Key Success Variables as Control Indicators Chapter 2

KEY SUCCESS

Introduction ØA

key variable is a significant indicator of business activity, whose sudden and unpredictable change warrants immediate action by management. Ø A small change in a key variable will have significant impact on the performance of the organization. Ø E.g.: profitability, market position, 2

Sources of key variables ØIndustry

characteristics. characteristics. ØEnvironmental factors. ØCompetitive strategy. ØStake holders. ØSignificant functions.

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Industry characteristics In a given industry, there are certain general requirements for success, which apply to all the firms. E.g.: in insurance industry, the basic requirement for the success of a firm is a positive investment performance.

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Environmental factors The economic and political climate consist of environmental factors which determine key variables. E.g.: publishers who depend on the postal services are affected by postal rates.

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Competitive strategy The strategy that a company adapts usually determines the variables that must be monitored and emphasized. emphasized. An organization that follows a low- cost strategy will require an analysis of the product cost structure.

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Stake holders Aspects of the business that are important to key stakeholders, namely customers, executives, suppliers may be considered as key variables.

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Significant functions In an organization with a function based structure, every manager can identify one or a few key variables related to the function of the unit.

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Identification of key variables Input variables. Ø Ø Ø

Raw material availability. Raw material quality. Raw material costs.

Production variables: Ø Ø Ø Ø Ø Ø

Capacity utilization. Losses. Quality control. Maintenance. Costs. Delivery. 9

Marketing variables ØOrder

book position. ØMarket share. ØInstitutional sales. ØAsset management variables. ØAsset turnover. ØWorking capital turnover.

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 Types of variables Broadly classified as: ØStrategy. ØStructural. ØProcess. ØEnvironmental.

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Key variables and their interaction Integration Effects Among Variables

Environmental Variables

Process Variables

Strategy Variables

Structural Variables

Performance Accomplishment Of  Goals 12

Steps involved in the identification of  key variables ØIdentification

of decision variables. ØInteractions with the environment. ØImplications for the control structure. ØKey success variables and the control paradigm.

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Identification of decision variables Ø

Decision variables refers to those key success factors which are subject to manipulation through a conscious decision making process. Ø To summarize, decision variables are those key success factors which help the management to choose a particular course of action and execute it promptly. 14

Interaction with the environment Ø

To identify key success factors, environmental variables has to be identified. Rogers hall has identified 4 critical relationships in a magazine publishing company, which interact with the environment. Ø Specified demand for advertising pages. Ø Demand for regular subscriptions. 15

Implications for the control structure Important Parameters: ØEfficiency and effectiveness. ØEconomies of scale. ØProblems of co-ordination. ØAssignment of profit responsibility. ØConflict of profit responsibility. The control systems prefer a divisional structure in an organization, because within a division, the departments are 16

Key success variables and the control paradigm The hierarchical structure of an organization gives an equal chance to process all the information pertaining to key success factors, and to make business decisions. Through decentralization, the management gives a degree of autonomy in decision making to subordinates.

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Multivariate analysis and key variables Ø

Multivariate analysis helps in identifying the critical control variables and latent factors. ØMultivariate analysis help in identifying the wide range of key variables which are latent, yet contribute to the success of the organization. ØThe motive behind using 18

Key variables in selected industries The key variables for various industries are mentioned below: 2. Insuranc Insurance e industry. industry. 3. Hotel Hotel indu industr stry. y. 4. Sugar Sugar indust industry. ry. 5. Managem Management ent training training institut institute. e. 6. Power Power indus industry try..

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Insurance industry In an insurance industry, the key variables are number of claims settled in a given period of time, number of claims outstanding against major insurance policy, the number of  policies processed in a given period of time, and growth rate in insurance business with respect to each policy.

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Hotel industry ØRoom

occupancy rate. ØNumber of complaints by customers. ØAmount of food wasted in the restaurant. ØPercentage of revenue contributed by the restaurant. ØPercentage of absenteeism among 21

Sugar industry ØPrice

of sugar sold in the open market. ØTransport cost per ton of cane. ØFuel cost per kg of sugar. ØNumber of production days lost. ØSupport prices by government.

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Management training institute Ø Number

of students appearing for an entrance examination. Ø Percentage of absenteeism among students. Ø Number of research projects undertaken and those completed. Ø Time spent by faculty on teaching and research. 23

Power industry Ø The

inputs for a power industry are cost and water. The output variables includes transmission losses. The key variables include the following. Ø Quantity and quality of coal. Ø Availability of wagons for transportation of coal. Ø Availability of water. Ø Capacity utilization. 24