Chapter 1 Full

1.
1
1.2
1.3
1.4
1.5
1.6
1.7
Enterprise Performance Management

Performance Management
Financial Performance Evaluation Parameter
Non-Financial Performance Evaluation Parameter
Measuring SBU Level Performance
Transfer Pricing
Goal Congruence through Transfer Pricing
Introduction
Performance management is the process through which supervisors and those

they lead gain a shared understanding of work expectations and goals,
exchange performance feedback, identify learning and development
opportunities, and evaluate performance results.
It is through this process that organizations are able to create and sustain
a workplace environment that: Values continuous improvement, Adapts well
to change, Strives to attain ambitious goals, Encourages creativity, Promotes
learning and professional development, is engaging and measuring
performance.
1.Enterprise Performance Management:
1.1 Enterprise Performance Management:

A) Concept:
Enterprise Performance Management (EPM) is the process of monitoring performance across
the enterprise with the goal of improving business performance. An EPM system integrates and
analyzes data from many sources, including, but not limited to, e-commerce systems, front-office
and back-office applications, data warehouses and external data sources.
B) Meaning:
Enterprise Performance Management (EPM) is a type of business planning that relates to
business intelligence (BI), which involves evaluating and managing performance for an enterprise
to reach performance goals, enhance efficiency or maximize business processes. EPM is also
known as Corporate Performance Management (CPM) or Business Performance Management.
C) Components of EPM:
1.1 Enterprise Performance Management:

C) Components of EPM:
1) Reporting and Analytics:
Financial Reporting and Analytics focuses on regulatory, tax and management reporting.
Providing the right "tool for the job" gives end-users the ability to access the information they
want, when they want it with the confidence that it's right.
2) Budgeting and Planning:
Planning, budgeting and forecasting provide the roadmaps to the future for high-performance
organizations.
3) Financial Consolidations & Statutory Compliance:
Financial consolidation gives organizations the ability to combine multiple general ledger
systems into one consolidated chart of accounts (COA) for management, regulatory and tax
related reporting purposes. Highly acquisitive organizations or those that have been through
significant merges oftentimes have multiple general ledger systems with widely varying charts
of accounts.
1.2 Performance Management:

A) Meaning:
Performance management is ongoing, continuous process of communicating and clarifying job
responsibilities, priorities and performance expectations in order to ensure mutual
understanding between supervisor and employee. Performance management involves clarifying
the job duties, defining performance standards, and documenting. Evaluating and discussing
performance with each employee.
B) Definitions:
1) De Cieri at el:
Performance Management is the process through which managers ensure that employees
activities and outputs are congruent with the organisational goals.
2) Hale and Whitlam:
"Performance Management is about applying processes, techniques and systems which
maintain and improve individuals performance whilst simultaneously aiming to improve the
performance of the organisation.
3) Gomez & Mejia:
"Performance Management is the process through which managers ensure that
employees activities and outputs contribute to organisational goals.

C) Need of Performance Management:
There are many return associated with the implementation of a performance management
system. A performance management system can be needed in following way:

1) Motivate to Perform:
Receiving feedback about ones performance increases the motivation for future performance.
Knowledge about how one is doing and recognition of ones past successes provide the fuel for
future accomplishments.
2) To Increased Self-esteem:
Receiving feedback about ones performance fulfils a basic need to be appreciated and valued
at work. This, in turn, is likely to increase employees self-esteem.
3) Managers Gain Insight about Subordinates:
Direct supervisors and other managers in charge of the appraisal gain new insights into the
person being appraised. Gaining new insights into a persons performance and personality
will help the manager build a relationship with that person.
4) To Clarified Job Definition and Criteria:
The job of the person being appraised may be clarified and defined more clearly. In other
words, employees gain a better understanding of the behaviors and results required of
their specific position.

5) Develop Self-insight:
The participants in the system are likely to develop a better understanding of themselves and
of the kind of development activities of value to them as they progress through the
organization.
6) To Improve Personnel Actions:
Performance management systems provide valid information about performance, which can
be used for personnel actions such as merit increases, promotions and transfers, as well as
terminations. In general, a performance management system helps ensure that rewards are
distributed on a fair and credible basis.
7) To Clear Organisational Goals:
The goals of the unit and the organization are made clear, and the employee understands the
link between what he or she does and organisational success.
8) Helps in making Employees more Competent:
An obvious contribution is that the performance of employees is improved. In addition,
there is a solid foundation for developing and improving employees by establishing
developmental plans.

9) For Better Protection from Lawsuits:
Data collected through performance management systems can help document compliance
with regulations. When performance management systems are not in place, arbitrary
performance evaluations are more likely, resulting in an increased exposure to litigation.
10) To Facilitate Organisational Change :
Performance management systems can be a useful tool to drive organisational change. Once
this new organisational direction is established, performance management is used to align
the organisational culture with the goals and objectives of the organization to make change
possible.

D) Performance Management Linkages with Strategic Planning:

1) Performance Management is Dependent on Strategic Planning:
The success of a fully integrated performance management system is dependent on three
components:
a) The linkage of the overall performance management system to strategic planning and
budget allocation at the whole-of- government and organisational levels;
b) Goals and strategies that are clearly defined and communicated to employees,
c) Managers who can objectively assess and measure performance and use this information
appropriately.
2) Strategic Planning is an Element of Performance Management :
Strategic planning constitutes an important element of performance management; as it is
through this process that the foundation of performance management namely the vision,
mission and values of the organization are determined.
3) Strategic Planning Linked to Organisational Processes :
Strategic planning process should begin with a dream, a notion or an idea. This notion
or blueprint should act as the driving force in making the corporate Leaders dream
become a reality.

4) Strategic Planning Supports the Effective Implementation of Performance Management:
When linked with strategic, workforce and budget planning, performance management
supports the effective implementation of the government`s agenda by aligning incentives
with strategic objectives, providing a tool for the prioritization of activities and
communicating a common vision and goals to help steer staff actions.
5) Performance Management System are the Strategic Goals :
Performance management frameworks are used to clarify organisational goals for staff linking
their roles to institutional objectives. The cornerstones of any performance management
system are the strategic goals and the business plans of the organization.
6) Performance Management make certain by Strong Linkages between Strategic and Planning
Budgeting Frameworks:
In operating an effective and efficient public administration, a performance management
system should be used to align organisational and individual performance goals to facilitate
the attainment of whole of-government objectives.

E) Performance Evaluation through Management Control and Operational Control:
1) Performance Evaluation through Management Control :
Management control refers to the evaluation by upper-level managers of the performance of
mid-level managers. Management control can be defined as a process of motivating
managers to perform actions and activities in line with the goals and strategies of the
organization.
2) Performance Evaluation through Operational Control :
Operational control refers to the evaluation of operating level employees by mid-level
managers. Operational control relates to the control of specied tasks and focuses on
execution. Operational control is the process of assuring that specic tasks are carried out
effectively and efficiently. The essence of operational control consists in increasing the
efficiency of enterprises. The main goal of operational control is a more efficient use of
existing resources to achieve the company expected earnings, the creation of a satisfactory
financial structure and positive cash flow, i.e. liquidity.
1.Financial Performance Evaluation Parameter:
1.3 Financial Performance Evaluation Parameter:

Responsibility accounting
Responsibility accounting is a management control system based on the principles of delegating
and locating responsibility. The authority is delegated on responsibility centre and accounting for
the responsibility centre. In which managers are given decisions making authority and
responsibility for each activity occurring within a specific area of the company.
A) Definitions:
1) Robert Anthony:
"Responsibility accounting is type of management accounting which collects and reports both
planned and actual accounting information in terms of responsibility centers.
2) Schaltke, R.W and Johnson, H.G:
"The management accounting system is that which ties budgeting & performance reporting to
a decentralised organisation is called responsibility accounting".

Responsibility accounting:
B) Objectives of Responsibility Accounting :
1) To Determine the Contribution of Sub-Units:

Determine the contribution that a division as a sub-unit
makes to the total organisation.
2) To Evaluate Quality of the Divisional Managers Performance:
Responsibility accounting is used to measure the
performance of managers and it is therefore, influence
the way the managers behave.
3) To Motivate the Divisional Manager:
Motivate the divisional manager to operate his division in
a manner consistent with the basic goals of the organisation
as a whole.

C) Principles of Responsibility Accounting:
1) Identify the Responsibility Centers :

Responsibility centers within an organization are identified.
2) Define Responsibility:
For each responsibility centre, the extent of responsibility is
defined.
3) Human Factor:
It lays a greater emphasis on human factor.
4) Specify Controllable and Non-controllable Factors:
Controllable and non-controllable factors and activities at
various levels of responsibility is specified and defined broadly.
5) Performance Reports:
Performance reports are prepared by the responsible person
to provide information to the user's team.

D) Process of Responsibility Accounting:

1) Identifying the Responsibility Centers:
A responsibility center is a sub-unit in organisations, whose manager is held accountable for
specific financial results of sub-unit's activities. The important criteria for creating a
responsibility center is that the unit of the organisations should be separable and identifiable
for operating purposes and its performance measurement should be possible.
2) Delegation of Authority and Responsibility or Decentralisation:
No one can be held accountable without having any prior responsibility and responsibility
always accompanies corresponding authority. Responsibility centers are the decision centers
also, and the decision requires the power or authority.
3) Controllable of the Object :
The manager of a cost center can be held accountable, only for the costs, which are
controllable by him. Therefore, it is an essential part of responsibility accounting to identify
the controllable and non-controllable costs.

4) Establishing Performance Evaluation Criteria :
Performance evaluation is a yardstick measurement of whether the results are obtained as
ought to be or not. Most often the following criteria are applied for divisional performance
evaluation :
a) Standard costing.
b) Budgetary control.
c) Profitability ratios.
d) Valuation measures.
5) Electing Cost Allocation Bases :
Divisional profitability heavily depends on the bases of allocation of joint overheads and
corporate overheads. Switching from one method to another of cost allocation over the
products or divisions, product wise profitability change to a great deal.

E) Advantages of Responsibility Accounting:

1) Assigning of Responsibility :
Everybody knows what is expected for him. The responsibility can easily be identified and
satisfactory and unsatisfactory performances of various people are known so that, nobody
can shift responsibility to somebody else.
2) Improves Performance :
Assigning of tasks to specific person has a motivational factor. As each one knows his
responsibility, he tries to improve the functioning of his section.
3) Helpful in Cost Planning :
As data available about cost and revenue, proper planning can be effected and standards can
be properly fixed.
4) Delegation of Authority :
The system of responsibility accounting enables the delegation of authority, while
retaining the overall control at the managerial level.

5) Helpful in Decision Making :
The information collected under this system is helpful to the management in planning for
future actions and past performance of various cost centers also helps in fixing their future
targets.
6) Better System of Control :
It enables the management to management to delegate authority to responsibility centers,
while remaining overall control with itself.
7) Decentralization of Decision Making :
It forces the management to consider the organisational structure to result in effective
delegation of authority and placement of responsibility.
8) Comparison of Performance :
It encourages the comparison between actual achievements with budgeted figures.
It compels the setting of realistic goal.

9) Increases the Interest of Staff :
It increases the interest of supervisory staff as they are answerable about deviations of
responsibility centers for which they are responsible.
10) Simplifies Facilitates the Prompt Reporting :
Because of exclusion of those items which are beyond the scope of individual responsibility.
F) Problems in Responsibility Accounting:

F) Problems in Responsibility Accounting:
1) Classification of Costs:
For responsibility accounting system, to be effective in a proper classification between
controllable and non-controllable costs is a prime requisite.
2) Inter-departmental Conflicts:
Separate departmental pursuits may lead to inter-departmental rivalry and it may be
prejudicial to the interest of the enterprise as a whole. Managers may act in the best interests
of their own, but not in the best interests of the enterprise.
3) Delay in Reporting:
Responsibility reports may be delayed. Each responsibility centre can take its own time in
preparing reports.
4) Overloading of Information:
Responsibility accounting reports may be overloading with all available information. This
danger is inherent in the system but with clear instructions by management as to the
functioning of the system and preparation of reports, etc.
5) Complete Reliance will be Deceptive:
Responsibility accounting can't be relied upon completely as a tool of
management control. It is a system just to direct the attention of management to
those areas of performance which required further investigation.

Responsibility Center
A responsibility center is a part or subunit of a company for which a manager has authority and
responsibility. The manager of a responsibility center is responsible for the activities of the
organizational subunit and for the results of specified financial and non-financial performance
measurements.
A) Factors Influencing the Activity of Responsibility Centers :

1) The Owner:
It influences the strategy and the objectives of the organisation and, implicitly of the
responsibility centers. He/ she influence the amount of resources.
2) The General Management of the Company:
Company establishes the strategy and the objectives of the organisation leading to the
objectives of the centre. They negotiate the system of rewards and the control procedures.
3) The Size and Complexity of the Enterprise:
Influences by the amount of resources of the enterprise, according to which the budget can
be established and the number of centers. It influences the acceptance or refusal of the
change represented by the reorganization of the activity in responsibility centers.
4) The Technical Endowment:
Performance is sticking to the budget.

5) The Human Resources:
Professional training, age, motivation, working capacity are Human Resources.
6) The Economic-Financial Status:
The amount of funds on the level of each centre; success in business, the strategy of
responsibility centers.
7) The Culture and Behaviour of the Enterprise :
The behavior norms of the employees is measuring performance and establishing rewards.

B) Types of Responsibility Centers :

1) Expense/Cost Center:
A cost center is an organizational sub-unit such as department or division, whose manager is
held accountable for the costs incurred in that division. Manager of a cost center is
responsible for controllable costs incurred in the department, but is not responsible for
revenue, profit or investment in that center. A cost center is a responsibility center in which
inputs, but not outputs are measured in monetary value.
Types of Expense Centers
Engineered
Expense Centers
Discretionary
Expense Centers
Committed Fixed
Costs

a) Engineered Expense Centers:
Engineered expense centers are usually found in manufacturing operations. In an
engineered expense center output multiplied by the standard cost of each unit produced
measures what the finished product should have cost.
b) Discretionary Expense Centers:
Discretionary expense centers include administrative and support units, research and
development operations, and most marketing activities. The output of these centers
cannot be measured in monetary terms.
c) Committed Fixed Costs :
Committed fixed costs are those fixed costs that arise from the possession of a plant,
building and equipment (e.g. depreciation, rent, taxes, insurance premium etc.) or a
functioning organization.

Performance Measurement of Expense/Cost Center: :
Cost centre is a segment whose financial performance is measured in terms of cost without
taking into consideration its attainments in terms of "output". The performance of the
managers is evaluated by comparing the costs incurred with the budgeted costs. The
management focuses on the cost variances for ensuring proper control.
Advantages of Expense/Cost Center:
a) It enhances performance measurement.
b) It enables training of managers in decision making and running the divisions or their
center on strict vigilance.
c) It enhances optimization of investments involved to centers identified.
d) The quality of accountability and decision may be improved.
e) Improved monitoring of investment returns
f) Improved management information on profitability.
g) Improved monitoring of costs and expenditure.

2) Revenue Center :
Sales or marketing departments are the most common forms of revenue centers in small or
large businesses. The management team is responsible for selling products or services that
the company produces at a specific cost. The team sets a selling price based on production
costs plus a margin for profit.
Performance Measurement Revenue Center :
Revenue centers usually have authority over sales only and have very little control over costs.
To evaluate a revenue centers performance, look only at its revenues and ignore everything
else.

3) Profit Center :
A profit center is an organizational unit in accounting that reflects a management-oriented
structure of the organization for the purpose of internal control. The profit center is used to
calculate its profit and losses separately. By doing this, the corporation can easily determine
the revenue and costs of the specific section of the business and add to management.
Performance Measurement:
The performance of the managers is measured by profit. In other words managers can be
expected to behave as if they were running their own business. Problem with profit centers
may relate to the measure of certain type of expenses which have to be involved in the
computation of profit centers.
Advantages :
a) Allows decision-making and power to be delegated effectively. Improves speed
and efficiency of decision making.
b) Increased motivation- now working for a smaller, more local business.
c) Allows more effective use of bonuses and other forms of financial motivation - all
linked to profitability of profit centre.

4) Investment Center :
The manger of investment centre is held accountable for the division's profit and the invested
capital used by the centre to generate its profits. Investment centers consider not only costs
and revenues but also the assets used in the division.
Performance Measurement and its Methods:
Performance of an investment centre is measured in terms of assets turnover and return on
the capital employed. In an investment centre, the performance is measured not by profits
alone, but is related to investments effected. The manager of an investment centre is always
interested to earn a satisfactory return. The return on investment is usually referred to as ROI,
serves as a criterion for the performance evaluation of the manager of an investment centre.
Methods of Evaluating Performance of Investment Center:

a) Return on Investment (ROI):
The performance of an investment center manager is evaluated on the basis of either
return on investment or residual income. Return on investment (ROI) focuses the
attention of a manager on both income and investment, making it a better measure of
performance than just income.
ROI =
Net Operating Income After Taxes

Invested Assets
ROI=Profit Margin Investment Turnover

ROI =
Income
Sales
X
Sales
Invested Capital
NOPAT
Invested Capital

b) Return on Assets (ROA):
The return on assets ratio (ROA) compares net income with invested capital as measured
by average total assets. The return on assets ratio measures how effectively those assets
generate profits. ROA is an indicator of how profitable a company is relative to its total
assets. ROA gives an idea as to how efficient management is at using its assets to generate
earnings.
ROA=
Net Income
Total Assets
c) Market Value Added (MVA):

Some organisations prefer to calculate the economic value of their firm at a point in time.
Market value added represents the wealth generated by a company for its shareholders
since inception. It equals the amount by which the market value of the company's stock
exceeds the total capital invested in a company.

c) Market Value Added (MVA):
Market Value Added (MVA) = Market Capitalization Total Common
Shareholders' Equity
Market Value Added (MVA) = Total Shares Outstanding Current Market
Price Total Common Equity
From the perspective of all investors, market value added equals the market value of the
company minus sum of the book value of equity and debt.
Market Value Added for all Investors = Market Value of the Company (Book
Value of Equity + Book Value of Debt)
Market Calue Added for all Investors = Market Value of Equity Total
Shareholders' Equity + Market Value of
Debt Book Value of Debt

d) Economic Value Added (EVA):
In corporate finance, Economic Value Added or EVA is an estimate of a firm's economic
profit - being the value created in excess of the required return of the company's
shareholders - where EVA is the profit earned by the firm less the cost of financing the
firm's capital. The idea is that shareholders gain when the return from the capital
employed is greater than the cost of that capital.
r=
NOPAT
K
Where:
r is the Return on Invested Capital (ROIC);
k is capital employed;
NOPAT is the Net Operating Profit after Tax.

Du-Pont Analysis
A) Concept:
The DuPont Model is a technique that can be used to analyze the profitability of a company
using traditional performance management tools. To enable this, the DuPont model integrates
elements of the Income Statement with those of the Balance Sheet. The DuPont model of
financial analysis was made by F. Donaldson Brown, an electrical engineer who joined the giant
chemical company's Treasury department in 1914.
B) Calculation of Du-Pont:
Return on Assets = Net Profit Margin x Total Assets Turnover
Net Operating Profit After Taxes
Sales
X
Sales
Average Net Assets
C) Applications of the DuPont Framework:

1) The model can be used by the purchasing department or by the sales department to
examine or demonstrate why a given ROA was earned.

Du-Pont Analysis
C) Applications of the DuPont Framework:
2) As the role of the credit manager is expanded cross-functionally, he or she may be

required to answer the call to conduct financial statement analysis under any of these
circumstances. The DuPont ratio is a useful tool in providing both an overview and a focus
for such analysis.
3) DuPont offers management-consulting and implementation services to help other
companies achieve sustainable improvements in productivity
4) Compare a firm with its colleagues
5) Analyze changes over time.
6) Teach people a basic understanding how they can have an impact on the company results.
7) Show the impact of professionalizing the purchasing function.
8) The DuPont ratio can be used as a compass in this process by directing the analyst toward
significant areas of strength and weakness evident in the financial statements.

Pitfalls in Performance Measurement
The Five Most Common Pitfalls in Performance Measurement:
Measurements
Involving self
Evaluation
Holding onto
Metrics for too
Long
Numbers can
be
Manipulated
Looking Back
Blindly Trusting
Figures

Pitfalls in Performance Measurement
1) Measurements Involving self Evaluation:
It does not matter whether an individual perform better than the plan or have stayed within
budget, but it is mandatory that his perform is better than the other competitors.
2) Looking Back:
It does not matter whether this years figures were better than last years. A performance
measurement system should tell whether the decisions in the near future will be of any help.
3) Blindly Trusting Figures :
The problem is that figure-driven managers often produce low quality data. Numbers never
tell the whole story, often produce a distorted picture of situations and are vulnerable
intentionally or otherwise to influence.
4) Numbers can be Manipulated :
It is virtually a daily occurrence in business life and virtually unavoidable. It is better to accept
this as a fact than to act as if it were otherwise.
5) Holding onto Metrics for too Long :
The development phases and circumstances within a company change, so the gauges
metrics must change with them. Be very precise about what is to measure, be explicit
about which metrics measure that, and make sure everyone is clear about this.

Limitation of Financial Measures

1) Not Consistent with Today's Business Realities:
Today's organizational value-creating activities are not fully captured in the tangible, fixed
assets of the firm. Instead, value rests in the ideas of people, in customer and supplier
relationships, in database of key information, and cultures of innovation and quality.
2) Driving by Rearview Mirror:
Financial measures provide an excellent review of past performance and events in the
organization. This detailed financial view has no predictive power for the future.
3) Tend to Reinforce Functional Silos:
Today teams comprised of many functional areas coming together to solve pressing problems
and create value in never imagined ways.
4) Sacrifice Long-Term Thinking:
Cost reduction efforts often targeted the long-term value-creating activities of the firm
such as research and development, associate development, and customer relationship
management.

5) Financial Measures are not Relevant to Many Levels of the Organization:
When we roll up financial statements throughout the organization, we are compiling
information at a higher level and it is almost unrecognizable and useless in decision making of
most managers and employees.
6) Difficulty in Quantifying Intangible Assets in Financial Terms:
Another limitation of traditional measures argue that drivers of success in many industries are
intangible assets such as intellectual capital and customer loyalty, rather than the hard
assets allowed on to balance sheets.
7) Financial Measures are of Limited Scope:
Financial evaluation systems generally focus on annual or short-term performance against
accounting yardsticks. They do not deal with progress relative to customer requirements or
competitors, or other non-financial objectives that may be important in achieving
profitability, competitive strength and longer-term strategic goals.
1.4 Non-Financial Performance Evaluation Parameter:

Non-nancial performance measures are often used for performance evaluation. They are
especially relevant if the available nancial performance measures not completely reject the
managers contribution to the rms total value.
Balance Scorecard:
A) Meaning:
The Balanced Score Card (BSC) is a performance management tool which began as a concept for
measuring whether the smaller-scale operational activities of a company are aligned with its
larger-scale objectives in terms of vision and strategy.
B) Use of Balanced Scorecard for Strategy Evaluation:
Balanced Scorecard is used in the strategy evaluation with respect to following points:
1) Drive strategy evaluation for changes to happen.
2) Simplify strategies and make them operational.
3) Identify strategic initiatives to be assigned to qualified individuals.
4) Link financial elements with strategy evaluation plan.
5) Align the Organization with its strategic evaluation plan.
6) Conduct performance reviews regularly to improve strategy evaluation.

Balance Scorecard:
C) Key Performance Measures:
The balanced score card identifies four key performance measures as follows:
1) Financial Perspective :
The financial perspective examines if the companys
implementation and execution of its strategy are
contributing to the bottom-line improvement of
the company. It represents the long-term strategic
objectives of the Organization and thus it
incorporates the tangible outcomes of the
strategy in traditional financial terms.
Financial
Perspective
Customer
Perspective
Internal
Perspective
Innovation
and
Learning
Perspective

Balance Scorecard:
C) Key Performance Measures:
2) Customer Perspective:
The customer perspective defines the value proposition that the Organization will apply to
satisfy customers and thus generate more sales to the most desired i.e. the most profitable
customer groups.
3) Internal Perspective:
The internal process perspective is concerned with the processes that create and deliver the
customer value proposition. It focuses on all the activities and key processes required in order
for the company to excel at providing the value expected by the customers both productively
and efficiently.
4) Innovation and Learning Perspective:
The innovation and learning perspective is the foundation of any strategy and focuses on the
intangible assets of an organisation, mainly on the internal skills and capabilities that are
required to support the value-creating internal processes.

Balance Scorecard:
D) Advantages of Balanced Score Card:
Holistic
approach
System
Approach
Overall
Agenda
Advantages
Feedback
and
Learning
Objectivit
y
Managem
ent by
Objectives

Balance Scorecard:
1) Holistic approach:
It brings strategy and vision as the center of Management focus. It helps Companies to assess
overall performance, improve operational processes and enable Management to develop
better plans for improvement.
2) Overall Agenda:
It brings together in a single Management Report, various aspects like customer oriented,
shortening response time, and improving quality etc. of competitive agenda.
3) Objectivity:
It emphasizes the need to provide the user with a set of information, which address all
relevant areas of performance in an objective and unbiased manner.

Balance Scorecard:
4) Management by Objectives:
The methodology of BSC facilitates communication and understanding of business goals and
strategies at all levels of the Firm. Thus it enables Management by Objective.
5) Feedback and Learning:
It provides strategic feedback and learning. BSC guards against subordination. It emphasizes
an integrated combination of traditional and non-traditional performance measures.
6) System Approach:
It helps Senior Managers to consider all the important performance measures together and
allows them to see whether an improvement in one area has been achieved at the expense of
another.

Malcolm Baldrige Framework
The Baldrige framework or criteria for performance excellence are a framework that any
organization can use to improve overall performance. While the Criteria characteristics, goals,
and purposes remain constant, the Criteria have evolved significantly over time to help
organizations address current economic and marketplace challenges and opportunities.
A) Characteristics:
1) Focus on results in all areas of organizational performance to ensure that all
strategies are balanced.
2) Are non-prescriptive and adaptable to promote creative and flexible approaches
for meeting requirements, and to foster incremental and breakthrough
improvements.
3) Support a systems perspective to maintain organization-wide goal alignment.
4) Support goal-based diagnosis on a profile of performance oriented strengths and
opportunities for improvement.

B) Goals:
The Criteria are designed to help organizations use an integrated approach to organizational
performance management that results in :
1) Delivery of ever-improving value to customers, contributing to marketplace success
2) Improvement of overall organizational effectiveness and capabilities.
3) Organizational and personal learning.
C) Purpose:
1) Is not prescriptive
2) Supports a systems approach to organization-wide goal alignment
3) Supports a goal-based means to diagnose the effectiveness of an organization and
to devise an improvement plan from that diagnosis
4) To help improve performance practices, capabilities, and results,
5) To facilitate communication and sharing of best practices information and
organizations of all types, and
6) To serve as a working tool for understanding and improving performance and for
guiding planning and opportunities for learning.

D) Seven Categories Make up the Award Criteria:

1) Leadership:
Examines how senior executives guide and sustain the organization and how the organization
addresses Governance, ethical, legal and community responsibilities.
2) Strategic Planning:
Examines how the organization sets strategic directions and how it determines and deploys
key action plans.
3) Customer Focus:
Examines how the organization determines requirements and expectations of customers and
markets; builds relationships with customers; and acquires, satisfies, and retains customers.
4) Measurement, Analysis, and Knowledge Management:
This examines the management, use, analysis, and improvement of data and information to
support key organization processes as well as how the organization reviews its performance.

5) Workforce Focus:
Examines how the organization engages, manages, and develops all those actively involved in
accomplishing the work of the organization to develop full potential and how the workforce is
aligned with the organizations objectives.
6) Process Management:
Examines aspects of how key production/delivery and support processes are designed,
managed, and improved.
7) Results:
This examines the organizations performance and improvement in its key business areas:
customer satisfaction, financial and marketplace performance, workforce, product/service,
and operational effectiveness, and leadership.

E) Significance:
1) Baldrige is the Most Comprehensive Management Framework Available:
It enables leaders to understand all of the internal and external forces that drive their
business; to prioritize, enhance, and improve what is critical to success; and to select the
courses of action that achieve, increase, and sustain the best possible overall performance.
2) Baldrige Works for all Types and Sizes of Organizations :
Baldrige works for all types and sizes of organizations because it asks the questions that all
high performing organizations consider and leaves the answers to those who can best
determine them the people who work in the organization.
3) Baldrige has a True Systems Perspective :
It looks at all components of an organization with equal emphasis and focuses on how each
part impacts and links with the others. It helps leaders align and integrate their leadership,
strategy, customer & market focus, data analysis & knowledge management, workforce, and
process management systems to produce the best overall results.
1.5 Measuring SBU Level Performance:

A) Concept of SBU:
Strategic Business Units or SBUs have been defined as autonomous divisions or organizational
units, small enough to be flexible and large enough to exercise control over most of the
factors affecting their long-term performance.
B) Definitions:
1) Fischmann and Santos :
SBUs refer to the division of business reality, followingspecific criteria of common
connection. Such criteria can be of an internal order (the chain of values within a company)
or an external order (the market environment of its operation). For the authors, the criteria
of common connection can be congruent or diversified. In any case, however, they must be
catalyses of the common characteristics of the businesses that in turn represent the profile
of each Strategic Unit.
2) Prahalad and Doz :
An SBU is a business obedient to the logic of portfolio configuration, whose contributive
economic value to the corporation results from the value logic and the logic of internal
governance.

C) SBU Level Performance Linkages with Enterprise Performance Management:
In order to accomplish its mission, every business unit should develop a competitive strategy. To
decide on its competitive strategy, a business unit should analyze the competitive structure of
the industry in which it plans to operate. Porters Five Forces Model analyzes the competitive
structure of an industry on the basis of the following factors:
1) Intensity of rivalry
2) Bargaining power of buyers
3) Bargaining power of the suppliers
4) Threat from substitutes
5) Threat from new entrants
An understanding of these factors can help a business unit to frame generic strategies through
which it can respond to the opportunities in the external environment. Alternative generic
strategies may be developed in terms of:
Low cost
Differentiation
Focus
Additional
Considerations

C) SBU Level Performance Linkages with Enterprise Performance Management:
1) Low cost:
The primary focus of this strategy is to achieve low cost relative to competitors. Cost
leadership can be achieved through economies of scale in production, learning curve effects,
tight cost control and cost minimization in areas such as research and development, services,
sales force or advertising.
2) Differentiation:
The goal of this strategy is to differentiate the product of the business unit, in order to create
a product that is perceived by customers as unique. Differentiation may be based on brand
loyalty, customer service, dealer network, product design and features, and product
technology.
3) Focus:
This strategy requires the business unit to focus on a particular buyer group, segment of the
product line, or geographic market. The focus strategy helps the unit to achieve core
competency by narrowing its market segment.
4) Additional Considerations:
Although a firm should adopt different controls for its units, there are some problems
associated with this strategy. The external environment of a business unit changes over time
and shifts in strategy may be required.
1.6 Transfer Pricing:

A) Concept:
The transfer price represents the value of goods/services furnished by a profit centre to other
responsibility centers within an organization. When internal exchanges of goods and services
take place among the different divisions of an organization, they have to be expressed in
monetary terms which are otherwise called the transfer price.
B) Objectives of Transfer Pricing:
Autonomy of the Division
Goal Congruence
Performance Appraisal

B) Objectives of Transfer Pricing:
1) Autonomy of the Division:
The prices should seek to maintain the maximum divisional autonomy so that the benefits, of
decentralization (motivation, better decision making, initiative etc.) are maintained.
2) Goal Congruence:
The prices should be set so that the divisional managements desire to maximize divisional
earrings is consistent with the objectives of the company as a whole. The transfer prices
should not encourage suboptimal decision-making.
3) Performance Appraisal:
The prices should enable reliable assessments to be made of divisional performance. There
are two board approaches to the determination of the transfer price and they are: (1) costbased and (2) market based. Based on the broad classification, there are five different types
of transfer prices they are (1) cost (2) cost plus a normal mark-up; (3) incremental cost; (4)
market price and (5) negotiated price..

C) Transfer Pricing Methods:
Market Based
Transfer
Pricing
Negotiated
Transfer
Pricing
Variable Cost
Transfer
Pricing
Cost Based
Pricing
Full Cost
Transfer
Pricing

C) Transfer Pricing Methods:
1) Market Based Transfer Pricing:
A market-based price is established by the open market. It is the price that a selling division
can get for its product in the external market or the price at which a buying division can
purchase the product in the market place.
2) Cost Based Pricing:
Cost based transfer pricing systems are commonly used because the conditions for setting
ideal market prices frequently do not exist.
3) Full Cost Transfer Pricing:
This method, and the variant which is full costs plus a profit mark-up, has the disadvantage
that suboptimal decision-making may occur particularly when there is idle capacity within the
firm.
4) Variable Cost Transfer Pricing:
Under this system transfers would be made at the variable costs up to the point of transfer.
Assuming that the variable cost is a good approximation of economic marginal cost then this
system would enable decisions to be made which would be in the interests of the firm as a
whole.
5) Negotiated Transfer Pricing:
This would be appropriate if it could be assumed that such negotiations would
result in decisions which were in the interests of the firm as a whole and which
were acceptable to the parties concerned.

D) Applicability of Transfer Pricing

D) Applicability of Transfer Pricing:
1) Breakup of Organisation into Units and Activities:
One key application of transfer pricing is to allow the breaking up of the organisation into
units and activities so that it can explore what these contribute to organisational value and it
is also important in understanding how value is generated within the organisation both to
stimulate policy and to set up motivational systems for individuals and groups of employees.
2) Strategic Instrument to Tackle the Issues of Brand Proliferation:
Decentralised transnational corporations use transfer pricing as a strategic instrument to
tackle the issues of brand proliferation.
3) Serve Cross Border Transaction :
Transfer prices serve to determine the income of both parties involved in the crossborder
transaction. The transfer price therefore tends to shape the tax base of the countries involved
in crossborder transactions.
4) Government-based Motivation:
The actions of government may have an impact on the Transfer pricing system of a
financial institution in a number of different ways of which the most central relate to
capital and liquidity requirements.

5) Funding Evaluation :
If any mergers and acquisitions (M&A) proposal in the finance industry will require valuation
and evaluation of the financial impacts of the decision.
6) Establish Profit Centres and Investment Centres :
The use of transfer pricing systems to establish profit centres and investment centres for
different types of unit may lead to behaviour which is more consistent with the overall goals
of the organisation and enhance the motivation of staff.
7) Organisational Management:
This is seen in terms of understanding how a financial organisation generates value and the
setting up d` the management and motivational systems that allow it to achieve a desired
level of performance.
8) Enhancing Operational Performance:

Transfer pricing has emerged as a critical success factor in corporate strategic
planning and executive decision-making. Companies focused on growth and market
leadership have recognized the important role transfer pricing can play in addressing
the corporate tax burden, enhancing operational performance, reducing tax
compliance exposure and increasing cash flow.

9) Other Applications:
a) Companies tend to look at transfer pricing not just as a mere accounting exercise, but also
as an important tool in policy formulation towards achievement of corporate objectives.
b) Transfer pricing acts as a major source of political conflict within the organization and this
takes place irrespective of the method used for this purpose. Different methods may,
however, increase or decrease the possibility of conflict.
c) Companies tend to use a variety of transfer pricing methods. However, the dominant
among them are the market prices or the methods based on modifications of the market
prices.
d) Even though many companies use transfer prices as a policy variable, it is not the major or
principal policy variable.
e) International companies use conscious manipulation of transfer prices as an instrument of
maximizing achievement of corporate goals.
1.7 Goal Congruence through Transfer Pricing:

The purpose of management control is to maximize congruence among the goals of the
organization, its various entities and its individual managers. This is called goal congruence. The
way in which managers react to management control information depends to a large extent on
their personal goals.
A) Informal Factors that Influence Goal Congruence:
Both formal systems and informal processes influence human behavior in organizations;
consequently, they affect the degree to which goal congruence can be achieved.
Informal Factors
External Factors
Culture
Internal Factors
Management
Style
Informal
Organization
Perception and
Communication

1) External Factors:
External factors are norms of desirable behavior that exist in the society of which the
organization is a part. These norms include a set of attitudes, often collectively referred to as
the work ethic, which is manifested in employees loyalty to the organization, their diligence,
their spirit, and their pride in doing a good job.
2) Internal Factors :
a) Culture:
The most important internal factor is the organizations own culture the common beliefs,
shared values, norms of behavior, and assumptions that are implicitly accepted and
explicitly manifested throughout the organization. Cultural norms are extremely important
since them explain why two organizations, with identical formal management control
systems, may vary in terms of actual control.
b) Management Style:
The internal factor that probably has the strongest impact on management control is
management style. Usually, subordinated attitudes reflect what they perceive their
superiors attitudes to be, and their superiors attitudes ultimately stem from the CEO.

2) Internal Factors :
c) The Informal Organization:
The lines on an organization chart depict the formal relationshipsthat is, the official
authority and responsibilitiesof each manager: The chart may show; for example, that
the production manager of Division A reports to the general manager of Division A But in
the course of fulfilling her responsibilities, the production manager of Division A actually
communicates with many other people in the organization, as well as with other managers,
support units, the headquarters staff} and people who are simply friends and acquaintances.
d) Perception and Communication:
In working toward the goals of the organization, operating managers must know what
these goals are and what actions they are supposed to take to achieve them.

B) The Formal Control System Rules:
1) Physical Controls :
Security guards, locked storerooms, vaults, computer passwords, television surveillance, and
other physical controls may be part of the control structure.
2) Manuals:
Much judgment is involved in deciding which rules should be written into a manual, which
should be considered to be guidelines rather than fiats, how much discretion should be
allowed, and a host of other considerations.
3) System Safeguards:
Various safeguards are built into the information processing system to ensure that the
information flowing through the system is accurate, and to prevent fraud of every sort.
4) Task Control Systems:
Task control is the process of assuring that specific tasks are carried out efficiently and
effectively. Many of these tasks are controlled by rules.

C) Problems of Goal Congruence:
Goal congruence is an important condition for effective performance management. The problem
of goal congruence can be described in more detail in the following way.
1) A first problem that can arise is a lack of congruence between the corporate and departmental
goals.
2) Top management might be striving for a company goal of strong growth and therefore wants th
division to grow. In this case, there is a lack of congruence between the different visions, and a
number of meetings will have to be organized to align the goals and strategies.
3) There should be goal congruence between profit centres and the parent organization.

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1.

Enterprise Performance Management

Performance management is the process through which supervisors and those

1.Enterprise Performance Management:

1.1 Enterprise Performance Management:

1.1 Enterprise Performance Management:

1.2 Performance Management:

1.2 Performance Management:

1.2 Performance Management:

1.2 Performance Management:

1.2 Performance Management:

1.2 Performance Management:

1.2 Performance Management:

1.2 Performance Management:

1.2 Performance Management:

1.Financial Performance Evaluation Parameter:

1.3 Financial Performance Evaluation Parameter:

1.3 Financial Performance Evaluation Parameter:

1) To Determine the Contribution of Sub-Units:

1.3 Financial Performance Evaluation Parameter:

1) Identify the Responsibility Centers :

1.3 Financial Performance Evaluation Parameter:

1.3 Financial Performance Evaluation Parameter:

1.3 Financial Performance Evaluation Parameter:

1.3 Financial Performance Evaluation Parameter:

1.3 Financial Performance Evaluation Parameter:

1.3 Financial Performance Evaluation Parameter:

1.3 Financial Performance Evaluation Parameter:

1.3 Financial Performance Evaluation Parameter:

1.3 Financial Performance Evaluation Parameter:

1.3 Financial Performance Evaluation Parameter:

1.3 Financial Performance Evaluation Parameter:

1.3 Financial Performance Evaluation Parameter:

1.3 Financial Performance Evaluation Parameter:

Types of Expense Centers

1.3 Financial Performance Evaluation Parameter:

1.3 Financial Performance Evaluation Parameter:

1.3 Financial Performance Evaluation Parameter:

1.3 Financial Performance Evaluation Parameter:

1.3 Financial Performance Evaluation Parameter:

1.3 Financial Performance Evaluation Parameter:

Net Operating Income After Taxes

ROI=Profit Margin Investment Turnover

1.3 Financial Performance Evaluation Parameter:

c) Market Value Added (MVA):

1.3 Financial Performance Evaluation Parameter:

1.3 Financial Performance Evaluation Parameter:

1.3 Financial Performance Evaluation Parameter:

C) Applications of the DuPont Framework:

1.3 Financial Performance Evaluation Parameter:

2) As the role of the credit manager is expanded cross-functionally, he or she may be

1.3 Financial Performance Evaluation Parameter:

1.3 Financial Performance Evaluation Parameter:

1.3 Financial Performance Evaluation Parameter:

1.3 Financial Performance Evaluation Parameter:

1.3 Financial Performance Evaluation Parameter:

1.4 Non-Financial Performance Evaluation Parameter:

1.4 Non-Financial Performance Evaluation Parameter:

1.4 Non-Financial Performance Evaluation Parameter:

1.4 Non-Financial Performance Evaluation Parameter:

1.4 Non-Financial Performance Evaluation Parameter:

1.4 Non-Financial Performance Evaluation Parameter:

1.4 Non-Financial Performance Evaluation Parameter: