JT Bear Division's Business Strategy, Key Success Factors, and Responsibility Centres - Example

Bahaviour and Organisation [Name] [Professor Name] [Course] [Date] Table of Contents Bahaviour and Organisation 1 Table of Contents 1 Introduction 2 Key Concepts: Business strategy, responsibility centres, cost centres, discretionary centres, engineered cost centres 3 1.0 JT Bear Division’s Business Strategy 3 1.1 Generic Strategies 4 1.2 Competitive Advantage 5 2.0 JT Bear Division’s Key Success Factors (KSF’s) 5 2.1 Brief explanation of the meaning of KSF’s 5 2.2 Justification for the KSF’s 6 3.0 Responsibility Centres 7 3.1 Meaning and purpose of Responsibility Accounting 8 3.2 Benefits of treating the Production Department and the Repairs and Maintenance Department as responsibility centres 8 4.0 Types of Cost Centres 10 4.1 Discretionary costs 11 4.3 Engineered costs 11 5.0 Problems in measuring and evaluating Discretionary Cost Centres 12 Introduction This report focuses on critique of performance evaluation and responsibility accounting of JB Collectibles’ new division called JT Bear Division. The Division will focus on production of JT Bears, which has become exceedingly popular to the point that the company has been witnessing difficulties in satisfying demand. To finalise the organizational structure of JT Bear Division, this report aims to provide an outline of JT Bear Division’s Business Strategy, with major focus on Business mission and the means of Competitive Advantage. JT Bear Division’s Key Success Factors (KSF’s) are also examined. Other areas explored in the report include the fundamentals of responsibility centres, with emphasis on the Production Department and the Repairs and Maintenance Department. The significance of Responsibility Accounting is also discussed. With regard to cost centres, the report suggests that the type of cost centre (discretionary or engineered) that should be used for JT Bear Production Department is the engineered cost centre. Conversely, discretionary cost centre is appropriate for the Repairs and Maintenance Department. A detailed explanation of the specific problems involved in measuring and evaluating performance of Discretionary Cost Centres and their managers are also discussed. Key Concepts: Business strategy, responsibility centres, cost centres, discretionary centres, engineered cost centres 1.0 JT Bear Division’s Business Strategy Business strategy (or long-term business panning) provides means by which JT Bear Division sets out to attain its mission, vision and objectives (Analoui and Karami 2003). The division’s business strategy is concerned with decisions on what products to apportion greater resources. For instance, even though the JT Collectibles deals in various collectible toys, it introduced a new product called the JT Bear. From its market analysis, the company found that JT Bear has the capacity to attain significant share of the growing market. As a result, the company decided to establish a new division to focus on the production and sale of JT Bear. Two main categories of JT Bear Division’s business strategy can be established, namely generic strategies and competitive advantage. 1.1 Generic Strategies The division’s business strategies is focused on five major product areas, namely cutting, sewing, construction of facial feature, filling and assembly. A number of departments have been created to help in achieving these product areas, including the Production and Repairs and Maintenance Department. Concerning the generic strategies, these comprise the division’s mission, vision and objective. JT Bear Division’s mission statement is tied to three basic beliefs (O'SUllivan 2012). These include customer satisfaction, respect for individual employees and striving for excellence. Counting on these basic beliefs, the division will seek to provide customer satisfaction. For instance, customers are allowed to customise their bears to fit personal preferences, such as the bear’s facial expression, outfit, fur colour and eye colour. The division also ensures life-time guarantee of the bear as the repairs division will undertake repair of bears free of charge. The division seeks to show respect to employees. For instance, the division seeks to protect the health and the safety of employees involved in the production of JT Bear. Since the bear is source of airborne acrylic and polyester fibres, air filtration system will be installed to remove dust and fibres that may pollute the air. Further, it strives for excellence by encouraging innovativeness. For instance, the division will promote customer-involvement in JT Bear’s innovativeness and production process by allowing them to customise their bears to fit their tastes and preferences. The division’s success also aims to rely on the steadfast willingness to execute strategies that are consistent with the aforementioned basic beliefs (O'SUllivan 2012). 1.2 Competitive Advantage JT Bear Division’s competitive strategies are integral to ensuring JT Bear’s are competitive in the bear production industry (Porter 2000). The division’s competitive strategies are focused on implementing activities and processes better than rivals. To be competitive, the division has sought to be unique so as to out-compete potential rivals. The company uses product differentiation to gain competitive advantage. By ensuring that the product is different from that of the potential rivals, the division hopes to attain high sales and customer loyalty. This is ensured through additional product features, packaging and labelling and customer care. For instance, JT Bear is made of high quality filling and fibre materials. Additionally, the facial features are hand-sewn. Lastly, a woven satin label with JT Collectibles’ insignia stating “Made in Australia by JT Collectibles” is sewn to the back of each JT Bear (Gates 2010). 2.0 JT Bear Division’s Key Success Factors (KSF’s) 2.1 Brief explanation of the meaning of KSF’s Key success factors (KSFs) refers to a set of cardinal areas that an organization is obligated to perform well consistently if it has to achieve its mission (Gates 2010). Typically, KSFs consist of a list of aspect or areas of organization performance that determine whether the organization will be able to achieve its strategic objectives as well as sustain itself (Parmentor, D 2011). 2.2 Justification for the KSF’s JT Bear Division’s KSFs can be derived through analysis of its goals and objectives and the barriers anticipated in achieving these (Gates 2010, 1-2). With reference to the case scenario, the limited range of areas in which customer satisfaction can be ensured, will guarantee competitive advantage to the JT Bears. This means that things must go right in these key areas for the business to thrive otherwise the division’s efforts will be futile or less desirable (MindTools 2013). The division’s key success factors include: Increased customer satisfaction. Optimal use of human resources and assets. Initiating value-adding projects. Encouraging customers to be key advocates for business. Prioritizing processes and activities that encourage fast cash flow from major accounts. Increased customer satisfaction: JT Bear Division has to ensure increased customer satisfaction to ensure it consolidates its market share and sale of the bears. To ensure this, customers are allowed to customize their bears to fit personal preferences. Additionally, JT Bears come with a life-time guarantee as any repairs are made at no cost. Prioritizing all activities that ensure increased revenues: JT Bear Division needs to prioritize on the major activities that will ensure increased revenue if it has to sustain itself financially. The division’s production department will focus on 5 key activities, namely cutting, sewing, facial feature construction, filling and assembly. These activities will aim to ensure production of quality bears that expected to guarantee increased customer and revenue base. Optimal use of human resources and assets: Since production of the JT Bears is labour-intensive as it involves using sewing machines and hand-stitching, JT Bear Division has to make maximal use of its human resources and equipment. To ensure this, it has developed two strategies to ensure the health and safety of its workers and to service its service equipment. First, the division seeks to install an air filtration system to remove dust and fibres from its production plant. Next, the production workers will wear dusk masks when working with the fabric or when filling. The division also seeks to clean and maintain its cutting, sewing and stuffing appliances on a regular basis. 3.0 Responsibility Centres A responsibility centre refers to an organizational department or unit that is headed by a single manager responsible for its overall activities and results (Drury 2005). In brief, it refers to an area of responsibility controlled by an individual. For instance, at JT Collectibles, the authority and responsibility is shared through delegation of duties. This is accompanied by segmentation and divisionalisation. JT Bear Division is an outcome of such an arrangement (Barnat 2005). However, the division may further be subdivided into line of responsibilities called departments. For instance, JT Bear Repairs and Maintenance Department will be headed by Dao Dung who will independently use his judgement in making decisions on the kinds of repairs needed on case by case basis. Under this arrangement, Dau Dung is responsible for the consequences of his decisions, and hence is duly accountable for the activities in the department (Global Academic Institute Kuwait 2000). 3.1 Meaning and purpose of Responsibility Accounting Responsibility accounting is a process of dividing the structure of an organization into a range of responsibility centres to determine their performance (Drury 2005). In brief, responsibility accounting is a tool for measuring the performance of divisions. More specifically, it determines the contribution made by the division to the whole organization. Responsibility accounting presents the required support for evaluating responsibility centres through accumulation and reporting of relevant information that is related to the activities of various responsibility centres. It also refers o the decentralization of responsibility centres to enable attaining desirable control and subsequently the goal of the organization. With reference to JT Bear Division, it can be used to measure the performance of Dao Dung and the Repairs and Maintenance Department. Consequently, it influences the way in which Dau Dung will carry out his responsibilities in a way that contributes to the corporate objective. It also serves to motivate the divisional manager to operate his division in a way that is consistent with the fundamental goals of the whole organization (Drury 2005). 3.2 Benefits of treating the Production Department and the Repairs and Maintenance Department as responsibility centres With particular reference to JT Bear Division, responsibility centre refers to a set of departments dependent on each other and which constitute the division as a whole (Ciurlau 2012). The examples include the Repairs and Maintenance Department and Production Department. Both are aimed at having a degree of autonomy in the utilization and optimisation of the resources allocated to them. There are several benefits for treating the departments as responsibility centres and use of responsibility accounting in these departments. First, responsibility centres enable allocation to be made of all activities of JT Bear Division. These may include the items of income and expenditure (such as capital expenditure) allocated to a well-define responsibility centre. This is effective in accounting process as well as in determining the productivity of each of the two departments. For instance, the expenditure of the Production Department is well-defined. If the expenses outweigh the department’s profitability, the division may look into ways of cutting costs (Drury 2005). Treating the Repairs and Maintenance Department, and Production Department as responsibility centres can also help motivate the workers in these departments. Although the managers in the departments are held accountable for their decisions, they work independently (Drury 2005). This may highly motivate the managers and their respective departments towards achieving the corporate objectives. For instance, Dau Dung gets the things done in the Repairs and Maintenance Department on his way with undue interference. This implies that JT Bear Division gives much preference to the workers. It also shows that the organization believes in their abilities and capacities. In treating the Repairs and Maintenance Department, and Production Department as responsibility centres, there is a link between achievement and effort. This means that any possible “loopholes” can be easily detected and managed. Through decentralization, or dividing the division into responsibility centres, realistic goals can be set for these centres. This makes it easy to achieve them. Additionally, the contribution of the employees can be easily evaluated by the employees themselves with the view of attaining the overall goals of JT Collectibles. A sense of belonging to the whole organization can further be created through responsibility accounting (Drury 2005). Treating the departments as responsibility centres means that authority at JT Bears Divisions is decentralized. This enables the goals and objective of the division to be easily and quickly communicated thus allowing guidance to be given to managers or employees to the operation (Hotel Mule 2010). Responsibility centres encourages cost-consciousness to be generated resulting in automatic reduction of cost (Hotel Mule 2010). Additional benefits include making it easy to detect the weak areas of operation in the division so that corrective measures can be undertaken. When the negative variances are recorded between the target and the actual performance of the departments, it allows for change in management strategy to correct the variance or discrepancy (Ciurlau 2012). 4.0 Types of Cost Centres Cost centres are types of responsibility centres where the manager is held accountable for controlling cost inputs (Drury 2005). They are responsible for certain activities such as production, release authorisation and maintenance that are related to each other. Cost centres are suitable for production departments or Repairs and Maintenance Department since the objectives of managers in these departments are mainly focused on production of JT Bears in amounts that ensure minimum consumption of material and optimal use of human resources and the production equipment. There are two types of cost centres, including discretionary cost centre and engineered cost centre (Ciurlau 2012). 4.1 Discretionary costs Discretionary cost centre consist of those costs that cannot be established based on the planning of the production processes (Drury 2005). This type of costs centre is distinguished by the fact that outcome of the activity is not directly measurable. Examples of such activities include maintenance and repair. Further, it is difficult to separate the variable costs from those of the structure. Their budget is created based on the experiences of the people in charge. It should further be established that the fact that the effectiveness and the efficiencies of the services in this centre are not measurable, particularly since the workers under this centres have no authority over the level of prices, which however must adhere to the fees already established by the management (Obreja 2008). Additionally, their objectives include ensuring high quality services in compliance with the budgetary allocation (Hotel Mule 2010). Based on these characteristics, discretionary cost centre is the type of cost centre that should be used for the Repairs and Maintenance Department since the cost of processing the JT Bears cannot be predetermined (Crawford and Henry 2000). The output in this department is not easily measurable in financial terms. Additionally, the relationship between the resources spent on inputs and the outcomes produced is weak. 4.3 Engineered costs Engineered cost centres are responsibility centres where an output can be measured quantitatively (Drury 2005). In addition, there is a considerably good understanding of the input and output. A typical example includes the amount of expenses that should be incurred to attain a certain amount of output. Such activities in an organization include production processes (Hotel Mule 2010). With regard to the JT Bears Division, a typical department that fits within this centre is the Production Department, since the cost of processing the JT Bears can be predetermined. 5.0 Problems in measuring and evaluating Discretionary Cost Centres The performance of discretionary costs centres and their managers is assessed based on the complex system of variances in costs that compare the actual cost of performance and the budgeted cost of performance (Kaplan 2006). There are several problems involved in measurement and evaluation of the performance of discretionary cost centres and their managers. In the case scenario, these conform to the problems involved in measuring and evaluating the performance of Repairs and Maintenance Department and its manager Dao Dung. Overheads can sometimes be allocated incorrectly. This makes it difficult to measure the actual performance of the discretionary cost centres and their managers. It also causes over- or underestimation of profits. Overhead allocation is a major aspect of the functions as cost centres (ALoA 2000). With reference to JT Bears Division, overheads are the expenses that are not directly generated through the production department. When JT Collectibles wishes to determine the actual costs of producing JT Bears at the Production Department, it will allocate the costs to the department (or cost centre), where they will be added to the direct costs of production. For instance, the cost of employing support staff (such as receptionist) could be allocated to the product. However, the main problem is that since the process of allocating the costs is arbitrary, the company runs the risk of distorting the actual cost of producing JT Bears (ALoA 2000). Classification of costs is also a major problem faced in the measurement and evaluation of the performance of discretionary cost centres and their managers. For the evaluation to be effective, proper classification of the measurable and non-measurable expenses is critical. However, problems arise in the process because of the complex nature of a variety of expenses (Slotta 2008; Kaplan 2006). 6.0 References ALoA 2000, Cost Centres and Profit Centres, viewed 18 August 2013, http://www.steplearn.net/bassaleg/departments/Social%20Sciences/Business/a%20level/Finance/cost%20centres.pdf Analoui, F & Karami, A 2003, Strategic Management in Small and Medium Enterprises, Cengage Learning EMEA: Hampshire Barnat, R 2005, Responsibility Centres, viewed 18 August 2013, http://www.strategic-control.24xls.com/en204 Ciurlau, L 2012, Measuring Financial Performance Types of Responsibility Centres, viewed 18 August 2013, http://fse.tibiscus.ro/anale/Lucrari2012_2/AnaleFSE_2012_2_051.pdf Crawford, D & Henry, E 2000, “Budgeting and Performance Evaluation at the Berkshire Toy Company,” Issues in Accounting Education, Vol. 15. No. 2 pp.283-293 Drury, C 2005, Management Accounting for Business, Cengage Learning EMEA: Hampshire Gates, L 2010, Strategic Planning with Critical Success Factors and Future Scenarios: An Integrated Strategic Planning Framework, Software Engineering Institute, viewed 18 August 2013, http://www.sei.cmu.edu/reports/10tr037.pdf Global Academic Institute Kuwait 2000, Responsibility Centres, viewed 18 August 2013, http://globalacademicinstitutekuwait.com/Post-Graduate%20Diploma%20in%20Financial%20Management/ms-43/Unit-4.pdf Hotel Mule 2010, Budgeting and responsibility accounting, viewed 18 August 2013, http://hotelmule.com/html/53/n-2753-4.html Kaplan, R 2006, The Demise of Cost and Profit Centers, viewed 18 August 2013, http://www.hbs.edu/faculty/Publication%20Files/07-030.pdf MindTools 2013, Critical Success Factors: Identifying the Things That Really Matter for Success, http://www.mindtools.com/pages/article/newLDR_80.htm Obreja, C 2008, The Role Of Responsibility Centres in The Overall Performance of The Entity, viewed 18 August 2013, http://www.seap.usv.ro/annals/ojs/index.php/annals/article/viewFile/48/47 O'SUllivan, K 2012, Strategic Options – Approaches to Sustainable Competitive Advantage, Certified Public Accountants, viewed 18 August 2013, http://www.cpaireland.ie/UserFiles/File/students/2012%20Examinations/Exam%20Related%20Articles/2012%20Sand%20L%20STRATEGIC%20OPTIONS.pdf Parmentor, D 2011, Finding your organisation’s critical success factors – the missing link in performance management, viewed 18 August 2013, http://csf.davidparmenter.com/articles/finding-your-organisations-critical-success-factors/ Porter, M 2000, “What is Strategy?” Harvard Business Review, viewed 18 August 2013 http://hbr.org/product/what-is-strategy/an/96608-PDF-ENG Slotta H 2008, Transfer Pricing, viewed 18 August 2013, http://www.personal.psu.edu/sjh11/BA521/NEW/Class08/TransferPricing.pdf Read More