1. © 2012 Pearson Prentice Hall. All rights reserved. Measuring and Managing Customer Relationships Chapter 6

2. © 2012 Pearson Prentice Hall. All rights reserved. Life-Cycle Profitability Companies invest considerable resources to attract new customers, which may turn out to be unprofitable Customer Lifetime Value (CLV) calculates the customer’s profit each year after all costs and the discounted cash flows are compared to the initial acquisition costs to obtain the total value of the customer A company using CLV is tracking how much it spent to acquire each customer and the profits earned

3. © 2012 Pearson Prentice Hall. All rights reserved. Life Cycle Profitability The critical parameters for calculating Lifetime Customer Value are: – Initial acquisition cost – Profits or losses earned each year – Additional costs to retain the customer – Duration of the relationship

4. © 2012 Pearson Prentice Hall. All rights reserved. Measuring Customer Performance with Nonfinancial Metrics Focusing on only financial metrics may cause a company to take actions that could risk the company’s long-term relationship with a customer

5. © 2012 Pearson Prentice Hall. All rights reserved. Customer Satisfaction Most companies attempt to measure customer satisfaction by using surveys Typical survey questions address: – Product quality – Ease of ordering – Responsiveness of company personnel – Customer complaint services

6. © 2012 Pearson Prentice Hall. All rights reserved. Customer Loyalty Loyal customers are valuable for several reasons: – Greater likelihood to repurchase – Persuade others to become new customers – Less likely to defect for price discounts from competitors – Willing to pay a price premium to retain a relationship with a key supplier – Willing to work with the supplier to improve performance and develop new products

7. © 2012 Pearson Prentice Hall. All rights reserved. Net Promoter Score Some researchers have found that there is a low correlation between customer satisfaction and future revenue growth Customers often remain with their current supplier because of lack of interest in moving, high switching costs, or lack of an alternative supplier A customer’s willingness to recommend a company is strongly correlated to future sales growth Customer surveys have been expanded to ask if a customer is willing to recommend the company

8. © 2012 Pearson Prentice Hall. All rights reserved. Measuring and Managing Life-Cycle Costs Chapter 8

9. © 2012 Pearson Prentice Hall. All rights reserved. Total-Life-Cycle Costing Total-life-cycle costing (TLCC) is the approach companies use to understand and manage all costs incurred in: – Research, development and engineering cycle – Manufacturing cycle – Post-sale service and disposal cycle Also known as managing costs “from the cradle to the grave”

10. © 2012 Pearson Prentice Hall. All rights reserved. Total-Life-Cycle Costing Each part of a company’s value chain (new product development, production, distribution, marketing, sales, post sale service and disposal) is typically managed by a different organizational function Companies need a total-life-cycle perspective that integrates the tradeoffs and performance over time and across functional units

11. © 2012 Pearson Prentice Hall. All rights reserved. Research, Development, and Engineering (RD&E) Stage The RD&E Stage has three substages: – Market research – Product design – Product development By some estimates, 80% to 85% of a product’s total life costs are committed by decisions made in the RD&E stage of a product’s life

12. © 2012 Pearson Prentice Hall. All rights reserved. Manufacturing Stage This stage offers little opportunity for engineering decisions to reduce costs since most costs have already been determined during the RD&E stage Methods to help improve product costs include: – Product and process costing – Facilities layout – Kaizen – Benchmarking – Just-in-time manufacturing

13. © 2012 Pearson Prentice Hall. All rights reserved. Post-Sale Service and Disposal Stage The service stage begins once the first unit of a product is in the hands of the customer Disposal occurs at the end of a product’s life and lasts until the customer retires the final unit of a product

14. © 2012 Pearson Prentice Hall. All rights reserved. The Service Stage The service stage typically consists of three substages: – Rapid growth From the first time the product is shipped through the growth stage of its sales – Transition From the peak of sales to the peak in the service stage – Maturity From the peak in the service stage to the time the last shipment is made to a customer

15. © 2012 Pearson Prentice Hall. All rights reserved. The Disposal Stage Disposal occurs at the end of a product’s life and lasts until the customer retires the final unit of a product Disposal costs often include those associated with eliminating any harmful effects associated with the end of a product’s useful life Products whose disposal could involve harmful effects to the environment, such as nuclear waste or toxic chemicals, often incur very high costs

16. © 2012 Pearson Prentice Hall. All rights reserved. Target Costing An approach that considers manufacturing costs early in the design decisions Helps engineers design new products that meet customers’ expectations and that can be manufactured at a desired cost An important management accounting method for cost reduction during the design stage that helps manage total-life-cycle costs

17. © 2012 Pearson Prentice Hall. All rights reserved. The Traditional Method Begins with market research into customer requirements followed by product specification Companies engage in product design and engineering and obtain prices from suppliers After the engineers and designers have determined product design, cost is estimated

18. © 2012 Pearson Prentice Hall. All rights reserved. Target Costing Method Although the initial steps appear similar to traditional costing, there are some notable differences: – Marketing research is customer-driven – Project engineers attempt to design costs out of the product before design and development end and manufacturing begins – The total-life-cycle concept is used by making it a key goal to minimize the cost of ownership of a product over its useful life

19. © 2012 Pearson Prentice Hall. All rights reserved. Target Costing Method Engineers set an allowable cost that enables the targeted product profit margin to be achieved at a price customers are willing to pay The target profit margin results from a long-run profit analysis, often based on return on sales The target cost is the difference between the target selling price and the target profit margin

20. © 2012 Pearson Prentice Hall. All rights reserved. Target Costing Method Once the total target cost has been set, the company must determine target costs for each component The value engineering process includes examination of each component of a product to determine whether it is possible to reduce costs while maintaining functionality and performance Several iterations of value engineering are usually needed before the final target cost is achieved

21. © 2012 Pearson Prentice Hall. All rights reserved. Target Costing Method Two other differences characterize the process: – Throughout the entire process, cross-functional product teams made up of individuals representing the entire value chain guide the process – Suppliers play a critical role in making target costing work

22. © 2012 Pearson Prentice Hall. All rights reserved. Cost Analysis Cost analysis requires five sub-activities: 1.Develop a list of product components and functions 2.Perform a functional cost breakdown 3.Determine the relative importance of customers’ requirements 4.Relate features to functions 5.Develop relative functional rankings

23. © 2012 Pearson Prentice Hall. All rights reserved. Conduct Value Engineering Value engineering—organized effort directed at the various components for the purpose of achieving these functions at the lowest overall cost without reductions in required performance, reliability, maintainability, quality, safety, recyclability, and usability

24. © 2012 Pearson Prentice Hall. All rights reserved. Conduct Value Engineering Two sub-activities: – Identify components for cost reduction by computing a value index (ratio of the value to the customer and the percentage of total cost devoted to each component) – Generate cost reduction and function enhancement ideas

25. © 2012 Pearson Prentice Hall. All rights reserved. Concerns about Target Costing Lack of understanding of the target costing concept Poor implementation of the teamwork concept Employee burnout Overly long development time

26. © 2012 Pearson Prentice Hall. All rights reserved. Break-Even Time (BET) BET measures the length of time from the project’s beginning until the product has been introduced and generates enough profit to pay back the investment originally made in its development

27. © 2012 Pearson Prentice Hall. All rights reserved. Break-Even Time (BET) BET brings together in a single measurement three critical elements in an effective and efficient product development process: – BET requires tracking the entire cost of the design and development process so that the company can recover its total investment – BET stresses profitability and encourages cross functional teamwork to meet the customer needs – BET is denominated in time and encourages the launch of new products faster than the competition so that higher sales can be earned sooner to repay the product development investment

28. © 2012 Pearson Prentice Hall. All rights reserved. Behavioral and Organizational Issues in Management Accounting and Control Systems Chapter 9

29. © 2012 Pearson Prentice Hall. All rights reserved. Management Accounting and Control Systems (MACS) A major role for MACS is to motivate behavior congruent with the desires of the organization Technical Considerations – Relevance of information that is accurate, timely, consistent, and flexible – Scope must be comprehensive and include all activities across the entire value chain of the organization

30. © 2012 Pearson Prentice Hall. All rights reserved. Major Behavioral Considerations Embedding the organization’s ethical code of conduct into MACS design Using a mix of short- and long-term qualitative and quantitative performance measures Empowering employees to be involved in decision making and MACS design Developing an appropriate incentive system to reward performance

31. © 2012 Pearson Prentice Hall. All rights reserved. Impact of MACS on Behavior Many managers try to implement new systems without considering the behavioral implications and consequences of a MACS Negative consequences: – Goal congruence may not occur – Motivation could be low – Employees may be encouraged to engage in dysfunctional behavior

32. © 2012 Pearson Prentice Hall. All rights reserved. Human Resource Model of Motivation (HRMM) Contemporary management view of motivation Based on initiatives to improve the quality of working life and the strong influence of Japanese management practices Introduces a high level of employee responsibility for and participation in decisions in the work environment Serves as the basis for the presentation of the four behavioral considerations in MACS design

33. © 2012 Pearson Prentice Hall. All rights reserved. Central Assumptions of HRMM Organizations operate under a system of beliefs about the values, purpose, and direction of their organization People find work enjoyable and desire to participate in: – Developing objectives – Making decisions – Attaining goals in their work environment Individuals are motivated by both financial and nonfinancial means of compensation

34. © 2012 Pearson Prentice Hall. All rights reserved. Ethical Code of Conduct and MACS Design A set of ethical principles is at the center of many boundary systems MACS should incorporate the principles of an organization’s code of ethical conduct MACS that incorporate ethical principles can provide decision makers with guidance as they face ethical dilemmas

35. © 2012 Pearson Prentice Hall. All rights reserved. Avoiding Ethical Dilemmas Most organizations attempt to address ethical considerations and avoid ethical dilemmas by developing a code of ethics Ethical considerations listed in descending order of authority: – Legal rules – Societal norms – Professional memberships – Organizational/group norms – Personal norms

36. © 2012 Pearson Prentice Hall. All rights reserved. Role of Senior Management A critical variable that can reduce ethical conflicts is the way that the chief executive and other senior managers behave and conduct business If these individuals demonstrate exemplary behavior, other organizational members will have role models to emulate Organizations whose leaders evince unethical behavior cannot expect their employees to behave according to high ethical standards

37. © 2012 Pearson Prentice Hall. All rights reserved. Conflict with Stated Values Employees may observe management, even senior management, engaging in unethical behavior This type of conflict is the most difficult because the organization is misrepresenting its ethical system The employee is in a position of drawing attention to the problem by being a whistle-blower

38. © 2012 Pearson Prentice Hall. All rights reserved. Conflict with Stated Values Experts who have studied this problem advise that the individual should determine: – That the facts are correct and that a conflict exists between the organization’s stated ethical policy and the actions of its employees in practice – Whether this conflict is institutional or reflects the decisions and actions of only a small minority of employees Most experts recommend that the employee work with respected leaders in the organization to change the discrepancy between practiced and stated ethics

39. © 2012 Pearson Prentice Hall. All rights reserved. Conflict with Stated Values Other potential courses of action include: – Point out the discrepancy to a superior and refuse to act unethically – Point out the discrepancy to a superior and act unethically – Take the discrepancy to a mediator in the organization, if one exists – Work with respected leaders in the organization to change the discrepancy

40. © 2012 Pearson Prentice Hall. All rights reserved. Conflict with Stated Values – Go outside the organization to publicly resolve the issue – Go outside the organization anonymously to resolve the issue – Resign and go public to resolve the issue – Resign and remain silent – Do nothing, hoping that the problem vanishes

41. © 2012 Pearson Prentice Hall. All rights reserved. Effective Ethical Control To promote ethical decision making, an ethical control system should include the following: – A statement of the organization’s values and code of ethics written in practical terms, with examples that the employees can relate to their individual jobs – A clear statement of the employee’s ethical responsibilities for every job description and a specific review of the employee’s ethical performance as part of every performance review – Adequate training to help employees identify ethical dilemmas in practice and learn how to deal with those they can reasonably expect to face

42. © 2012 Pearson Prentice Hall. All rights reserved. Effective Ethical Control – Evidence that senior management expects members to adhere to its code of ethics, meaning that management must: Provide a statement of the consequences of violating the organization’s code of ethics Establish a means of dealing with violations of the organization’s code of ethics promptly, ruthlessly, and consistently according to the statement of consequences Provide visible support of ethical decision making at every opportunity Provide a private line of communication (without retribution) from employees directly to the chief executive officer, chief operating officer, head of human resource management, or someone else on the board of directors

43. © 2012 Pearson Prentice Hall. All rights reserved. Effective Ethical Control – Evidence that employees can make ethical decisions or report violations of the organization’s stated ethics (be the whistle-blower) without fear of reprisals from superiors, subordinates, or peers Formal training is part of the process of promoting ethical decision making