Complete the following exercise and provide a recommendation for each of the fou

Question

Complete the following exercise and provide a recommendation for each of the four scenarios presented. There is often more than one way to improve a performance measure. Unfortunately, some of the actions taken by managers to make their performance look better may actually harm the organization. For example, suppose the marketing department is held responsible only for increasing the performance measure "total revenues," Increases in total revenues may be achieved by working harder and smarter, but they can also usually be achieved by simply cutting prices. The increase in volume from cutting prices almost always results in greater total revenues; however, it does not always lead to greater total profits. Those who design performance measurement systems need to keep in mind that managers who are under pressure to perform may take actions to improve performance measures that have negative consequences elsewhere. For each of the following situations, describe actions that managers might take to show improvement in the performance measure but which do not actually lead to improvement in the organization's overall performance.

Concerned with the slow rate at which new products are brought to market, top management of a consumer electronics company introduces a new performance measure--speed-to-market. The research and development department is given responsibility for this performance measure, which measures the average amount of time a product is in development before it is released to the market for sale.
The CEO of a telephone company has been under public pressure from city officials to fix the large number of public pay phones that do not work. The company's repair people complain that the problem is vandalism and damage caused by theft of coins from coin boxes--particularly in high-crime areas in the city. The CEO says she wants the problem solved and has pledged to city officials that there will be substantial improvement by the end of the year. To ensure that this is done, she makes the managers in charge of installing and maintaining pay phones responsible for increasing the percentage of public pay phones that are fully functional.
A manufacturing company has been plagued by the chronic failure to ship orders to customers by the promised date. To solve this problem, the production manager has been given the responsibility of increasing the percentage of orders shipped on time. When a customer calls in an order, the production manager and the customer agree to a delivery date. If the order is not completed by that date, it is counted as a late shipment.
Concerned with the productivity of employees, the board of directors of a large multinational corporation has dictated that the manager of each subsidiary will be held responsible for increasing the revenue per employee of his or her subsidiary.

Explanation / Answer

1.         Speed-to-market can be improved by taking on less ambitious projects. Instead of working on major product innovations that require a great deal of time and effort, R&D may choose to work on small, incremental improvements in existing products. There is also a danger that in the rush to push products out the door, the products will be inadequately tested and developed.

2.         Performance measures that are ratios or percentages present special dangers. A ratio can be increased either by increasing the numerator or by decreasing the denominator. Usually, the intention is to increase the numerator in the ratio, but a manager may react by decreasing the denominator instead. In this case the managers pulled telephones out of the high-crime areas. This eliminated the problem for the managers, but was not what the CEO or the city officials had intended. They wanted the phones fixed, not eliminated.

3.         In real life, the production manager simply added several weeks to the delivery cycle time. In other words, instead of promising to deliver an order in four weeks, the manager promised to deliver in six weeks. This increase in delivery cycle time did not, of course, please customers and drove some business away, but it dramatically improved the percentage of orders delivered on time.

4.         Ratios can be improved by changing either the numerator or the denominator. Managers who are under pressure to increase the revenue per employee may find it easier to eliminate employees than to increase revenues. Of course, eliminating employees may reduce total revenues and total profits, but the revenue per employee will increase as long as the percentage decline in revenues is less than the percentage cut in number of employees.

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