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SolutionsManual–Chapter7

SolutionstoDiscussionQuestions

Astheanswertomostquestionsalwaysseemstobe,itdependsonthetypeofbusinesswearerunning.Onadashboard,we’dprobablylikesomethingthatchangesfrequentlysoeverytimewelookatthedashboardtheinformationtherewillhelpguideusindecisionmaking(byhelpingwithforecastsorcorrectorconfirmpriorforecasts).Forfinancialperformance,wemayusesomethingliketotalsalestodateifwearetryingtogrowsalesoverlastyear.Orcountcashonhandifweareworriedaboutpayingourbillscomingup.Forcustomers,perhapswecouldtrackhowmanycomefromdifferentefforts,likefromawebsite,orwordofmouth,etc.

MorespecificallyforarentalunitthatusesAirBNB,thefinancialperformanceKPIsmighttrackhowdaysofourshort-termrentalarerentedandatwhataveragerate.ThecustomerKPIsmightincludecustomersatisfaction,sayovertherecentmonthcomparedtoprioryearaverage,asAirBNBtrackscustomersatisfactionforitslandlords.

Astheanswertomostquestionsis,itdependsonthetypeofbusinesswearerunning.Onadashboard,we’dprobablylikesomethingthatchangesfrequentlysoeverytimewelookatthedashboardtheinformationtherewillhelpusindecisionmaking.ForinternalprocessKPIs,we’reinterestedinhowwe’reperforminginsidethecompany.Ifwe’reneedingtogettomarketquicklywithnewproducts,we’dwanttousetimetomarket.Ifwe’reconcernedaboutquality,we’dusesomesixsigmalevelquestions,orextentofreworks?Organizationally,wemaybeconcernedaboutemployeesatisfactionandemployeeturnover,sowecouldusethoseasKPIs.

MorespecificallyforarentalunitbusinessthatusesAirBNB,andinternalprocessmeasures,wemaybeinterestedinthetimetakentoturnoverarentedhousetogetreadyforanewrenter.ApossibleorganizationalKPImightbetogaugetheturnoverofourhousecleaningstaffsinceeachnewstaffentailssignificanteffortstofindareplacementandtotrainthem.

Customerretentionrate,customersatisfactionindexandcustomerturnoverratemightallbegoodKPIsforAmazon,particularlysincetheyappeartobemoreinterestedinmarketsharethanaboutprofitability.

PWCwouldwanttotracktheprofitabilityperclienttomakesuretheyarepricingtheirauditandtaxworkinaprofitableway,whileatthesametimecheckingoncustomersatisfactionandcustomerretention.

TheCustomer/ClientKPIscouldincludeitemssuchas:

CustomerRetentionRate

CustomerSatisfactionIndex

CustomerProfitabilityScore

CustomerLifetimeValue

CustomerTurnoverRate

CustomerEngagement

CustomerComplaints

TheFinancialPerformanceKPIscouldincludeitemssuchas:

NetProfitpercustomer/client

NetProfitMargin

GrossProfitMargin

OperatingProfitMargin

EBITDA

RevenueGrowthRate

Justasthebalancedscorecardsuggests,WalmartmusttradeoffcurrentprofitabilitywithdevelopingorganizationalcapabilitytocompetewithAmazonandothercurrentandpotentialcompetitors.Byconsistentlytrackingperformanceonbothdimensionsandcommunicatingwithitsemployees,suppliersandcustomersthethingsthataremostimportanttothem,theycanworktobalancebothdimensionsofperformance.

IfcustomersarehappywiththeirTeslavehicleandtheirTeslacustomerservice,theywillcontinuetobuyTeslaproducts.ThroughuseofthecustomerretentionKPIandcustomersatisfactionKPI,theycantrackhowwelltheyaredoingwiththeircustomers.TheymightalsobeabletocountcustomercomplaintsasaKPIasanotherwaytotrackhowwelltheyaredoing.

Generallygettingreal-timedataisgenerallyveryhelpfulanduseful.However,sometimesgettingdataeachminuteofeachdayisnothelpful.Anallowanceofdoubtfulaccountsdoesnotneedtobeupdatedinrealtimeorperhapsonlybeupdatedifitiskeptupaspartofatrailingmonthaverage.

Answersmayvary.Itseemslikediversityfitsbestwithintheorganizationalcapability.Thatwehaveadiversesetofemployeestohelpourcompanybethebestitcanbe.Diversityisoftremendousimportancetoallinstitutionsincludinginstitutionsofhigherlearning.

SolutionstoProblems

Problem7.1

AnswerswillvarydependingontheKPIschosen.IfwechosethefirstfiveitemsunderFinancialPerformance,theywouldbeasfollows:

1.NetProfit

2.NetProfitMargin

3.GrossProfitMargin

4.OperatingProfitMargin

5.EBITDA

ForeachoftheseKPIs,theywouldcomeoutofthefinancialreportingsystem.Currentdatacouldbeusedforthetrailingmonthtohelptrackprofitability.Eachofthesemetricslendthemselveswelltotrackingoverrecentmonths,comparingtolastmonthandprioryearaveragetoaddresspotentialseasonalitysincemostbusinessesandproductsexperienceseasonality.

HereisasetofKPIsthatcouldbechosenforEmployeePerformance.

57.RevenuePerEmployee

58.EmployeeSatisfactionIndex

61.EmployeeChurnRate

62.AverageEmployeeTenure

65.SalaryCompetitivenessRatio(SCR)

66.TimetoHire

Whileeachisunique,eachcapturesadifferentaspectofemployeeperformance.Employeesatisfaction(#58)couldcomefromsurveysofsatisfaction(#58)hopefullytakenfrequently.Revenueperemployee(#57)couldcomeviacountsofemployeesandtheirrelatedrevenuesthatcouldcomefromthefinancialreportingorHRsystem.Employeechurnrate(#61)andaverageemployeetenure(#62)couldcomebylookingatHRdataonemployeeturnover,includingemployeesleavingpositionsforanyreasonandemployeeshired.Thisdatacouldprobablybelookingatprioryearorpriormonthaverage.Dataforthesalarycompetitivenessratio(#65)couldprobablybetakenbysurveysofoutsideemployersintheregionandintheindustryandthencomparingtoourownsalary.Thequestionoftenishowoftenwewanttopayforasalarysurvey.Thesevisualizationswouldusuallybegraphsortablesthatshowhowwehavefaredinthepastandhowwearedoingcurrently.Benchmarkswillusuallycomefromtheindustryandfromtheregionsincemanyemployeescomeincloseproximitytothecompanylocation.

AnswerswillvarydependingontheKPIschosen.IfwechosethefirstfiveitemsunderMarketingPerformance,theywouldbeasfollows:

27.MarketGrowthRate

28.MarketShare

29.BrandEquity

30.CostperLead

31.ConversionRate

Thesedetailswouldcomeoutofthemarketinginformationsystem,orquitelikelyoutoftheCustomerRelationshipManagementsystem(thathasdetailsofinteractionswithnew,potentialandexistingclients).Informationabouttheoverallproductmarketwouldlikelycomefromnationalsurveysandtradeindustrypublicationsandstatistics.Costperleadwouldbetrackedbyestimatingcostsspenttodeveloptheleadthatwouldbegatheredfromthefinancialreportingsystem.Frequencywouldgreatlydependonthespeedofchangeandourcompany’sdesiresforupdates.Thisdatacouldprobablybelookingatprioryearorpriormonthaverage.

Visualizationscouldbegraphsandtablesofcurrentperformanceordashboardsthatreportchangesinperformancetoseeiftherecentmonth’sorweek’sperformanceisimprovingordeclining.Benchmarkswillusuallycomefromtheindustryandfromtheregionsincemanycustomerswilllikelyhavesimilarcharacteristicsintheindustry.

Dataanalyticsgivesyoutheskillstolearnfromanddrawinsightsintothedatathatisavailable.Whiledataanalyticsdoesn’tnecessarilymakethedatamoretimely,themorewebecomefamiliarwiththedataandcananalyzeitquicklytomakedashboards,assessKPIshelpsfacilitatequickerassessmentandproposedchanges.

TherearemanypossiblebenchmarksforROA.Thebestplacetoprobablystartisthefirm’sownpastperformanceandwhethercurrentperformancemeetsorexceedsthatperformance.IndustryROAgivesusagoodideaifwearedoingaswellasothersinthesameindustrythatfacesimilarconstraints,customersandmarketdemands.Acomparisontobothrecentandlong-termindustryperformance(likerecentfiveyears)wouldbothbeappropriatecomparisons.

Thecompanyisprobablymakingprogressiftheyareimprovingfromtheirownpastperformanceaswellastheperformanceofcompetitors.

DataanalyticscanhelpaccessROAoftheirowncompany,competitorsandindustry.ItmightalsobeabletoperformaDuPontanalysisofROAbybreakingitdownintoprofitmargins,assetturnoverandcapitalstructurecomponents.

ItseemsusefultolookatROAonamonthlybasistocomparetothesamemonth12monthsearlier.Andthenalsocomparequarterlyandannualperformancetocompetitorsandtotheindustry.Allwillbeuseful,butlikelydependentoncompanyneedstoidentifytrendsthatneedcorrecting.

Therearemanypossiblebenchmarksfortimetomarket.Thebestplacetoprobablystartisthefirm’sownpastperformanceandwhethercurrentperformancemeetsorexceedsthatperformance.Industrytimetomarketgivesusagoodideaifwearedoingaswellasothersinthesameindustrythatfacesimilarconstraints,timetoinnovate,customersandtheirchangingtrendsaswellasmarketdemands.Acomparisontobothrecentandlong-termindustrytimetomarket(likerecentfiveyears)wouldbothbeappropriatecomparisons.

Thecompanyisprobablymakingprogressiftheyareimprovingfromtheir