supply chain relationships. ▪
Building on the availability and visibility of the product that boost channel intermediaries to support the product. ▪
Setting price in alignment with the competitive realities of the market.
Growth Stage: The next stage in the product life cycle is the growth stage. Sales are beginning to expand rapidly
because of greater customer awareness. Competitors often enter the market in large numbers. As a result of
competition, profit starts declining near the end of the growth stage.
Strategies ▪ Establish a clear brand identity through promotional campaigns. ▪ Maintain control over product quality
to assure customer satisfaction. ▪ Maximize availability of the product through strong distribution channel. ▪ Find
the ideal balance between price and demand as per price elasticity. ▪ Overall strategy shifts from acquisition to
retention of customers, from motivating product trial to generating repeat purchases and building brand loyalty. ▪
Development of long-term relationships with customers and partners for the maturity stage. ▪ Value-based pricing
strategies may be considered. ▪ Leverage the product’s perceived differential advantages to secure a strong market
position.
Maturity Stage: During the stage of maturity sales continue to increase, but at a decreasing rate. When sales level off,
profits of both producers and middlemen decline. The main reason is intense price competition; some firms extend
their product lines with new models. This stage poses difficult challenges.
Strategies ▪ Strong marketing efforts are needed to win over the competitor’s customers. ▪ Product features may be
improved or enhanced to differentiate the product from that of the competitors. ▪ Prices may have to be reduced to
attract the price-sensitive consumers. ▪ Various sales promotion incentives are necessary for the consumers as well
as dealers to maintain their interest in the product. ▪ Distribution becomes more intensive, and incentives may be
offered to encourage product over competing products.
Decline Stage: A decline in sales volume characterizes this last stage of the product life cycle. The need or demand for
products disappears. The availability of better and less costly substitutes in the market accounts for the arrival of this
stage.
Strategies ▪ The product can be maintained in the market by differentiation, keeping low cost for some more time by
adding certain new features and finding new uses. ▪ The firm can continue to offer the product to its loyal customers
(niche segment) at a reduced price. ▪ The firm can even discontinue the product. ▪ Use the product as replacement
product for launching another new product successfully in the market. ▪ The various marketing decisions in the
Pre-start-up stage- This is the problem-solution FIT stage. Vision and idea are conceptualised, while considering– ▪
Who will be the customers? ▪ Which of their problems to be solved and ▪ How these will be solved?
Start-up stage- This is the product-market FIT stage. It starts showing commitment. It is intended to have customer
validation that the product offered is a market valuable product. Testing is also performed to get feedback from
clients and iterate the process accordingly.
Scale-up- This is the scale-FIT stage. It starts establishing growth, trying to get to profitable cash flow. They are
creating bigger customer bases and aim to come close to unicorns.
An innovation hub is a physical space that brings together researchers, creators, and innovators to nurture ideas into
industry-changing products and services.
Incubators focus on early-stage startups that do not have a business model in place. They help nurture a startup by
developing its strong idea into a viable product and are commonly referred to as a school for startups. Incubators
typically work on a fee-basis as opposed to taking an equity stake in the startup.
Hyper Competition
Hyper-competition is a condition when the competition is so intense that it creates instability in the market. The
bargaining power of buyers is also getting stronger, putting more pressure on producers. Consumers can easily
switch to competing products when unsatisfied with a product. That, in turn, drives them to want not only higher
quality products but also cheaper ones.
▪ Adoption of flexible strategies is common because the competitive landscape is changing rapidly.
▪ Low entry barriers, allowing new players to enter and challenge existing companies.
▪ The competitive advantage is temporary. The new strategic competitiveness would immediately appear, destroy,
and replace the old ones.
Disruptive business models are those that create, disintermediate, refine, reengineer, or optimize a product or
service, role, function, or practice, category, market, sector, or industry.
The Free Model: This is a business model in which the core product is distributed for free to a large number of
users. The premium products are then sold to a smaller subset of users who desire premium features. The key to
success with this business model is to ensure that the product or service you are providing is of high value to the
customer. In this case, they will spread the word about the service or product. This results in a large user base. Users
can network for free, but advertisers must pay to advertise on the platform.
Advertising (also known as the Hidden Revenue Model): The organisation seeks to attract users so that they
may be presented with advertising messages. Users do not pay for the product or service (more commonly) they
receive; rather, the advertiser pays the organisation for access to its audience.
Cross-subsidisation (also known as the razorblade business model): An organization provides a free (or very
low-cost) product or service to customers in order to drive high-margin sales of a complementary product. Since
a product is sold at a much lower price to make the consumer buy higher-priced items later, it is called
razorblade. It is one of the tried-andtrue methods of acquiring customers for high-priced products. Companies
earn high revenue on a consistent basis as more and more customers become loyal
Open Source (also referred to as the Free Access or Gift Model): When a product or service is provided for free,
the seller or provider either derives satisfaction or some other benefits; but the buyer or user has nothing to pay.
The difference between this model and the hidden revenue model is that support and other services are not
provided under the opensource model. There is no incremental service cost for each added user, even if there is
little or no customer acquisition cost involved; hence, the product or service is free for anyone to use. It becomes
easier to create a community of users who can improve on the technology
The Subscription Model: In this business model, a company takes a service or product that consumers could have
easily accessed in the past and locks it in. As a result, the only way for the consumer to gain access to the service is to
pay a subscription fee. Some of the products are sold on a monthly basis, generating recurring and sustainable
revenue for the company.
Freemium Model: By offering digital sampling, this business model will disrupt. Users will pay for the basic services
with their data (basis information or customer profile) rather than money. The company will then charge them a fee
to upgrade to a more comprehensive offer. To gain access to additional features or an upgraded version, users must
pay a set fee to the company. This model will only work for products where the marginal cost of additional units and
distribution is less than the cost of selling personal data. This model disrupts businesses that could formerly charge
for even the basic service.
(i) Cost-Based Pricing Method – estimate the cost of product & fix a margin of profit. The term ‘cost’ here means
Full Cost at current output and wages level since these are regarded as most relevant in price determination.
Pricing based on total costs is subjected to two limitations viz arbitrary allocation of interdepartmental
overheads and estimation of normal output. In order to avoid these complications, Variable Costs which are
considered as relevant costs are used for pricing, by adding a markup (to include fixed costs allocation also).
Mark-up can be arbitrary percentage or based upon desired rate of return.
(ii) Competition-Based Pricing Method – When a company sets its price mainly on the consideration of what its
competitors are charging, its pricing policy under such a situation is called competitive pricing or competition-
oriented pricing. Going Rate Pricing – It is a competitive pricing method under which a firm tries to keep its
price at the average level charged by the industry. The use of such a practice of pricing is especially useful
where it is difficult to measure costs. Sealed Bid-Pricing – Competitive pricing dominates in those situations
where firms compete on the basis of bids, such as original equipment manufacturer and defense contract work.
(iii) Value Based Pricing Method – to price the product on the basis of customer’s perception of its value.
Objective Value or True Economic Value (TEV) = Cost of the Next Best Alternative + Value of Performance
Differential.
A new product is analysed into three categories for the purpose of pricing –
(i) Revolutionary Product – Revolutionary product may enjoy the premium price as a reward for its innovation
and taking first initiative.
(ii) Evolutionary Product – The evolutionary products may be priced taking cost-benefit, competitor, and
demand for the product into account.
(iii) Me-too Product – The me-too products are price takers as the price is determined by the market mainly by
the competitive forces.
While preparing to enter the market with a new product, management must decide whether to adopt a skimming or
penetration pricing strategy.
(i) Skimming Pricing – It is a policy of high prices during the early period of a product’s existence. This can be
synchronised with high promotional expenditure and in later years the prices can be gradually reduced.
(ii) Penetrating Pricing, means a pricing suitable for penetrating mass market as quickly as possible through lower
price offers. The company may not earn profit by resorting to this policy during the initial stage. Later on, the
price may increase as and when the demand picks up.
1. Perfect Competition – Under this type of market, firm has no pricing policy of its own as the sellers are price
takers (i.e. it has to accept the price determined by the market) and sell as much as they are capable of selling at
the prevailing market price
2. Monopoly – Under the monopoly, a firm is a price setter i.e. it can fix any price but here also the pricing is done
taking elasticity of demand for the product into consideration. That means though the seller/ producer can fix
any price, but it will go for the price where demand for the product and consequent profit will be maximum.
(Author’s Note: Pricing Strategies can be read from ICAI SM page 6.61, only if you have time)
The Kano Model of product development and customer satisfaction is used for prioritizing the most important features
in a product roadmap. Developers can use research data to decide which features will make the most positive impact
on users, which are considered essential for basic function, and which may help a product stand out in a crowded
marketplace.
Threshold attributes (Must-be qualities) (M) - When these characteristics are met, they are taken for granted, but
when they are not met, they cause dissatisfaction. Customers expect these qualities and regard them as basic; it is
unlikely that they will mention them to the company when asked about quality attributes. To illustrate – Touch Screen.
Performance attributes (One-dimensional qualities) (O) - These are features that, as businesses invest in them,
result in a proportionate increase in customer satisfaction. Dr. Noriaki referred to this type of feature as "one-
dimensional" due to the direct, linear relationship between the amount of money invested in it and the amount of
customer satisfaction it provides. These also include customers who know what they want and consider carefully
when deciding whether to buy your product or your competitor's. To illustrate - battery life of smart phones.
Excitement or Delight attributes (Attractive qualities) (A) - These characteristics provide satisfaction when they
are met but do not cause dissatisfaction when they are not met. They are not usually expected and thus frequently go
unspoken. Hence the wow factor therefore yields high ROI. To illustrate – seat upgrade in a flight/ train.
Indifferent qualities (I) - These aspects are neither good nor bad and have no effect, positive or negative, on customer
satisfaction. To illustrate – look of emoticons in messaging apps, placement of logo on phone, size thereof.
Reverse qualities (R) - If these aspects exist, they lead to dissatisfaction; if they do not exist, they do not lead to
satisfaction. To illustrate – Pop-up messages appear on phones whenever open apps for approval or have too much
complexity to operate.
Questionable attribute (Q) - An ambiguous feature whose presence is doubtful or questionable. It behaves in a
similar fashion to reverse quality.
Pareto Analysis
McKinsey's 7S
The 7S framework is divided into two areas i.e., Hard S and Soft S. The hard areas
comprise 3S namely Strategy, Structure and System, whereas soft areas comprise 4S namely Style, Staff, Skills, and
Shared values.
Strategy: It is a plan or method put in place, specific to the organisation, to achieve its goals with an available set of
resources (usually scarce). This is helpful to attain a competitive advantage over the other firms.
Structure: It is the formal framework by which job tasks are divided, grouped, and coordinated. It is the formal pattern
of interactions and coordination designed by management to link the tasks of individuals and groups towards
achieving organizational goals
Systems: These are the processes and daily activities undertaken by people who work in the organisation.
Style: These are the informal rules of the organisation and include the culture of the organisation. It is the way the
organisation presents itself to the outside world.
Staff: These include the intellect capital, i.e., people, or the Human Resource of the organisation. Mind it, people are
the resources that create organisation and culture thereat.
Skills: It involves identifying and getting insight into the core competencies of the organisation and working on them.
The organisation must analyse the skill gap and work on filling it. It must also keep outsourcing as an option for non-
core skills.
Shared Values: These are the values of the organisation that transverse through horizontal and vertical segments
across different divisions. It is indeed guiding the beliefs of people in the organisation as to why it exists.
Though there is no universally acceptable definition of complex business structure or list thereof , but any business
structure is said to be complex business structure if one or combination of the following features exist – ▪ Diluted
control; or ▪ Shared objectives; or ▪ Pooled resources; or ▪ Connected virtually; or ▪ Collaboration of different
cultures, interests; or ▪ Diverse business environment.
A strategic alliance is an arrangement between two or more enterprises to undertake a mutually beneficial project
while each retaining its independence. Since independence is retained, it is difficult to put common performance
measures in place and to collect and analyse management information for the same because the security of confidential
information is a concern.
A joint venture is a combination of two or more parties that seek the development of a single enterprise or project for
profit and share the risks associated with its development. Therefore, in simple words, a joint venture is a separate
business entity whose shares are owned by two or more business entities; this results in the following specific
difficulties apart from those stated above. Joint Venture are of different types, such as Project based, Vertical,
Horizontal, and Functional, since the purpose of each sort of joint venture is different, hence assigning accountability
for performance to joint venture partners in light of the distribution of resources and work (which is usually not equal)
is always a critical aspect.
In Case of Multinationals
Multinationals are enterprises that have subsidiaries or operations in a number of countries. Places (countries) have
their own culture, language, precedents, notions, conventions, apart from differences in time zone, legal and reporting
framework, and more importantly, currency; hence, the co-ordination of subsidiaries or operations to ensure they are
working towards the overall mission and objectives can be difficult. This difficulty further multiplies due to greater
levels of uncertainty on account of exchange rate movements, changes in government taxation, or foreign trade policy.
A supply chain is a network of enterprises which are connected to each other while involved in creating a product and
delivering it to the consumer. In the dynamic modern business environment, the supply chain is becoming more
complex than earlier. Issues including logistical communication barriers, incompatible technology, and high levels of
pressure in modern supply chains can prevent the trust and efficiencies on which effective trading partner
relationships should ideally rest, which in turn leads to poor performance management. Collaboration among supply
chain partners can only be a solution to the above issues. Coordination among the supply chain partners can be
ensured and enhanced through the free flow of information.
A virtual organisation is one that has little or no physical premises but where employees and managers work remotely
and are connected using IT. Collecting reliable performance related data from widespread sources is difficult,
especially where the control that can be exercised over these sources is limited.
Altman Z score
Private Firms
Z score for emerging markets’ entities = 3.25 + 6.56X1 + 3.26X2 + 6.72X3 + 1.05X4
Wherein,
Argenti's A score
This model has three dimensions or groups – defects, mistakes, and symptoms of failure. These groups are further
sub-grouped enumerating areas (negative aspects like high-gearing, Chief Executive is an autocrat, etc.). Score shall
be marked by management for each such area (negative aspect), and then all such score shall be added. If the total
score arrived is more than 25, then the company is likely to fail; hence, there is cause for concern and corrective
measures need to be applied.
Defects include management weaknesses (such as faulty organisation structure, an autocratic chief executive, the
Chairman is the CEO of the company, etc.) and accounting deficiencies (such as a lack of budgetary control, a costing
system, etc.).
Mistakes will occur over time as a result of the defects. Defects and Mistakes are interconnected. To illustrate, if the
management and accounting system are weak, then mistakes are bound to happen. A mistake includes high gearing,
overtrading, or failure of a big project, etc.
Symptoms of failure will surely be present if the mistakes identified above are of a continuing nature. Eventually,
these symptoms will become visible. Symptoms of failure can be something like deteriorating ratios or creative
accounting.
The maximum score allotted is 100 (43 from Group A, 45 from Group B, and 12 from Group C). For a firm to be cleared
as healthy, its overall score must be less than the maximum acceptable score of 25 (with 10 and 15 being the maximum
acceptable scores in Group A (defects) and B (mistakes) respectively). If a firm scores anything in Group C, this is
immediately seen as an indicator that the firm is at risk. A firm that scores more than 25 overall, even if it scores below
the individual thresholds in either Group A (10) or Group B (15), would still be considered at risk
Balanced Scorecard
In today’s business environment information becomes a vital element and to gain competitive advantage over peers,
it cannot be denied. In this era of information age competition, a company cannot survive just by injecting huge capital
investment in new technology for physical assets only or by excellent management of financial assets and liabilities.
In this information age both manufacturing and service organisation need new capabilities for competitive success.
Merely investing in and managing physical, tangible assets is not enough but an organisation must be able to mobilise
and exploit its intangible or invisible assets, which in turn becomes a decisive factor.
Financial Perspective: “How Do We Look to Shareholders?” In this step, the manager of a division or unit links its
business objectives to the corporate strategy of the company as a whole. Financial performance measures indicate
whether the company’s strategy implementation and execution are contributing to its revenue and earnings. To
identify key performance measures from this perspective, managers, during strategic planning, ask, “How do we look
to shareholders?”
Customer Perspective: “How Do Customer View Us?” In this stage, companies identify customers and market
segments in which they compete, as well as the means by which they provide value to these customers and markets.
Managers identify the lead indicators which make a particular business unit or product different from others. Lead
indicators may vary from customer to customer or market segment. If, for example, a customer values on-time
delivery, then on-time delivery becomes a leading indicator. Examples of lead indicators may include any number of
customer considerations.
Internal Business Perspective: “At What Must We Excel?” In this stage, companies identify processes and activities
which are necessary to achieve the objectives identified from financial and customer perspectives. These objectives
may be achieved by reassessing the value chain and making the necessary changes to the existing operating activities.
If maintaining net earnings is the financial objective of a company and after sales service can increase customer
retention, then the internal business perspective needs to improve after sales services to satisfy customer
requirements and maintain net earnings.
Learning and Growth Perspective: “How Do We Continue to Improve and Create Value?” In the learning and growth
perspective, companies determine the activities and infrastructure that the company must build to create long term
growth, which are necessary to achieve the objectives set in the previous three perspectives. Organisational learning
and growth come from three principle sources: ▪ People, i.e., employee capabilities ▪ Systems, i.e., information system
capabilities and ▪ Organisational procedures, i.e., motivation, empowerment, and alignment.
Dimensions- Dimensions are the goals for the business, i.e., the CSFs, and
suitable measures must be developed to measure each performance
dimension. They are further divided into two sub-categories.
❑ Quality- It is the ability to deliver goods and services with consistency. Quality should be judged from the eyes of
the customers. Quality is the level of benefits customers expect from the product. Quality should be enough for the
product price paid.
❑ Flexibility- It is the responsiveness to change in the factor influencing business performance. For example, ability
to cope with a sudden increase in sales demand
❑ Innovation- the ability of the business to devise new products and new ways of doing things. Like packaging
products with environmentally friendly (recyclable) material.
❑ Resource Utilization- It is the ability to use resources to achieve business objectives. Business assets should be used
for the proper purpose and in the most efficient way possible. For example, delivery vans should be used to maximum
capacity only by carrying authorized goods.
❑ Financial Performance- Financial performance gives an indication of overall business at a glance in monetary terms.
These can be used to identify areas of strength and weakness. It may also highlight other areas previously identified
which may be critical to business success.
❑ Competitive Performance- How do they stand in comparison to their competitors? How are they different from their
competitors? For example, offering products of higher quality than competitors and products having distinct features
than rival products.
❑ Equity- Performance measures should be equally challenging for all parts of the business. Relaxation given to one
part of the business leads to the perception of unfair treatment, which hinders productivity.
❑ Ownership- Performance measures should be acceptable to everyone. Employees should be involved in the
identification of measures rather than being imposed on them. Ownership means here is responsibility for the results.
❑ Achievable- Performance measures should be realistic. For example, using actual results for the competitors to set
as targets. Employees will not be motivated to achieve targets if they consider them impossible.
❑ Motivation- Rewards schemes should be set up in a manner which motivates employees to achieve their business
goals. If sales growth is desired, then the bonus can be linked to performance measures, like an increase in the number
of units sold in the previous year.
❑ Clear- Rewards scheme should be clearly communicated to employees in advance. What kind of performance will
be rewarded, and how will their performance be measured?
❑ Controllability- Employees should only be rewarded or penalized for the results over which they have some control
or influence.
❑ Planet, the environmental bottom line measures the impact on resources, such as
air, water, ground, and emissions to determine the environmental impact and
ecological footprints.
❑ People, the social equity bottom line relates to corporate governance, motivation, incentives, health and safety,
human capital development, human rights, and ethical behaviour.
❑ Profit, the economic bottom line, refers to measures that maintain or improve the company’s success in terms of
adding value to shareholders.
TBL believes in a stakeholder approach rather than a shareholder approach. TBL implies that businesses must
consider the full cost; hence, it has become a substitute for full cost accounting with an even wider perspective.
TBL can be used to encourage each division and manager within the organisation to act in a responsible manner from
a holistic perspective.
Organisational Structure
An organisation structure outlines the roles of individuals in the organisation and decides the way in which authority
and responsibility is allocated among them and how they coordinate with each other to attain organisational
objectives. It has significant bearing on determining the need of responsibility accounting and design of performance
management system.
Residual Income = Operating Income – Operating Expense – (Minimum Required return X Operating Assets)
Economic Value Added = [NOPAT – (Invested Capital X Weighted Average cost of Capital)]
VFM framework can be used for measurement of performance in the not-for-profit sector because Not-for-profit
organisations are expected to provide the best possible value from available money (usually limited). VFM
framework ensures–
1.1 Effectiveness (spend wisely) (an output measure, the goal approach) → whether the organisation has achieved
its desired mission and objectives?
1.2 Efficiency (spend well) (a link between input and output factor, as a process approach) → Whether the resources
and funds available to the organisation have been efficiently utilised i.e., maximum output has been obtained with
minimum input?
1.3 Economy (spend less) (as an input measure, the resource approach) → Whether the appropriate quantity and
quality of inputs are available at the lowest cost?
Now two more Es have been added, i.e., Equity (spend fairly) and Ethics (spend properly). It is worth to note that
five elements (to ensure the value for money framework works properly) need to be taken care of: Input, Process,
Output, Outcome, and Impact.
Minimum and Maximum Transfer Pricing (Charts taken from CA Sankalp Kanstiya Sir Book)