Chapter 2
The Organization as a System of Activities
Study Guide by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
ABKY Main Page |
Martin's Textbook Main Page
This chapter includes a discussion of several important management concepts including: strategy, levels of strategy, the value chain, activities, types of quality, types of control, performance measurements, methods for developing performance measurements, problems associated with managing by the numbers, life cycle costs, cost causes or drivers, activity data and the steps for activity based management, or activity value analysis.
| Level of Strategy | General Definition | Examples |
| Organizational | Determining what type of business the company is in or should be in. | Diversified or narrowly defined product or service. Example. Some companies do what the company does best and outsource the rest. |
| Business | Choosing target customers and competitive strategy. | Compete based on: Cost minimization (cost leadership) Niche (customer relationship) Innovation (product leadership) |
|
Operational |
Determining specifically how to pursue the strategy. | Defining the value chain or linked set of activities needed to serve the target customers. |
3. Classes of Activities Along the Value Chain
| Customer | Innovation | Operations | Service |
| Activities involved in determining what the customer wants, if possible even before the customer knows. | Activities related to developing the products and services needed to please customers. | Activities required to make and deliver the products and services to customers. In bound logistics, manufacturing, distribution etc. | Activities related to customer support after the sale. |
| Quality Concept | Definition |
| Quality of design, service or functionality |
Planned quality in terms of features, functions and reliability. High quality is where the product, or service has a relatively large number of features or level of functionality and reliability. A Cadillac is a higher quality product than a Chevrolet in this category. |
| Quality of conformance. |
High quality is where the product, or service conforms to the engineering specifications and customer expectations. Inexpensive products may be high quality products in terms of conformance. Expensive products are low quality if they do not meet these conformance expectations. A Cadillac could be lower quality than a Chevrolet in this category. |
| Type of Control | General Concept | More Specific Components |
| Organization control | Macro, long term | Includes: 1) specifying objectives, 2) communicating them to workers, 3) monitoring or measuring progress 4) acting on discrepancies. |
| Process or operations control | Micro, short term | Involves: 1) directing, 2) evaluating and 3) improving processes. Types of process controls include: task controls such as standard procedures and results controls.* |
* Statistical process control fits into the process control category, but it's not covered in the ABKY textbook. (See MAAW's SPC page).
6. Components of Effective Performance Measurements
1. Should have the customer's perspective.
2. Should be based on the customer's perception of value.
Customer validated outcomes measurements relate to value.
3. Consider all aspects of performance.
4. Provide feedback to help identify problems and potential
solutions.
7. Inputs, Outputs, Outcomes and Productivity
Input and output measurements are also useful, particularly output per input measurements, referred to as productivity measurements.
See ABKY Exhibit 2-5 for some examples of inputs , outputs (physical objective measures) and outcomes (subjective measures of value).
Note that productivity relates to efficiency rather than effectiveness. Killing a mosquito with a sledge hammer is effective , but not efficient . Efficient means no excess resources are used to achieve the objective.
8. Methods of Developing Performance Targets
Base targets on:
1. Potential performance
estimates.
2. Past performance.
3. Benchmarking against the best.
4. Customer expectations.
9. Types of Performance Measurements are Related To
1. Revenue and Cost - financial.
2. Quality (Quality of conformance) - non-financial measurements of conformance.
3. Service (Quality of design) - non-financial measurements such as
functionality, customer responsiveness, cycle time.
Overemphasis on financial measurements has been referred to as managing by the numbers (See Relevance Lost summary - Chapter 6). Problems caused by managing by the numbers include:
1. Focuses on cost cutting rather than
process improvements.
2. Implicitly assumes that only financial results are relevant.
3. Ignores the drivers or causes of the financial results, e.g., cost drivers.
Life cycle costs include all cost across the products life cycle including:
1. Development and design.
2. Introduction.
3. Production.
4. Distribution.
5. Post sales service.
6. Product take back.
7. Abandonment.
(See Artto and MAAW's PLC topic).
1. Customers requirements for products & services create the need for activities.
2. Activities consume resources.
3. Resources create costs.
Resource costs can be traced from resources to activities, then to products, services and customers. That is the basic underlying concept of activity based costing.
13. Advantages of the Activity Approach
Thinking in terms of activities helps identify activities that add value (from the customers perspective) and those that do not add value. Some activities that have been referred to as non-value added include materials and product inspection, handling and moving. Some have advocated eliminating non-value adding activities, but this confuses the issue. Note that the reasons the activities are needed must be removed first. Since most, it not all, activities involve some waste or excess, a better idea is to reduce the waste in all activities as well as to remove the need for non-value adding activities.
Activity data provide diagnostic information that helps identify waste and potential areas for improvement. Some examples include:
Time measurements related to
activities.
Amount of materials moved.
Number of times an activity is performed, e.g., number of moves.
Amount of storage space available and used.
Amount of rework.
As indicated above, a key idea is to eliminate the need for activities and reduce the waste in all activities. Eliminating waste can be accomplished by reengineering the company's operating processes. This is a theme in the area of the just-in-time philosophy and techniques to be covered later.
14. Five Steps for Activity Value Analysis or Activity Based Management
1. Identify objectives.
2. Chart or map the activities.
3. Classify activities according to whether or not they add
value for the customer.
4. Continuously improve the efficiency of all activities.
5. Eliminate wasteful activities by reengineering processes
to make them unnecessary.
Activity based management is defined in several ways by differ authors.
(See MAAW's ABM page).
_________________________________________
2-1. Why is the target set of customers the central strategic planning element? (See Levels of strategy).
2-2. What are stakeholders? (See the Estes summary).
2-3. Why should stakeholders requirements matter to an organization? (See the Handy summary). (See the Social accounting and Environmental cost topics for more on stakeholders).
2-4. What are organizational objectives?
2-5. What are the distinctions between the three levels of strategy: organizational level, business level and operational level? (See Levels of strategy).
2-6. What is the value chain? Provide an example. (See Figure 8-2 for Porter's view).
2-7. What is an activity? Provide an example. (See Classes of activities...).
2-8. How are service and quality defined? Are they related? Explain. (See Types of quality and Morse summary).
2-9. What elements does price, defined as the lifetime cost of a product to a customer include? (See Artto summary).
2-10. What is organizational control, and what are its four components? (See Types of control).
2-11. What is process, or operations control? (See Types of control).
2-12. What does effective mean? (See inputs, outputs, outcomes and productivity).
2-13. What does efficient mean? (See inputs, outputs, outcomes and productivity).
2-14. What are customer-validated performance measures? Provide an example. (See components of effective performance measurements).
2-15. How are outcome and output defined? Are they related? Explain. (See inputs, outputs, outcomes and productivity)
2-16. What is task control? Provide an example. (See Types of control).
2-17. What is results control? Provide an example. (See Types of control).
2-18. What is benchmarking? (This calls for a short answer since this topic is covered in Chapter 9. For long answers see the Chapter 9 summary and MAAW's Benchmarking topic).
2-19. What is managing by the numbers, and what problems are associated with such an approach? (See Managing by the numbers).
2-20. From the producer's point of view, what costs are included in life-cycle costs? (See Life cycle costs and Artto summary).
2-21. How does continuous improvement differ from reengineering? (See the PDSA graphics).
2-22. How are efficient and inefficient activities defined? (See inputs, outputs etc.).
2-23. How can activity, or value, analysis help an organization reduce costs while improving processes? (See Advantages of the activity approach and Five steps for activity value analysis).