Key Variables 2

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Key success variables as control

indicators


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Key success variables as control

indicators


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Key Variables

It is a significant indicator of businessactivity 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.


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A small change in key variable hasa significant impact on performanceof the organization.

Key variables differ fromorganization to organization.

Key variables are crucial to the

organization for attainment of itsgoals and objectives.


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The nature of the task,the technology andthe environment in which the organizationoperates are the factors which greatlyinfluence the identification of key variables.

Once the manager identifies the keyvariables he can rely on them to monitorbusiness activities and alert the

organization to the changes in businessenvironment that could affect attainment ofmanagement goals.


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The top management should analyzethe reasons for significant changes in

key variables continually.

Some examples of key variables areprofitability,market position,productivity

and employee attitude.

Though key variables differ frombusiness to business,they have certain

common characterstics.


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Characterstics of Key variables

They determine success or failure of theorganization.

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


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Predictable variables are not

key variables.

Management action isneeded whenever significant

changes occur in keyvariables.


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Identifying key variables

The most common method ofidentifying key variables is input

through output model.

The input variables are related to

raw material.

The throughput variables arerelated to production,processing

and manufacturing.

The output variables are related to


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Input variables Raw material availability

Raw material quality

Raw material cost


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Production variables It includes the following:-

Capacity utilization:-It is affected by marketingvariables 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.


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Losses :-The percentage of spoilage andwastage in process of manufacturing the product.

Quality control:-The number of complaints fromcustomers and the quantity of goods returned are

usually good indicators of quality.

Maintainence:-The number and percentage ofproductive hours lost due to maintainence .


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Marketing Variables

Order book position:-It isimportant for organizations that take

manufacturing based on orders.It

helps the marketing department to

decide planning schedules for

marketing and distribution.

Market share :-performance andcompetitive strength.


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Institutional sales:-If institutionalsales 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.


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Asset management variables

Asset turnover :- The assetturnover denotes the relationshipbetween the total assets in an

organization and sales volume.Adecrease in asset turnover is not agood sign for the organization and

needs immediate managerialattention.


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Working capital turnover:-Theefficiency of management of

working capital is indicated bythe working capital turnover.The

inventory turnover and accounts

receivable can also help inanalysis of working capital.


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Sources of Key variables

Industry characterstics

Environmental characterstics

Competitive strategyStakeholders

Significant functions


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Industry characterstics :-In agiven industry , there are certain

general requirements forsuccess which applies to all the

firms.In the insurance

industry,for example the basicrequirement for success is

positive investment


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Industry , the occupation rateiscritera for success.

Environmental factors:-Itincludes the economic andpolitical climate.example is the

publishers who depend on thepostal services are affected bypostal rates.


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Competitive strategy:-Thestrategy that a company adoptsusually determine the variablesthat must be monitored andemphasized.An organizationthat follows a low cost strategywill require an analysis of theproduct cost structure.


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Stakeholders :-It includes thecustomers,suppliers,executives andcreditors can also be considered as keyvariables.

Significant functions :- In anorganization with a function basedstructure , every manager can identifyone or more few key variables related to

the function of the unit.A key variable foran operations manager , for example,isthe quality of goods produced.


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Type of key variables

Strategy

Structural variables

Process variablesenvironmental


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CONTROL PARADIGM

The control system should fit with the hierarchicalstructure 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.


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DYNAMICS OF THE CONTROL

PROCESS

After identification of key variables it is importantto examine the dynamics of control system.

Controlprocess

REINFORCINGINTERACTIONS

BALANCINGINTERACTIONS


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Cont..

These interactions are circular and are calledCAUSAL LOOPS.

Secondary Effects also plays a major role inreinforcement.

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.


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SOLUTION TO

DYNAMICCONTROL

PROBLEM


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ADAPTIVE ORGANIZATION

In today's world characterized by rapidunpredictable 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.


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ADAPTIVE ORGANIZATION

Cont.

An organization that is open to new ideas.

i. Encourage employee creativity.

ii. Participative style of management

Adaptive leadership theory is composed of the

two major concepts of the

i. taking-in of information (assimilation)

ii. internal change (accommodation)


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The Dynamics of controlling a management team

Kirby conducted a study to show how a reinforcing system of informal activitiesenables 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.


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Key Variables used in certain Industries

Industry Key Variable

Airline Paid Seats, Capacity Seats, Fuel

Cost, Turnaround time

College No. of applicants, offers made

Hospital Beds occupied, Avalaible beds

Magazine Renewals, Subscription rate

Restaurant Service, Quality


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COMPEHENSIVE PERFORMANCEINDICATORS

KEY VARIABLES SHOULD BE

IDENTIFIED AT EACH LEVELAND FOR EACH

RESPONSIBILITY CENTER OFTHE ORGANIZATION


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PROBLEMS

CONCENTRATING ON VARIABLES

THAT ARE EASY TO MEASURE For Example :-

Focus on Quantity and not QualityReduction of expenses on R&D,Maintenance and Employee Development.


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PRECAUTIONS

VARIABLESSHOULD

CORRESPONDWITH THEGOALS ANDOBJECTIVES

ONLYCRUCIAL

VARIABLESSHOULD BEMEASURED

ACCOUNTFOR BOTH

SHORT-TERMOBJECTIVESAND LONG-TERM GOALS


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GENERAL ELECTRIC

MEASURING THE WHOLEDEPARTMENT AS AN ECONOMICENTITY

MEASURING THE FUNCTIONALDEPARTMENTS

MEASURING THE PERFORMANCE OF

THE MANAGEMENT OF THEDEPARTMENTS

ON THE BASIS OF THE ABOVE MEASURES, THEPRINCIPLES FOR THE CONTROL PROGRAM AT

GE WERE FORMULATED

THE PRINCIPLES FOCUSED


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THE PRINCIPLES FOCUSEDON -

FACTUAL KNOWLEDGE TO SUPPORTJUDGEMENT IN PERFORMANCEAPPRAISAL OF DEPARTMENTS

PERFORMANCE INFORMATION FORBOTH SHORT-RUN AS WELL ASLONG-TERM GOALS

MINIMUM NUMBER OF MEASURESFOR USE AT EACH LEVEL OFORGANIZATION


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PERFORMANCE MEASURESSHORT-TERM PROFITABILITY

MARKET SHARE

PRODUCTIVITY

PRODUCT LEADERSHIP

PERSONNEL DEVELOPMENT

EMPLOYEE ATTITUDE

PUBLIC RESPONSIBILITY

BALANCE BETWEEN SHORT-RANGE OBJECTIVES

& LONG-RANGE GOALS


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LIMITATIONS OF INDICATORS

ABSENCE OF CONSENSUS AMONGMANAGERS ON USE OF INDICATORS

PROBLEMS ENCOUNTERED DURING

MEASUREMENT OF INDICATORS

LACK OF CLEAR SPECIFICATION OF THEUNIT OF MEASUREMENT

LACK OF CONSISTENT INFORMATIONLEADING TO INCORRECT CONCLUSIONS


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Key variables in selected in

industries


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Insurance Industry

Number of claims settledIn given period of time.

Number of policies

processed. Growth rate in business

with respect to each policy


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Hotel Industry

Room occupancy rate Number of complaints

by customers.

Amount of food wastedin restaurant

Percentage of revenue

contributed by restaurant.

Percentage of absenteeism

among employees.


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Sugar Industry

Price of sugar sold inthe open market.

Transport cost per

ton of cane.

Fuel cost per

kilogram of sugar.

Number of production

days lost.

Support price by

government.


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Management Training Institutes

Number of students appearingfor 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.


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Power Industry

Quantity and qualityof coal.

Availability of wagons

for transportation.Availability of water.

Capacity utilization.

Preventive and breakdown

maintenance.


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Airlines Industry

Attracting customer. Managing fleet.

Managing people.

Managing finances.

l f k i bl f


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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

Key Variables 2

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