Business Process Reengineering is the process of rethinking and resigning about the fundamental’s business process in the organizations. Management of the entity consider Business Process Reengineering only for significant process in the entity and to make sure its business could meeting the following factors.
Simplification
Cost reduction
Improved quality
Enhance customer satisfaction
My personal word for Business process reengineering is radically and fundamentally change the way how processes are usually running to meet the above objective.
Let me clarify about these four main objective of Business process reengineering before we move to the influence of operational performance.
First one is simplification. The objective of process reengineering is to make sure that process of doing an activity is as easy as possible. It is start by rethinking about the basis of each of activities and making sure people handing each process could easily understand the process. Process should not involve too many stage to get one activity done. The objective is the result of process complexity that happen in the day to day operation. Then, the reengineering will need to make sure the complexity are not happen again.
Cost reduction stand in the second in rank, but it is equally importance in term of the benefit to the entity. The cost reduction here does not mean the reduction in quality.It still focus on the quality that those processes are running and supporting. However, while performing redesign the process, we have to ensure that all of the waste of material or others kind of resource need to be minimizes.Long running process and complexity of the process also incur cost. Therefore, this one link directly with process simplification.
Improved quality of the products or services to make sure that the company could compete its business in the market. This is quite importance. The quality here sometime not exactly the products or service that we sold to outside customers. But it is the quality of output that the process being consider to reengineer are offering.
The last objective of Business Process Eeengineering is to enhance customer satisfaction. Business Process Eeengineering need to make sure that all the Business Process Eeengineering provide the benefit to customers. The customers are relies because of quality of products and quality of services. For example, the process are design to make sure after sales services are fast and reliable.
Now let move to the way how Business Process Reengineering would influence operational performance of an entity.
Reengineering would influence into the operation of company by making two main out put. Negative and Positive.
Well, positive or negative will base mainly on how the environment, processes and leadership of project management are. It also affect by the gap of existing and new process is. In some organization, people are enjoy follow the old fashion, or old way of doing thing. People are not fully aware about the new technology and they willing not to adopt the new things. Especially, when we introduce new things.
With such situation, probably there is big resistance from those process holders. In this case, the the project manager who is responsible to make change is not strong enough, the change will not success. Then there will be negative impact. The better way to make sure that the Business Process Reengineering is require project manager to have proper planing.
For example, the project plan schedule need to be prepared. The budget for project need to be approve. The project manager also need to get strong support from key person and senior manager.
If the Business Process Reengineering is success, the company will get many positive affect and appear the better result in the performance. As mention in the objective above, the company’s cost will in decrease as the result of removing the process that is not necessary. Staff who hold the process also feel being motivate because of the process they are doing are importance for the company.
One of the best benefit is the company will receive the positive feedback from its customers because the change will make the process flexible with quality mine set.
Transfer pricing (TP) is the price of goods or services being sold or buy between divisions in the same group or entity. For the divisions that operate in the same jurisdiction, transfer pricing is set for the purpose of performance management, and motivation of division from the group or entity level. Sometime it is setting up to solve the conflict between division. However, for the group that have many divisions operate in the multinational countries, TP is setting for the purpose of complying with law and tax purpose.
To summary, the purposes of transfer pricing are:
To keep goal congruence among divisions: Pricing police are normally set to ensure that the decision making at the divisional level are retaining the benefit for both divisions and group as a whole. It is the risky when the decision making are delegate all the power to the divisional level since some division made at the division are benefit at the division but impair group profit.
To allow managers to retain autonomy: In the modern performance management, the decision making are delegated to the local manager as they know the situation more that group level. Transfer Pricing is part of modern performance management so that divisions could survive for themselves. Yet, not all of the power and decision are delegates.
To permit performance evaluation of division: Divisional performance management is very importance as it is affected the performances, reward and motivation of starts and managements at divisional level. This is one of the most importance parts of TP.
Tax Management: For the group companies that have many divisions that operate in different countries and corporate tax rates are different, transfer pricing that manage by group are very importance to make sure that the group pay too much tax or in others words, how the group could save tax.
Managing profit for minor shareholders: Well, it might be a bit difficult in this point, but some of the major shareholders are managing profit of the companies and they have the chance to manage the benefit of minor shareholder as well. Mostly through the pricing of goods or services transfer among the group.
Types of Transfer Pricing:
The following are the five types of transfer pricing usually set by the group company and jointly set by the division.
Market Price Transfer Pricing: Marketing price is the type of transfer price policies that use available market price of the same or similar products or services in the market as the base price for charging. This type of pricing is fair for both transferring division and receiving division. Both division could compare the price that they are paid and receive to the market price; however, by using Transfer Price, the Transferring Division might not are not spend on transportation fee if they both are in the same country.
Adjusted Market Price Transfer Pricing: Adjusted Marketing Price is the type of TP policies that use the available price in the market and make adjustment for some type of expenses that not incurred as the outsider. For example, transport fee.
Marginal Costs Transfer Pricing: This kind of pricing is charge at the variable cost incurred at the transferring division. Such pricing might demotivate transfer division as some cost that incurred at their department is not considered. For example, fixed cost is not taking into account.
Full Cost Transfer Pricing: The price is charge based on the full cost that incurred at the transferring division. This type of TP have many disadvantages. First, it might be motivating the transferring division not to control the cost of products or services because all of the cost that incurred at the transferring division will be charged to the receiving division. Per group point of view, there is poor cost control and result wasted to the group. Another disadvantage is that the receiving division will be demotivate as they could control the cost that being charge to them.
Negotiate Transfer Pricing is the type of transfer price that Group Company delegates the power to its division to have the right to negotiate the prices. This type of TP strategy is almost of same to adjusting market as the prices are decided by both transferring and receiving division.
Issues Need to Consider for International Transfer Pricing
Many of the group of companies now has many international divisions for the purpose of market expansion and low cost strategy. In such situation, transfer pricing play the significant rule and normally there are many issue to consider.
The following are the five issues that need to consider when setting Transfer Pricing for International Division:
Exchange Rate Fluctuation: Some of the divisions are operating in the county that have low economic and highly fluctuate exchange rates. For example, the transferring division is operating in the high fluctuation exchange rate; the receiving division will incurred the loss of exchange rate. In such case, hedging currency might need to consider.
Taxation Rates: It is for obverse reasons operating in different countries, the group have to expose different tax rates, and the pricing have to set based on those tax rates to ensure that the group does not paid too much tax.
Import Duties: Some country try to control and manage the transfer price by setting the price for import or exports. It also the main factors that we need to consider when consider the transfer pricing strategy.
Fund Repatriation: The concept of fund repatriation is that the government wants to control the fund outflow from its country by investors through transfer pricing by charging the high prices products or services.
Anti-dumping legislation: Such concept that governments want to propose the local products by setting the market price for products export from the country. For example, some of the group companies open the production division in the low labor cost country and the product charge from those countries is at the low price.
Cost leadership is one of the corporate strategies aimed at achieving overall cost leadership in an industry.
In the situation where the companies compete in the industry in which the customers are highly influenced by price, cost leadership assumes strategic importance.
Therefore, it is important that the board of directors understands its cost and cost drivers. They must also be fully cognizant of exactly what constitutes the quality of their target customers group.
The essential task is to deliver the requisite level of quality at the lowest possible cost which allows the pricing strategy of penetration price.
If the organization could attain a cost level that is lower than that of each of its competitors then it could sustain time of falling prices and this the lower prosperity better than its competitors thereby ensuring long-term survival.
Cost leadership might enable the organization to pursue the policies of penetration on pricing.
If the Board of Directors could estimate the total market size, then it is possible to determine what share of the market that they would require in order to realize revenue and profit targets.
Differentiation Strategy:
Product differentiation involves the use of multiple products, each of which is branded and subject to the promotion.
Using this corporate strategy, the competitor must out of necessity to compete in many areas and strive to overcome brand loyalty through reductions in the selling price of their product offerings.
Product differentiation involves the identification of the features for which the customers are willing to pay.
Product differentiation may be related to the product image, quality, reliability, durability or post-sales supports in terms of the availability and quality of after-sales service.
Where the products differentiation can be achieved it may enable the board of directors to implement a pricing strategy based on market skimming, which involves setting a relatively high price stressing the attractions of the new features such as robustness, durability and perceived quality attaching to those with a genuine interest in the product or its association attraction.
Reaction and support are thus solicited form the ‘top end’ of the particular market.
If the launch is successful this ‘cream-skimming’ exercise, and the decision has been taken to invest in the possible, then the appeal of the new product can be enlarged through a shift in advertising and a reduction in price.
The price reduction can be made in stages to coincide with the supply-side increase as new resources come into use.
One of the price requisites for the successful operation of a pricing strategy based on the market difficult for competitors to come up with a similar product quickly with which they can undercut the price being charged by the organization.
If the organization can successfully archive the product differentiation it may also be possible to implement a pricing strategy based upon premium pricing.
Such a strategy would involve pricing its products above the price of the competitor’s products on a permanent basis. The success of such a strategy will depend upon potential buyers perceiving that the product is different and superior to the competitor’s products.
Focus Strategy:
Niche marketing targets markets in which the company can focus on cost and quality in order to meet the need of customers who comprise a specific market.
This corporate strategy, directors could target its products at the specific market segment comprising relatively well-off people who are willing to pay a premium for the unique feature if its product.
It is quite conceivable that such a policy might be aimed at a particular geographical region in which relatively well-off people living.
An organization might meet a need of such a niche segment of the market better than its competitors simply by the concentration of the specific focus on a narrow target market than those of market competitors.
Cost leadership would give the organization the opportunity to develop a cost-focus strategy providing niche customers with a lower-priced product than competitor offerings.
Obviously, such a niche mark would have to be sufficiently large to enable the desired levels of profitability to be attained.
Before looking into detail of the types of business entities, we would like to introduce the definition of business.
Business is the trading activities from one person, a group of person, entity, and organization in which the purpose of those activities is for generating profit directly or indirectly.
Business is whatever size or nature of activities that could generate profit or return on what they invested directly or indirectly. The business could be formed in commercial or industry commercial transactions in the form of supplying goods or services.
The business rang from a very small entity consist of few members to a very large one that has a hundred thousand staff like Facebook and Google.
And the meaning of profit is the excess of income over the expenses for the period of time.
The following are the list of types of business entities. The list contains four types of business including Sole Trader,
#1: Sole Trader:
Sole Trader or sole trader-ship are the types of business entities that own, run, and manage by mainly one person. Mostly, sole trader-ship employ few employees and have not many business transactions.
Accounting records for the sole traders’ business also not much complicated as the others. This kind of business is normally formed by the entrepreneur and get many exceptions for legal and tax purpose.
The sole trader is not legally separate its debt from the entity one the business go into liquidating. Personnel assets might be used to compensate for the liabilities.
Some advantage of the sole traders are there are less legal requirements, probably got many tax exception, the owner control business and assets directly, and it is very flexible.
#2: Limited Liabilities Companies:
Most of the big companies or the corporation are registered under the limited liabilities companies.
Legally, limited liabilities companies the personnel assets of the shareholder or the owners of the companies are legally separate from the entity or company.
This type of company normally has a complicated management structure as well as the board of directors, many legal documents are required.
The shareholders of this type of the entity normally the companies as well as the individual. The legal documents may be differently required by different legal jurisdictions.
#3: Partnership:
As its name, these types of business entities formed by at least two partners to carry the business. The partners of the business normally expertise in a specific skill or know-how.
Some disadvantages of these types of business entities in every one of the partners owe the liabilities of others. Normally, this type of business got many conflicts.
To form a partnership, the member normally done by partnership agreements.
Advantages of partnerships include:
Less stringent reporting obligations – no requirement to make financial accounts publicly available, no audit requirement, unless the partnership has LLP status.
Additional capital can be raised because more people are investing in the business.
Division of roles and responsibilities and an increased skillset.
Sharing of risk and losses between more people.
No company tax on the business (profits are distributed to partners and then subject to personal tax).
Balance scorecard is the strategic performance management system used by many types of organizations like private and public by converting the current daily activities into vision and strategy to improve internal control, improve the customer relationship as well as shareholders satisfactions.
Balance scorecard was created by Drs. Robert Kaplan (Harvard Business School) and David Norton which is developed framework into four different perspectives. These fours perspective have to be balanced and none of which is overweight.
A balanced scorecard is the most well know performance management tool as it is easy to use and a sense of good measurement.
It is the ready-framework performance system and management just has to identify the critical success factors for each perspective, financial perspective, internal business perspective, customer perspective, learning, and innovation.
Not like performance prism which requires management to identify all of the critical success factors by themselves, balance scorecard, provide the pre-framework.
Financial perspective
Financial perspective concerns mainly with financial factors which the companies need in order to survive, and satisfy with its major stakeholders—shareholders.
Managements have to identify what are those financial measurements. Mostly, those financial measurements come from profitability ratio, investment ratios, and liquidity ratios.
Pick up all of the important financial measurement ratios and then set the measurement against the required rate, competitor, or industry.
Keep in mind that the concept of a balanced scorecard requires the companies to keep competitive finance factors that why management has to measure its.
Mostly, those financial measurements come from profitability ratio, investment ratios, and liquidity ratios.
Pick up all of the important financial measurement ratios and then set the measurement against the required rate, competitor, or industry.
Keep in mind that the concept of a balanced scorecard requires the companies to keep competitive finance factors that why management has to measure its.
Learning and Innovation:
Learning and Innovation: No company could survive without innovations. These required competitive staff, up-to-date system, and equipment.
Management has to identify what are the learning and innovation in the organization that could help the organization itself stay competitive in the market. Pick those factors up, and measure them against the required rate.
Customers’ perspective:
Customers’ perspective: It is one of the most important factors that most of the organization concern with. balance scorecard, this factor concern with what are the customers’ requirements, how much are we currently satisfying them?
The system has to design to make sure that the information about the customer’s satisfaction could flow to management. Identify the gap between the customer requirement and what we currently provide them.
This is mostly close by business process perspective, or internal control perspective.
Internal control perspective:
Internal control perspective is very importance and this perspective mostly recognize by many performance management tools.
After identifying the gap of satisfaction that the company currently provides and what the customers expect from us, the company has to close it.
This probably done by review all the processes are strategic importance to the company and then improve those processes. It could be done by Business Process Re-Engineering.
Hope this post helps you to understand more about a balanced scorecard.
The major concept of the performance prism is letting management identify what performance indicators or criteria should be the measure to make sure the entity stays competitive and satisfy with its stakeholders rather than use a framework that telling management specific call on which criteria to measure as the others Performance Management Framework.
Not like other performance management framework, performance prism requires you to perform a deep analysis of your entity stakeholders about their power, interest, and what they really want.
Then, after performing the stakeholder’s analysis, you need to review whether your current strategy could satisfy the stakeholders require or not. If not, you need to consider changing your currents strategy.
The next step in performance prism after you identify the gold strategy that could make sure the stakeholders are satisfied, you need your analysis of whether the current business process could really help to achieve the strategy you just identify you not.
In this process, normally link to resource or capabilities analysis and audit. The strategy will be just an idea if you don’t have the right process and enough capabilities.
The last step could be the stakeholder’s contribution. This step, you need to identify what you really want from your stakeholders. But in practice, this point is normally done at the first one.
Why? the big reason is the business normally identify the opportunity that they could get from stakeholders first and then find the ways to get to rather than seeking the way to satisfy the stakeholders and then see what are the opportunity from this.
The following are the detail of five important factors that you need to know about performance prism:
1) Stakeholder Satisfaction
Stakeholder Satisfaction: is the first question asking in the performance prism concept.
It intended to ask management to identify its stakeholders. Management might need to classified all of that stakeholder into categories.
Some example of the stakeholder is shareholder, customers, suppliers, employees, government, and regulator.
Breaking down into small categories could help management to analyst the need of its stakeholder mores accurately.
For example, management might want to classify its customers into different categories by their purchasing behavior, or other important criteria.
After identified and classify all of the stakeholders, management needs to identify their needs. The performance prism believes that satisfy the need of stakeholder is very important to point that lead to the success of the company.
The next step in this point has identified the gap between what the stakeholder need and what the company currently provides. For example, one of the important stakeholders of the company is its shareholders.
In the market that the company currently operates, return on investment is about 10% per year, and the company currently has a return on investment only 5% per year.
In this case, the gap is about 5%. To satisfy the shareholders, the company has to close this gap.
The company might use many methods to identify the stakeholders need and current benefit that company currently provide and gap. Closing the gap is very important.
2) Strategies
The strategy is the second important criterion of the Performance prism concept. To ensure that the company could meet the need for stakeholders as identified above, management needs to have a proper business strategy.
As mention above, Performance prism is not the framework which is telling management what to do. It asking management what they need to do by themselves.
The best strategy might be the one that is fit with its current straight and weakness, and management might need to find it’s out by themselves, for example, cost driver, product or service differentiation, as well as a cost driver.
Gap analysis is also might be an important tool that could help management to identify the gap of satisfaction, and proper strategy could be applied to close the gap.
3) Processes
To ensure that the strategy works well and met, the process to run that strategy plays a vital rule. The concept of Performance prism in this process stage is that the business strategy could only be met if the business process runs well toward that strategy.
Business Process Re-engineering, and value change analysis might help the company to meet its strategy.
Just want to remind, this stage is managements have to ensure that the company business process could help the company achieve its business strategy which is set to meet the stakeholder satisfaction.
4) Resource and Capabilities
Performance prism philosophy believes that the company could meet the above objective unless it has enough resources and capabilities. The major question is whether the current resource is enough to run the above three criteria?
Resource audit and 7 ‘S’ might help the company to review its current resource capabilities, efficiency, and effectiveness.
5 Stakeholder Contribution
The last point of Performance prism philosophy is Stakeholder contributions. The concept believes that the company requires the contribution back from its stakeholders.
For example, it needs the investment fund from its shareholders, loyalty from its customers, and well cooperation from its staff.
