There is often more than one way to improve a performance measure. Unfortunately, some of the actionstaken by managers to make their performance look better may actually harm the organization. For example, suppose the marketing department is held responsible only for increasing the performance measure“total revenues.” Increases in total revenues may be achieved by working harder and smarter, but theycan also usually be achieved by simply cutting prices. The increase in volume from cutting prices almostalways results in greater total revenues; however, it does not always lead to greater total profits. Thosewho design performance measurement systems need to keep in mind that managers who are under pressure to perform may take actions to improve performance measures that have negative consequenceselsewhere.Required:For each of the following situations, describe actions that managers might take to show improvement inthe performance measure but which do not actually lead to improvement in the organization’s overallperformance.1. Concerned with the slow rate at which new products are brought to market, top management of aconsumer electronics company introduces a new performance measure—speed-to- market. Theresearch and development department is given responsibility for this performance measure, whichmeasures the average amount of time a product is in development before it is released to the marketfor sale.2. The CEO of a telephone company has been under public pressure from city officials to fix the largenumber of public pay phones that do not work. The company’s repair people complain that the problemis vandalism and damage caused by theft of coins from coin boxes— particularly in high-crime areasin the city. The CEO says she wants the problem solved and has pledged to city officials that there willbe substantial improvement by the end of the year. To ensure that this is done, she makes the managersin charge of installing and maintaining pay phones responsible for increasing the percentage of publicpay phones that are fully functional.3. A manufacturing company has been plagued by the chronic failure to ship orders to customers by thepromised date. To solve this problem, the production manager has been given the responsibility ofincreasing the percentage of orders shipped on time. When a customer calls in an order, the productionmanager and the customer agree to a delivery date. If the order is not completed by that date, it iscounted as a late shipment.4. Concerned with the productivity of employees, the board of directors of a large multinationalcorporation has dictated that the manager of each subsidiary will be held responsible for increasingthe revenue per employee of his or her subsidiary.
There is often more than one way to improve a performance measure. Unfortunately, some of the actions
taken by managers to make their performance look better may actually harm the organization. For example, suppose the marketing department is held responsible only for increasing the performance measure
“total revenues.” Increases in total revenues may be achieved by working harder and smarter, but they
can also usually be achieved by simply cutting prices. The increase in volume from cutting prices almost
always results in greater total revenues; however, it does not always lead to greater total profits. Those
who design performance measurement systems need to keep in mind that managers who are under pressure to perform may take actions to improve performance measures that have negative consequences
elsewhere.
Required:
For each of the following situations, describe actions that managers might take to show improvement in
the performance measure but which do not actually lead to improvement in the organization’s overall
performance.
1. Concerned with the slow rate at which new products are brought to market, top management of a
consumer electronics company introduces a new performance measure—speed-to- market. The
research and development department is given responsibility for this performance measure, which
measures the average amount of time a product is in development before it is released to the market
for sale.
2. The CEO of a telephone company has been under public pressure from city officials to fix the large
number of public pay phones that do not work. The company’s repair people complain that the problem
is vandalism and damage caused by theft of coins from coin boxes— particularly in high-crime areas
in the city. The CEO says she wants the problem solved and has pledged to city officials that there will
be substantial improvement by the end of the year. To ensure that this is done, she makes the managers
in charge of installing and maintaining pay phones responsible for increasing the percentage of public
pay phones that are fully functional.
3. A manufacturing company has been plagued by the chronic failure to ship orders to customers by the
promised date. To solve this problem, the production manager has been given the responsibility of
increasing the percentage of orders shipped on time. When a customer calls in an order, the production
manager and the customer agree to a delivery date. If the order is not completed by that date, it is
counted as a late shipment.
4. Concerned with the productivity of employees, the board of directors of a large multinational
corporation has dictated that the manager of each subsidiary will be held responsible for increasing
the revenue per employee of his or her subsidiary.
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