Key success variables as control indicators

Key success variables as control indicators

Key Variables
It is a significant indicator of business

activity whose sudden or unpredicatble change warrants immediate action by the management. These are called as key success factors as they help in explaining the success or failure of the organization.

 A small change in key variable has

a significant impact on performance of the organization. Key variables differ from organization to organization. Key variables are crucial to the organization for attainment of its goals and objectives.

 The nature of the task,the technology and

the environment in which the organization operates are the factors which greatly influence the identification of key variables. Once the manager identifies the key variables he can rely on them to monitor business activities and alert the organization to the changes in business environment that could affect attainment of management goals.

 The top management should analyze

the reasons for significant changes in key variables continually. Some examples of key variables are profitability,market position,productivity and employee attitude. Though key variables differ from business to business,they have certain common characterstics.

Characterstics of Key variables

They determine success or failure of the

organization. They require examination and in depth evaluation. They are easily measurable either directly or via surrogate or substitute. They are volatile. Changes in key variables are unpredicatble

Predictable variables are not

key variables. Management action is needed whenever significant changes occur in key variables.

Identifying key variables

The most common method of

identifying key variables is input through output model. The input variables are related to raw material. The throughput variables are related to production,processing and manufacturing. The output variables are related to

Input variables
Raw material availability

Raw material quality

Raw material cost

Production variables
It includes the following:-

Capacity utilization:-It is affected by marketing

variables or procurement variables.It reflects the ability of the production staff to schedule and plan what to produce , how much to produce and when to produce.

 Losses :-The percentage of spoilage and

wastage in process of manufacturing the product. Quality control:-The number of complaints from customers and the quantity of goods returned are usually good indicators of quality. Maintainence:-The number and percentage of productive hours lost due to maintainence .

Marketing Variables
Order book position:-It is

important for organizations that take manufacturing based on orders.It helps the marketing department to decide planning schedules for marketing and distribution. Market share :-performance and competitive strength.

 Institutional sales:-If institutional

sales comprise a significant part of total sales,the number of orders received from institutional buyers is a key variable.A decline in it is a signal of trouble in marketing area.

Asset management variables

Asset turnover :- The asset

turnover denotes the relationship between the total assets in an organization and sales volume.A decrease in asset turnover is not a good sign for the organization and needs immediate managerial attention.

 Working capital turnover:-The

efficiency of management of working capital is indicated by the working capital turnover.The inventory turnover and accounts receivable can also help in analysis of working capital.

Sources of Key variables

Industry characterstics

Environmental characterstics
Competitive strategy

Stakeholders
Significant functions

 Industry characterstics :-In a

given industry , there are certain general requirements for success which applies to all the firms.In the insurance industry,for example the basic requirement for success is positive investment

Industry , the occupation rate iscritera for success. Environmental factors:-It includes the economic and political climate.example is the publishers who depend on the postal services are affected by postal rates.

 Competitive strategy:-The

strategy that a company adopts usually determine the variables that must be monitored and emphasized.An organization that follows a low cost strategy will require an analysis of the product cost structure.

 Stakeholders :-It includes the

customers,suppliers,executives and creditors can also be considered as key variables. Significant functions :- In an organization with a function based structure , every manager can identify one or more few key variables related to the function of the unit.A key variable for an operations manager , for example,is the quality of goods produced.

Type of key variables

Strategy Structural variables Process variables environmental

CONTROL PARADIGM
The control system should fit with the hierarchical

structure of an organization. Decentralization gives autonomy to managers of various units of organization. Responsibility centers are set up to coordinate and control various activities. Each responsibility center has its own goals and strategies.

DYNAMICS OF THE CONTROL PROCESS

After identification of key variables it is important

to examine the dynamics of control system.

Control process
REINFORCING INTERACTIONS BALANCING INTERACTIONS

Cont..
These interactions are circular and are called

CAUSAL LOOPS. Secondary Effects also plays a major role in reinforcement. Reasons for delays in control process:i. When management overreacts to a problem. ii. Management unable to solve a complex problem. This results in low performance. iii. A dominant team member can block informal planning efforts.

SOLUTION TO DYNAMIC CONTROL PROBLEM

ADAPTIVE ORGANIZATION

In today's world characterized by rapid unpredictable change and volatility, the sustainable ability to change is much more important than the ability to create change in the first place. Companies, like any living organism, must become learning organization that change and adapt to suit their changing business environment.

ADAPTIVE ORGANIZATION Cont.

An organization that is open to new ideas.

i.
ii. i. ii.

Encourage employee creativity. Participative style of management

Adaptive leadership theory is composed of the two major concepts of the taking-in of information (assimilation) internal change (accommodation)

The Dynamics of controlling a management team

Kirby conducted a study to show how a reinforcing system of informal activities enables successful teams to achieve goals. The key findings of the study are:

Successful teams normally have a culture of trust and openness.

The leaders develop certain preconceived ideas about the best way to perform any given action. The group has a shared vision of achieving the targets. The leaders also provide the right feedback which increases the level of trust and openness in the team.

The study also highlights 2 important concepts:

1. Creative Tension : When employees are able to perform effectively in order to

fill the

performance gap.

2. Emotional tension : When employees are unable to achieve the organisational

goals on account of their ambiguous roles.

Key Variables used in certain Industries

Industry Airline College Key Variable Paid Seats, Capacity Seats, Fuel Cost, Turnaround time No. of applicants, offers made

Hospital
Magazine Restaurant

Beds occupied, Avalaible beds

Renewals, Subscription rate Service, Quality

COMPEHENSIVE PERFORMANCE INDICATORS

KEY VARIABLES SHOULD BE IDENTIFIED AT EACH LEVEL AND FOR EACH RESPONSIBILITY CENTER OF THE ORGANIZATION

PROBLEMS
CONCENTRATING ON VARIABLES THAT ARE EASY TO MEASURE
For Example :Focus on Quantity and not Quality Reduction of expenses on R&D, Maintenance and Employee Development.

PRECAUTIONS
VARIABLES SHOULD CORRESPOND WITH THE GOALS AND OBJECTIVES ONLY CRUCIAL VARIABLES SHOULD BE MEASURED ACCOUNT FOR BOTH SHORT-TERM OBJECTIVES AND LONGTERM GOALS

GENERAL ELECTRIC
MEASURING THE WHOLE DEPARTMENT AS AN ECONOMIC ENTITY MEASURING THE FUNCTIONAL DEPARTMENTS MEASURING THE PERFORMANCE OF THE MANAGEMENT OF THE DEPARTMENTS ON THE BASIS OF THE ABOVE MEASURES, THE PRINCIPLES FOR THE CONTROL PROGRAM AT GE WERE FORMULATED

THE PRINCIPLES FOCUSED ON FACTUAL KNOWLEDGE TO SUPPORT JUDGEMENT IN PERFORMANCE APPRAISAL OF DEPARTMENTS

PERFORMANCE INFORMATION FOR BOTH SHORT-RUN AS WELL AS LONG-TERM GOALS

MINIMUM NUMBER OF MEASURES FOR USE AT EACH LEVEL OF ORGANIZATION

PERFORMANCE MEASURES
SHORT-TERM PROFITABILITY

MARKET SHARE
PRODUCTIVITY PRODUCT LEADERSHIP PERSONNEL DEVELOPMENT EMPLOYEE ATTITUDE

PUBLIC RESPONSIBILITY
BALANCE BETWEEN SHORT-RANGE OBJECTIVES & LONG-RANGE GOALS

LIMITATIONS OF INDICATORS
ABSENCE OF CONSENSUS AMONG MANAGERS ON USE OF INDICATORS
PROBLEMS ENCOUNTERED DURING MEASUREMENT OF INDICATORS LACK OF CLEAR SPECIFICATION OF THE UNIT OF MEASUREMENT LACK OF CONSISTENT INFORMATION LEADING TO INCORRECT CONCLUSIONS

Key variables in selected in industries

Insurance Industry
Number of claims settled

In given period of time. Number of policies processed. Growth rate in business with respect to each policy

Hotel Industry
Room occupancy rate

Number of complaints

by customers. Amount of food wasted in restaurant Percentage of revenue contributed by restaurant. Percentage of absenteeism among employees.

Sugar Industry
Price of sugar sold in

the open market. Transport cost per ton of cane. Fuel cost per kilogram of sugar. Number of production days lost. Support price by government.

Management Training Institutes

Number of students appearing

for an entrance examination. Percentage of absenteeism among students. Number of research projects undertaken and completed. Time spent by faculty on teaching and research. Time spent on management development programs.

Power Industry
Quantity and quality

of coal. Availability of wagons for transportation. Availability of water. Capacity utilization. Preventive and breakdown maintenance.

Airlines Industry
Attracting customer.

Managing fleet.
Managing people. Managing finances.

an example of key variables of magazine publishing company

The annual subscription rate

The advertising rates of the publisher

The annual expenditure incurred for the

promotion of subscription Annual expenditure for the promotion of the magazine The size of the magazine i.e. number of pages per issues