Contemporary Performance Measurement Systems And Pricing Strategies Essay.

What are the essential characteristics of contemporary (modern) performance measurement systems?

What are the four key perspectives in the balanced scorecard and how are they presented in a strategy map?

And how can a strategy map be used in developing and testing an organisation’s strategy?

You should provide an example to illustrate your answer. 

Customer profitability focuses on analyzingthe customers in terms of their profit contribution to the business. The analysis helps the management to decide on which customers to retain, which ones to drop or if it would be effective to acquire new ones. Customer profitability analysis helps the management in; a) enhancing acquisition spend, b) focus on retention plans that bring profitability, c) rework on the discounting policy, d) revisit the channel strategy, and e) improve the terms of business with respective customers (Ryals, 2009, p. 56).

The main objective of any business is to maximizeowners’ wealth through profitability. Although customer profitability state that customer contributing to organizational loss should be dropped, I don’t believe that such a decision is good for the business. Company should focus on improving terms of business, channel strategy, discounting policy, and control acquisition expenditure (Ryals, 2009, p. 71).

Predatory pricing is used by large firms in the market by setting the prices unprofitably low as a strategy to push small firms out of the market. Onthe other hand, dumping refer to selling exported goods at a lower price compared to the domestic goods as a strategy to drive a foreign industry out of the market. Lastly, price fixing refers to competing companies in the industry coming together and agreeing not to offer their products or services below a given price (Source Wikipedia, 2010, p. 173).

1. NT Airways: A daily return-flight from Darwin to Singapore
2. Pricing Strategy
3. Business Travellers

• If the price is $41,350, NT Airways will sell 50 seats.
• The variable cost would be $ 150.
• Therefore, the contribution margin per passenger = $41,350 -$ 150 = $ 41,200.

• If the price is $1298, NT Airways will sell 177 seats.
• The variable cost would be $ 165.
• Therefore, the contribution margin per passenger = $1298 -$ 165 = $ 1,133.

Contribution margin from business travellers at prices of $41,350 and $1,298, respectively,
follow:

At a price of $ 41,350: $41,200 × 50 passengers At a price of $ 1,298: $1,133 × 177 passengers

= $ 2,060,000 = $ 200,547

Therefore, NT Airways would maximize its contribution margin and operating income by charging business travelers a fare of $ 41,350.

1. Pleasure Travellers

• If the price is $600, NT Airways will sell 300 seats.
• The variable cost would be $ 65.
• Therefore, the contribution margin per passenger = $600 -$ 65 = $ 535.

• If the price is $779, NT Airways will sell 295 seats.
• The variable cost would be $ 80.
• Therefore, the contribution margin per passenger = $779 -$ 80 = $ 699.

Contribution margin from business travelers at prices of $41,350 and $1,298, respectively,
follow:

At a price of $ 600: $535 × 300 passengers At a price of $ 779: $699 × 295 passengers

= $ 160,500 = $ 206,205

Therefore, NT Airways would maximize its contribution margin and operating income by charging pleasure travelers a fare of $ 779.

Recommended pricing strategy: Price differentiation would be the best strategy to maximize NT Airways’ contribution margin and operating income. Therefore, the business travelers should be charged $ 41,350 per passenger while pleasure travelers should be charged $779 per passenger (Source Wikipedia, 2010, p. 134).

1. Implementing price discrimination

The elasticity of demand between the two classes of passengers causes different demand for each one. The fare for business travelers is paid by the companies they work for. This group is price sensitive; a reduction of price from $ 41.350 to $ 1298 would increase the number of travelers from 50 to 177. In contrast, increasing the fare for pleasure travelers from $600 to $ 779 will only reduce the number of passengers by 5; these passengers are price insensitive (Abdallah, 2004, p. 45).

Predatory pricing, dumping and price fixing

Business travelers return within the same week while pleasure travelers stay over the weekend. Offering any kind of discount to one class and disregard the other would be considered to be price discrimination. Providing price discrimination in the service industry has legal protection because they are not used for unethical fight with the competitors. Therefore NT Airways is at liberty to implement price discrimination between the two classes (Source Wikipedia, 2010, p. 153).

1. Five stages of the capital budgeting process

First, exploring the opportunities that come with the project and determine whether they are worth investing in. Second, estimate the costs associated with the project. Third, determine the benefits (cash flows) expected from the project. Fourth, assess the possible risks, such as uncertain cash flows, associated with the project. And fifth, make the decision to invest based on the expected returns and potential risks (Cover, 2009, p. 62).  

1. Investment decision making

Investment appraisal techniques such as Internal rate of return (IRR), Payback (years), NPV, and Average ARR have been used by the Siggy’s Construction’s manager to evaluate the projects A, B, and C. The three projects are mutually exclusive hence should be evaluate independently of each other.

According to the NPV technique, a project with the highest NPV value should be chosen (Pike & Neale, 2006, p. 73). Projects A, B, and C has NPVs of ($134,512), $508,158 and $436,533 respectively. Project A has a negative NPV and hence should not be chosen even as a single project. Compared to Project C, Project B has a higher NPV and should be chosen.

According to IRR technique, when evaluating mutually exclusive projects, the one with highest IRR rate should be chosen (English, 2011, p. 78). Project A should be rejected because its IRR (6.9%) is below the Company’s required IRR of 8.0%. Project B with IRR of 13.2% should be chosen compared to project C with IRR of 12.6%.  

According to the Payback technique, when evaluating mutually exclusive projects, the one with shortest Payback period should be chosen (English, 2011, p. 69). Project A will only require 2.91 years to recover the initial investment hence should be chosen; however, payback technique does not take time value of money into account.

According to the AARR technique, when evaluating mutually exclusive projects, the one with the highest AAR value should be chosen (Cover, 2009, p. 51). Over the project period, Project B is expected to have the highest AARR value if 7% and should, therefore, be chosen.

Uncertain cash flow is as a result of the potential risks associated with the projects. Although, the higher the risks, the higher the returns from a projects such risks should be manageable. The Company’s capital budget is limited to $6,000,000 for the year. Both projects B and C have are associated with positive results. Likewise, their initial investment amounts adds up to $ 6,000,000. Therefore, the manager should apply diversification strategy to increase the investment portfolio by investing in the two projects. Project diversification is a technique used to manage project risks.

Capital budgeting process for expansion projects

The negative and positive consequences of various economic exposures, cultural differences, and transfer pricing arrangements on management control for Subsidiaries.

There are several challenges faced by multinational enterprises (MNE) while trying to manage and control its subsidiaries. Most parent companies try to replicate the management practices used in their domestic markets in the foreign markets when preparing strategic planning, budgets, management compensation and performance evaluation. However, problems arise when management control tools cannot be adopted by the foreign market (Lohr, 2013, p. 98).

Some of the problems faced by MNEs in the foreign markets arises as a result of cultural differences, transfer pricing, and exchange rates. First, the dimensions of cultural differences faced by MNEs are power distance, collectivism/ individualism, uncertainty/ avoidance, and Femininity/ Masculinity. Therefore, parents companies should take into account cultural difference as they control and coordinate their subsidiaries. Second, different foreign markets have different policies that govern their taxation, government regulations, tariffs, exchange controls funds accumulations and joint ventures (Marinov, 2012, p. 101). Therefore, MNEs should take all these factors when determining the transfer price. Lastly, MNEs operate in different countries with different currencies and different exchange values. The exchange rate variation complicate the efficiency in measuring the performance of subsidiary managers and subsidiaries. Some of the exposures associated with exchange rate are translation exposure which impact the assets, liabilities and earnings as well as the economic exposures which cause changes in the cash flow (Marinov, 2012, p. 119).

In addressing management control issues, the subsidiary managers should not be held responsible for the impact of translation exposure when evaluating performance. Translation effects are handled using a centralised system by the MNEs. However, subsidiary managers are responsible for exchange rate effects arising from economic exposure. Moreover, the subsidiary managers is entitled to ensure that a subsidiary operates based on the acceptable cultural practices and established ethical practices in a foreign country. Likewise, such a manager should advise the head office on the most appropriate transfer pricing method to be used in a foreign market (Lohr, 2013, p. 93). Therefore, the effect of transfer pricing and cultural differences lie with the subsidiary manager as well.

1. No, transfer from Division A to Division B should not be made if there is no unused capacity in Division A.

Based on incremental cost approach, there is a positive contribution margin at Division A as shown below;

Selling price of final product $ 300

Incremental cost per unit in Division A $ 120

Incremental cost per unit in Division B $ 150 $ 270

Contribution margin per Unit $    30

Challenges faced by multinational enterprises in management control for subsidiaries

However, if a transfer occurs even without excess, a negative contribution is incurred as shown below;

Selling the final product $ 300

Selling the intermediate product $ 200

Incremental revenue Per Unit $ 100

Less: Incremental cost $ 150

Contribution Margin ($ 50)

Selling price of intermediate of $200 (is the market price). There is a contribution margin of $ 80 ($200 market price less $ 120 incremental margin). Therefore, the market price is the correct transfer price. Transfer to Division B should not be done unless there is dire need. In other words, Division should either reduce its increment cost or drop the product.

1. With an excess of 200 units at a minimum transfer price of $ 200, the opportunity cost from Division A is $0. Therefore, the incremental cost is obtaining by adding $120 (minimum transfer price) to $ 0 (opportunity cost) for the first 200 units. Buying from Division A at a transfer fee of $ 120, Division B will have contribution margin per unit of $ 30.

Selling price of final product $ 300

Incremental cost per unit in Division A $ 120

Incremental cost per unit in Division B $ 150 $ 270

Contribution margin per Unit $    30

1. Division B would be willing to buy from Division A at a price of up to $150 because at this price B would yield more profit margin. At a market price of $ 200, B will incur incremental cost of $ 120 which would yield $ 80 for every unit.

Units Transfer Price

0-200 $ 120- $ 150

200-1000 $ 200

1. Under imperfect market, Division B would add zero contribution to the overall organizational performance. However, the company will have a positive contribution margin of at least $ 30 per unit arising from Division A. Actually a transfer price between $ 120 and $ 150 would provide desirable revenue generation for the whole organization. However, conflicts on how to contribute the positive margin between the two divisions are likely to arise when Division B does not participate actively in revenue generation. The price should be kept below $ 150 for Division B to have significant contribution to the success of the organization(Abdallah, 2004, p. 81).

1. The essential characteristics of contemporary (modern) performance measurement
   systems

The key characteristics of the modern performance measurement systems are; a) the use of financial characteristics used to measure the short-term performance of an organisation. Financial characteristics focuses on shareholders’ value, revenue generation, and profitability; b) Non-financial characteristics which focus on corrective the limitations that come with short-term goals that come with financial characteristics; Non-financial characteristics focuses on evaluating the long-term performance of an organization; and c) the design purposes which combine both the financial and non-financial characteristics. It focuses on a more tailored towards performance measures that fit unique organizational strategies.

1. Perspectives and Strategy map

Perspectives help a company establish how different goals and objectives impact its different areas of operation. The strategy map is then used to bring different perspectives together to form a unified business strategy (Harbour, 2009, p. 145). Strategy mapping allow the management to identify the objectives that are most critical to their organization and how the success or failure of such objectives would affect the general performance.

1. Finance which examines how a company can expand its revenue while keeping the cost down,
2. Customer perspective which focus on differentiating factors that create customer satisfaction and loyalty,

• Internal Processes that contribute to the financial success and customer satisfaction. Some of the internal objectives include improving processes, quality optimization and capacity utilization.

1. Learning and Growth refers to how best to nurture organizational culture among the employees, optimise technology and improve their skills and capabilities.

A strategy map show a unified organizational strategy generated from the four perspectives in one page. It helps a company to easily communicate of objectives to its stakeholders. For instance, each group can easily tell how their responsibilities impact the company’s performance strategy (Howell, 2006, p. 92).

References List

Abdallah, W. M., 2004. Critical Concerns in Transfer Pricing and Practice. 1 ed. London: Greenwood Publishing Group.

Cover, F., 2009. Managerial Judgement and Strategic Investment Decisions. Reprint ed. Heinemann: Butterworth-Heinemann.

English, P., 2011. Capital Budgeting Valuation: Financial Analysis for Today's Investment Projects. 1 ed. New York: John Wiley & Sons.

Harbour, J. L., 2009. The Basics of Performance Measurement. 2nd ed. London: CRC Press.

Howell, M. T., 2006. Actionable Performance Measurement: A Key to Success. Chicago: ASQ Quality Press.

Lohr, N., 2013. Foreign Market Subsidiary Mandates: A Select and Temporary MNC Phenomenon?. 2nd ed. London: Springer Science & Business Media.

Marinov, M., 2012. Impacts of Emerging Economies and Firms on International Business. New York: Springer .

Pike, R. & Neale, B., 2006. Corporate Finance and Investment: Decisions & Strategies. reprint ed. New York: Financial Times Prentice Hall.

Ryals, L., 2009. Managing Customers Profitably. 1 ed. New York: John Wiley & Sons.

Source Wikipedia, 2010. Anti-Competitive Behaviour: Cartel, Price Fixing, Collusion, Vendor Lock-in, Predatory Pricing, Dumping, Competition Regulator, Tying. New York: General Books LLC.