CHAPTER 4

Need of Modern Service Industry

Difference between service and manufacturing businesses is on a rise due to two main reasons:
1. Performance management is tougher in service sector
2. It affects the information needs of the service organization

Characteristics of Service Organization

 Intangible: output of the product is not tangible and there is no single measurable
output because it is not easy to value professionalism
 Heterogeneity: two service providers are providing services of different nature or even
if they are providing similar services yet we cannot compare them; at times, services are
customized because of need of specific customers and high level of human intervention
is another reason for heterogeneity
 Simultaneity: provision and consumption of the service take place at the same time
 Perish ability: it is not possible to create inventory of the service even if its demand is
high
 Non transferability: in service industry, use of service is for a limited time period but we
cannot become owner of any product/service

How to Review Service Quality

 Soundness of advice given
 Attitude of staff towards customers, colleagues, organizational goals, and mission
statement
 Being a service provider, management of the company has ambiance of premises
 Timely delivery of services, consistency of quality, and timely response to customers are
all requisite of a good service organization

Business Integration
All aspects of the business are contributing towards the efficiency and effectiveness of the
organization; all aspects will contribute towards the ultimate objectives of the organization;
there are mainly 4 interconnected factors that ultimately contribute towards effectiveness:
1. People
2. Operations
3. Strategy
4. Technology

Porter’s Value Chain

It is the concept that consists of mainly 2 types of activities:
1. Primary Activities: necessary to perform and it will add value to organization; or it will
contribute to competitive advantage for the organization; primary activities shall consist
of:
 a. Inbound Logistics: associated with input of raw materials, also linked with
procurement where purchasing of raw materials is associated with operations and
quality output; procurement department is expected to purchase all relevant items
at competitive prices without compromising on quality
b. Operations: processes and operations are the backbone of primary activities where
quality of output will determine the organization’s development; it is difficult to
maintain effective operations without the support of human resource department,
IT department, and firm infrastructure
c. Outbound Logistics: it is the output of the production process
d. Marketing & Sales: will be of huge proportion if in a service organization, not of
huge amount if manufacturing organization but still linked with the success of
product
e. After Sale Services: hold significance if the company has made commitment with the
customers of continued support; it is unachievable without trained human resource,
firm infrastructure, and appropriate use of technology
2. Secondary Activities: also called support activities which are essential to fulfill the needs
of primary activities
Porter’s Value Chain will contribute towards the profit margin of the organization or it expects
that the whole supply chain will contribute towards the profit margin

McKenzie’s 7S Model
It states that there are 7 interrelated factors which affect the consumers; it is divided into 2
elements:
1. Hard Elements: comprising of overall strategy of the company which a company is
intended to achieve, it includes:
i. Structure
ii. Strategy
iii. System

2. Soft Elements: it includes:

i. Staff
ii. Style (management)
iii. Shared Values (culture/attitude)
iv. Skills (required to fulfill organizational needs)

There are following influences on organizational performance of BPR:

 BPR has completely eliminated traditional departmental lines:
1. Change in processes is influenced by change in culture
2. It is bringing change in process teams but there will be change in functional
departments
3. Only productive employees will retain and there will be effective communication
between leadership and senior managers
4. There will be extensive use of IT and company can integrate
 BPR can improve the organizational performance if they focus on followings:
 1. How core processes can be honed to achieve ultimate corporate objectives
2. It revolves around the customer needs and it helps to achieve key competitive
advantages
3. It can help eliminate unnecessary activities
4. It can help make processes cheaper owing to due focus on value added activities
and due to adoption of IT
 Practical problems
1. Staff will not corporate because they think that they will lose their job
2. Staff feels demotivated and devalued if there is change in their roles
3. Middle managers assume that there will be poor controls and practically there will
be less coordination from managers
4. Employees can focus on all negative aspects of change management or BPR and they
will try to delay the process
5. Company will focus on core activities where there will be elimination of non core
items through outsourcing
6. There will be complete adoption of automation but maybe not the redesigning of
processes
 Changes to performance management system
1. System redesigning is needed if data, relevant to performance measurement, has
changed
2. Reward system should be aligned with the new measures within the organization

Does BPR Improve Business Performance

BPR focuses on long term strategic view, focusing on customer needs and eliminating
unnecessary activities but staff morale will fall and overall response from existing staff will be
discouraging

Influences of BPR on System Development

 It helps improve quality
 It brings innovation
 Ability to work as a team and timely delivery of products/services

Impact of Change in Structure, Culture, and Strategy on Performance Measurement

Structure: highly organized or functional structure will collect data and then they will measure
the performance at all functional levels; decentralized structure will help to make performance
measures for improvement in overall organizational practices
Culture: organization is coming out of restrictive bureaucratic culture to innovative & creative
culture
Strategy: organization is focusing on TQM and adopting new techniques like JIT and other
advancements which can business processes easy and efficient

Approaches to Budgeting
A budget is a quantitative plan which is set by a company for a specified time period; usually,
this time period is 12 months or 1 accounting period because these budgets are short term

Purposes of Budgeting
 Planning
 Control and Performance Measurement
 Improved inter-departmental Communication
 Coordination
 Evaluation – actual achievements are not only compared with targets, but they are also
compared with available circumstances in which we actually achieved given targets
 Motivation – targets are a key source of employee motivation
 Authorization – senior management authorizes the budget
 Delegation – company will delegate budget and authority to managers; who are
expected to achieve targets under responsibility accounting

Participation in Budget Setting

1. Top-Down Budgeting: also called imposed budgeting; where budget is prepared and
approved by senior management and it is expected from tactical and operational
management to achieve given targets
 if budgets are prepared by senior management, it will be close to mission
statement of the company and there are no chances of setting easy targets
(budgetary slack)
 dysfunctional behavior will be controlled and budget will not reflect inexperience
or bad decisions but managers will not be able to improve themselves and their
learning curve will remain unchanged
 at times, senior managers set ideal standards which cause de-motivation among
employees
2. Bottom-Up Approach: where budget is prepared by managers; purpose of this approach
is to improve motivation and understanding of managers;
 such type of budget document could be more useful because it is based on local
knowledge and it motivates managers through their involvement towards
relevant department
 senior management will be able to give more time to vision/mission of the
organization but it leads to dysfunctional behavior and budgetary slack
 owing to less experience, managers will take more time to complete their task

Budgeting Methods
1. Fixed: in this method, budgeting quantities and methods will remain unchanged
throughout the accounting period even if actual circumstances are significantly different
2. Flexible: these budgets are prepared are 3 different activity levels: best possible, most
likely, worst; purpose of flexible budgeting is to understand cost behavior for each cost
such as identification of variable, fixed, and semi-variable costs
3. Flexed: used to calculated variable costs variances; these budgets use variable
production cost/unit along with actual activity level
4. Incremental: prepared on actual results of last year; company will bring only percentage
changes in actual results to determine next year’s budget; it is mainly used by consumer
businesses where there will be no change in production technology or overall features
of the product will remain unchanged;
 it allows managers to put more focus on actual activity but company will
continue with previous wastages and loss making activities
5. Activity Based: based on the principles of activity based costing where each production
overhead has its own cost driver for e.g. procurement department considers purchase
orders as cost driver; deliveries to retailers divides cost on the basis of sales order; ABB
divides cost by using following steps:
 Estimating production and sales volume of individual products/customers
 Estimating demand for organizational activities
 Determining the resources needed to perform organizational activities
 Estimating each resource which can fulfill the demand for product
 Take actions to adjust the capacity of resources to match projected supply

 It is based on the assumption that company control costs if apportionment is

accurate
 If volume is controlled then activity cost becomes controllable
 It can be useful for TQM because it is analyzing overheads for each activity
 But, it is time consuming and costly activity which is only suitable for large
organizations where overheads are in great detail and complex
 It is also not useful in the short term for cost controlling purposes
6. Rolling/Continuous: it is an approach of budgeting where budgets are prepared usually
on quarterly basis and company can prepare on monthly basis too
 rolling budget helps prepare budget on recent available information because it is
more accurate for the planning purposes
 it helps to avoid significant variances and it encourages managers to take
budgeting as a serious activity
 but, it is time consuming and costly
 managers will be unable to concentrate on actual results
 at times, it is expected that it will become approach like incremental budgeting
which will render it useless
7. Zero Based Budgeting: it starts budgeting from scratch; there will be no concentration of
actual activity in the last accounting period; company will evaluate all the activities in a
way that these activities are being performed for the first time and have no allowance of
budget where the following steps are used:
 Managers will evaluate activities at the start of accounting period
 They will treat each and every activity as a separate decision and conduct a CBA
of each activity
 If activity will be profitable on the basis of ranking then company will allocate the
resources to it
 Wasteful activities will not remain part of the organization
 There will be no allocation of resources to inefficient and obsolete operations
  Involvement of staff will be high and staff will be more motivated because they
are responding quickly to changes in business environment
 It also provides more accurate knowledge and understanding of cost behavior
 But, it is time consuming and costly
 The discarded activities labeled as ‘wasteful’ may have the potential to be
profitable in the long term
 At times, managers are no adequately skilled to follow ZBB
 We are comparing/ranking unrelated activities to allocate the budget which is
not justifiable
 Budgeting process is too rigid which can cause de-motivation among employees

Variances
The difference between expected and actual results; variance needs to be investigated at the
end of accounting period if they are significantly high – it is called exceptional reporting
If during the period, actual circumstances are significantly different from the initial standards,
then a company is allowed to revise their budget; when company will calculate the difference
between original and revised standards, it is called planning variance
When company will calculate difference between revised standards and actual results, it is
called operational variance