A research at the Corporate Center of Philips DAP
Author: N. Reuselink, 1150537
Improving the evaluation process of Philips DAP
A research at the Corporate Center of Philips DAP Business Unit Shaving & Beauty
“In what way can post calculation of introduced projects of the LoB Shaving be optimized?”
Thesis:
Produced by: Nicole Reuselink Student number: 1150537
Email: nicolereuselink@hotmail.com Date: 25 October 2005
University: University of Groningen (RUG). The Netherlands
Faculty: Faculty of Economics
Main subject: Management Accounting and Control Place of residence: Groningen
Supervisor: Mr. P.C.G. Molenaar
Company: Philips.
Office: Philips DAP, Corporate Center, Business Unit Shaving & Beauty.
Place of residence: Amersfoort Supervisor: Mr. H. Hanssen.
Acknowledgements
I would like to thank some people who made it possible to produce this thesis. First, I would like to thank the financial team of the Business Unit Shaving & Beauty at the Corporate Center of Philips DAP; Herman Hansen, Eliana Leon Sanchez and Jan Willem Ruinemans.
Furthermore, I would like to thank the managers and specialists assisted me in the depth interviews and during May, June and July in 2005 at Philips DAP. Without their help it was not possible to accomplish my report and gather the information. Also I would like to thank all secretaries for making appointments and for rescheduling the scheduled agendas of many managers. Dirkje ter Laan, thank you for the delivery of the product design pictures.
Also, I would like to thank Rogier du Pau for the delivery of the factory information of Drachten and for the arranging of the factory tour.
Furthermore, I would like to thank everybody who disengaged some time to read the thesis and gave some critics and recommendations to improve the paper.
And last but not least, I would like to thank Pieter Molenaar for this critical and clear vision on the thesis through which the entire paper could be lifted to a next level.
I am glad that I was able to deliver some input in the Business Unit Shaving & Beauty and that the research made some Sense and helped to improve the evaluation process of the company by Simplicity and standardization of the evaluation process.
That was it…
It is time for a new step, a new phase…
Time to say good bye…
Good bye, Ome Loeks, Good bye, Martinitoren...
Good bye, Groningen…
Thank you for being such a lovely city, and thanks you for all the great times I had over the last six years within your walls.
Groningen, 25th of October, 2005.
Preface
Philips, who is not familiar with this company? The existence of the company influences daily lifes in many ways. Imagine, waking up in the morning, you switch on the light (Philips), and get out of bed. You brush your teeth with an electric toothbrush (Philips) and, for the man, you shave with the Cool Skin (Philips). You have breakfast, and make a fresh juice with the help of the citrus press (Philips). Then you take some coffee by your fancy colored Senseo coffee machine (Philips). And put on the television (Philips) to watch the latest news of the world. You go to work. You arrive at the office and turn on the computer (Philips) to do some good business for the company (Philips).
After work you go home, to do some housekeeping, clean the house with help of the vacuum cleaner (Philips) or the Electric Sweeper (Philips). After that, you go to the kitchen to prepare your dinner. For the preparation you need a food processor (Philips), a mixer (Philips) and a toaster (Philips), to complete a nice dinner. After dinner you can relax by turning on some music you prefer with the audio system (Philips), or watching a DVD, with the DVD recorder (Philips).
In short, in the life style of a modern human being, it will be difficult without Philips. All the technological feat of strengths became a way of life. The mission of the company is closely linked to this life style. The mission is “the improvement of the quality of people lives through the timely introduction of meaningful technological innovations”. The mission is not only based on the consumer products mentioned above, but is also on the increasing developments in the medical health care sector.
This research is accomplished for this exceptional successful organization. But next to all the positive words about the multinational, there are also some critical remarks to make which regard cases of improvement. The thesis paper in front of you is about the financial evaluation process and organizational control of projects of Philips DAP. The current way of working is outlined and a research is accomplished to develop a way to optimize the evaluation process, also named the post calculation process. The outcomes of the research are recommendations for the post calculation process framework of the company. This framework will be implemented in the BU’s of Philips DAP.
Management summary
The thesis is performed at the Business Unit (BU) Shaving & Beauty at the Corporate Center of Philips DAP. A research about the standardization of evaluation processes of projects is accomplished for the BU and a way of working to optimize this process is examined. The corporate criteria for this topic are involved, in order that in the long run the process can be implemented in all five BU’s of Philips DAP. The research in this graduation paper is mainly focused on the financial aspects of the process. The management approach of Horngren (1999) is leading in the fields of activities in this paper. There are key elements involved in the evaluation process.
Post calculation is a form of performance management, performances have to be evaluated and if possible be improved. Three terms of strategic performance management are important to be mentioned, focus, balance and integration. These three factors are combined in the performance scorecard of Paragon (1997). The financial evaluation process can be performed by variance analysis. During the research at Philips this is named post calculation. From a theoretical point of view, some different approaches of organizational control can be mentioned, like the traditional approach and the system- cybernetics approach. A framework for organizational control is outlined, existing of factors that influence the performances, like the organizational activity, the managerial choices, structural configuration, information system and contingency factors, and is used in this Philips case. For the implementation of the control process two systems, the Budgetary Process Control and the Systematic Quality Control are discussed and used during the development of the framework of the post calculation.
Furthermore, the Total Life Cycle Costing (TLCC) is discussed and its influences on the evaluation performances. The weight of the costs compared to the total costs depends on in which phase the product is in. This can influence the performances and therefore can influence the post calculation. Another important element in the post calculations is to find the causes of deviations in forecasted and actual numbers. It is significant to get an insight in the internal and external causes to get to know the business and improve the forecasting of the business plans.
Some organizational aspects to take into account are the possible agency problem within an organization and the learning aspect. Within the agency problem interests of the stakeholders are not the same, so people can work incompatible with each other. This can have a large impact. Also the learning aspect has a lot of impact. Learning is one of the main objectives for
Philips to implement the post calculation process within the company. Problems in the business process can be found in an early stage and managers can learn from mistakes and improve the way of working. Another element that can influence the performance evaluation process is the structure of the post calculation process, for example, by the Cost- Volume- Profit analysis.
In the current way of working at Philips DAP no official tools were used for the evaluation process. Therefore a new tool had to be developed. Within the organization of the tasks and the responsibilities for the involved managers, it is important to take into account that the product manager is in the end responsible for the post calculation. The other managers have to support the product manager by delivering specific information. All managers have specific resources to deliver the needed information. In the thesis a recommendation for the post calculation process is accomplished for the company. The post calculation process exists of three main elements.
The first element, the post calculation, exists of three aspects, the gross margin and its variance effects, the investments and the other dynamic variables. The variables used in the post calculation are punctually chosen by the following criteria. First criterion is the sensitivity of variables. The changes in the variables can have a large influence in the performances. Second criterion is the workability of variables. This means that the data delivery should not take too much time and should be easy. And the third criterion is the volatility. This means the size of changes during a period. With help of these criteria the framework is build and post calculation variables are selected.
The gross margin exists of the variables: sales, volumes, net net prices, and FSP. The variance effects are the price-, volume and mixed effects. The second aspect of the post calculation, the investments, exists of the CAPEX, the Tools and the Total Initial Costs. The third aspect is the other dynamic variables and is standard provided by the exchange rate influences and the A&P%. Furthermore, it is possible to expand this dynamic part if unusual variables deviate during the evaluation. Important to take into account is that the gross margin variables are based and calculated on regional level and on product type level. The investments and other dynamic indicators are calculated at project level.
The second element of the post calculation process is the learning process. Learning can be divided in the project specific learning and the process learning. The project specific learning is related to improve forecast of the business plan and is based on project specific aspects.
Process learning is related to the general process improvement. The general causes should be taken into account for new generations of products.
The third element is look ahead into the projects future, defined as the ‘looking forward’ of
project. The looking forward is focused on the short run and the long run. The short run is based on improvement at the midlife update. The long run is based on the new generation of products.
Other important criteria to take into account are the timing and the applied business plan for post calculation. The timing will be one year after the introduction of the product in the market. The business plan applied for the comparison of the budget and actual performances within the post calculation process, is the business plan Consolidated Concept (CC). In the CC phase the investment requests are accomplished and product designs will be tested for the large production. In this phase the largest preparations for the production are accomplished.
The developed framework is tested on the Cool Skin project. The actual project performances of 2004-2005 are used for this test. In the test some surprising and unexpected project performances came up. Some business improving steps for the Cool Skin will be accomplished in the BU to correct the current way of working and the future business performances. Because of confidentiality it was not possible to publish the real financial numbers. Therefore, in the report only the way of working and examples of the project performances are outlined.
It can be concluded that the framework is working well and will be implemented in the BU.
However, a point to take into account is that the research is mainly based on financial numbers. Other perspectives have an inferior role. This can be expanded and is recommended for future research. Furthermore, another suggestion is accomplished for future research, namely, the deepening of the Total Life Cycle Costing. If the performances and causes of deviations per life cycle phase will be investigated further, the optimalization per phase can be improved. A new developed framework is recommended in this thesis. In conclusion the post calculation process has fulfilled its objectives and the post calculation process will be implemented in the BU Shaving & Beauty. In the future the evaluation process will possibly be implemented in the other BU’s of Philips DAP.
Contents
Acknowledgements ... 2
Preface... 3
Management summary ... 4
Contents... 7
Chapter 1 General description of the research ... 10
1.1 Introduction... 10
1.1.1. Historical facts of Philips ... 10
1.1.2. Philips DAP Corporate Center... 11
1.2 Goal of the research... 13
1.3 Formulation of the problem ... 14
1.4 Research questions ... 14
1.5 The structure of the report ... 15
Chapter 2 Field of activities ... 16
2.1 Introduction... 16
2.2 Field of activities of the research ... 16
2.2.1 The management approach of the evaluation process ... 16
2.2.2 The value chain of business functions... 17
2.3 Qualitative research... 18
2.3.1 Literature research... 18
2.3.2 ‘Field’ research ... 18
2.3.3. Depth interviews ... 19
2.4 Method of collecting data ... 19
2.5 The process of the research... 20
Chapter 3 Organizational control... 21
3.1 Introduction... 21
3.2 Performance management... 21
3.3 The post calculation... 22
3.4 Different point of views... 23
3.4.1 Different schools of organization control ... 24
3.4.1.1 The Traditional approach... 24
3.4.1.2 System-cybernetics approach... 24
3.4.2 Framework of organizational control ... 24
3.4.3. General organizational conditions for organizational control... 26
3.4.3.1 Budgetary Process Control ... 27
3.4.3.2 Systematic Quality Control... 27
3.5 Concluding remarks ... 28
Chapter 4 Evaluation indicators... 29
4.1 Introduction... 29
4.2. The Total Life Cycle Costing... 29
4.3 Causes of deviations in the performance ... 31
4.3.1 Internal causes of deviations... 31
4.3.2 External causes of deviations... 32
4.4 General organizational aspects... 33
4.4.1 Agency problems ... 33
4.4.2 Learning curve ... 34
4.5 The structure of the evaluation process ... 35
4.5.1 The Cost-Volume-Profit analysis... 35
4.5.2 Variances in sales, profit and costs analysis ... 36
4.6 Concluding remarks ... 38
Chapter 5 Philips Post Calculation Research... 39
5.1 Introduction... 39
5.2 The managerial choice... 40
5.2.1 The objectives of post calculation... 40
5.2.2 The current way of working... 41
5.3 Structural configuration ... 42
5.4 The Information system... 45
5.4.1 The key indicators ... 45
5.4.2 Information resources... 49
5.4.3 The responsibilities ... 49
5.4.4 Timing of post calculation ... 50
5.4.5 The applied business plan... 51
5.5 Causes of deviations ... 52
5.6 The organizational activities ... 53
5.6.1 Conflict of interests ... 53
5.6.2 Learning... 54
5.7 Concluding remarks ... 55
5.8 The Cool Skin test ... 55
Chapter 6 The post calculation framework... 56
6.1 Introduction... 56
6.2 The management approach ... 57
6.3 The post calculation process ... 57
6.4 The post calculation framework... 58
6.4.1. The Gross Margin ... 58
6.4.2. The Investments ... 60
6.4.3. The other dynamic variables... 61
6.5 Learning... 62
6.6 The review of the business plan and corrective actions... 63
6.7 The performances of the Cool Skin test... 64
6.7.1 The post calculation of the Aquarius... 66
6.7.2 The post calculation of Pluto ... 67
6.8 The learning process and the looking forward ... 68
6.8.1 The learning process... 68
6.8.2 The looking forward... 69
6.9 Concluding remarks ... 70
Chapter 7 Conclusion and recommendations ... 71
Appendix 1 The organizational framework ... 76
Appendix 2 Definitions and abbreviations ... 77
Appendix 3 The Questionnaire ... 79
Appendix 4 An abstract of the functions ... 80
Appendix 5 Causes of deviations per product life cycle phase... 81
Appendix 6 The Product Creation Process... 83
Appendix 7 Causes of deviations in the key variables ... 85
Appendix 8 The post calculation framework... 88
Appendix 9 The Aquarius performances framework ... 95
References ... 97
List of figures... 99
List of Tables ... 100
Chapter 1 General description of the research
1.1 Introduction
In the dynamic world of globalization, the growing new markets, like China, and new technological developments, the competition is strong and it grows fast. For multinationals, like Philips, it is significant to know how well the business is doing compared to the competition and what the company share is in the market. One way to calculate and judge performances is by evaluation processes and organizational control. In this thesis, theories and practical cases about these subjects are discussed and outlined in a research accomplished in the Corporate Center of Philips DAP in Amersfoort.
1.1.1. Historical facts of Philips
Philips, one of the larges electronic companies in the world, was founded in 1891 in Eindhoven, according to the website of the company (May 2005). In the starting phase of Philips, the company was focused on the manufacturing of lamps. The company was in the beginning of the 20-century one of the largest producers in Europe. In 1925 the company introduced the first television, shortly followed by the production of the radio. To continue, in 1939 the first electronic shaving appliance was introduced on the market. Philips became, and still is in 2005, a market leader in this product. An indication about the size of the company can be given by the following fact. In the forties about 45.000 employees were active in the multinational worldwide. In the years between 1940 and 1950 Philips Research developed the shaving appliance ‘Philishave’. Characteristic of this product is the ‘rotated shave headers’.
This product was very successful. The milestone of the production of 100 millions televisions was accomplished in 1984 and in 1985 the production of 300 millions Philishave units had been reached.
However, the nineties were characterized by large changes in the company. Large restructuring was accomplished to simplify the company structure and the general Corporate Center of Philips moved from Eindhoven to Amsterdam. Nowadays, in the 21st century the multinational is focused on changes and growth. The objective of the company is to enhance the image to a more representative image. Philips’ vision is to be a leading solution provider in the areas of healthcare, lifestyle and enabling technology, aspiring to become the most admired company in their industry according to their stakeholders. In 2004 Philips introduced sense and simplicity as their new slogan. They want to fulfill the needs of all consumers worldwide in advanced and make it easy to experience their products. These products have to
be designed around the consumer in daily life. And in the end, Philips wants to be leader in all their active businesses.
1.1.2. Philips DAP Corporate Center
In 2005 Philips is grown out to be one of the largest electronic companies in the world.
According to the intranet of DAP (June 2005) the company is focused on three main segments: Healthcare, Lifestyle and Technology. This is shown in figure 1.1.
Within the three segments the multinational can be separated in 6 businesses, Lighting, Consumer Electronics (CE), Domestic Appliances & Personal Care (DAP), Semiconductors, Medical Systems and Other Businesses. This is outlined in figure 1.2. For example, the segment Healthcare consists of the business Medical Care. The segment Lifestyle consists of the businesses Consumer Electronics and Lighting.
Figure 1.1 Philips Businesses focus. Source: Intranet, DAP company presentation 2005.
Figure 1.2 The business of Philips DAP. Source: Intranet, DAP company presentation 2005.
The research discussed in this paper was accomplished in the Corporate Center of Philips, Business Domestic Appliances & Personal Care (DAP). An indication of the size of Philips DAP can be given. The sales volume sold to consumers worldwide is about 70 million products in 2004. The mission Philips DAP carries out is:
‘DAP offers consumers exciting experiences that help them look, feel and live better, thanks to breakthrough products that combine advanced technology with a deep understanding of what consumers seek with respect to health, beauty and home care.’
According to the presentation of the company in 2005, some other facts about Philips DAP can be mentioned. The company holds a first or second market position of 75% of its product categories. Second, there are about 8,200 employees working for the company. And third, the organization sells products in more than 60 countries worldwide. DAP Corporate Center is subdivided in the following 5 Business Units (BU’s):
1. Food & Beverage (F&B) 2. Home Environment Care (HEC) 3. Oral Healthcare (OH)
4. Consumer Health & Wellness (CHW) 5. Shaving and Beauty (S&B)
The BU Food & Beverage has some well known products, like the coffee maker, the Senseo, the home beer pump and all the Cucina range products. This range includes all kind of housekeeping products, like the toaster, the mixer, the blender etc. The BU Home Environment Care is known by its solariums and steam irons. To carry on, the BU Oral Healthcare is familiar to consumers by the electric toothbrushes. The BU Consumer Health &
Wellness is familiar by the product the Sky Walker. It is a depilation system that removes hear with the help of light.
The BU Shaving and Beauty is most trusted by the production of the Cool Skin and the Satin Ice Optima, the depilation system. The Business Unit Shaving and Beauty is subdivided into 3 Lines of Businesses (LoB’s), LoB Shaving, LoB Grooming and LoB Beauty. LoB Shaving is furthermore subdivided in Dry and Addition. The products produced by the LoB Shaving, are the Cool Skin, the dry Electric 3 header and the dry Electric 2 header. In the LoB Grooming the Hair Clippers, the Beard Trimmer and the D-finer are produced. And the LoB Beauty is responsible for the products Female Depilation and Hair Care. The research about post calculations, explained and expanded in this graduation paper, takes place in the LoB Shaving and is first of all focused on the subdivision Additive. The organizational framework of the BU Shaving and Beauty is abstracted in appendix 1. The names of the employees are not mentioned because of the confidentiality within Philips.
Philips DAP has a lot of strategic partnerships. Relevant companies are Nivea, Unilever, Douwe Egberts, Proctor & Gamble and InBev. For example, Philips and Unilever (Robijn) work together within the steam irons business. Philips and Douwe Egberts created a unique and very successful combination of in the coffee business, with the Senseo. And Philips and Nivea work together within the shavers, the Cool Skin.
Furthermore, Philips DAP carries out some key messages, according to the intranet of the Corporate Center of DAP (June, 2005),
1. DAP will be a value creating business.
2. The business processes and costs have to be under control.
3. Initiatives will be stimulated instead of fuel top-line growth.
4. Good strategies to maintain margins.
The research for Philips discussed in this paper, can be connected to the second message the company carries out. A business process, the evaluation process will be outlined and there will be a focus on the organizational control and costs control.
1.2 Goal of the research
The goal of the graduation paper is to establish a framework for the evaluation process of projects of the LoB Shaving in order to optimize this process and improve business performances. In the evaluation process a form of variance analysis will be used. During the research at Philips DAP this variance analysis is called post calculation. Within this process the predicted business plan performances will be compared to the actual performances. The evaluation process will be established on business plans of new introduced projects. The target of the framework is that it will give an insight in the performances after some periods.
The duration of the period and the timing of the post calculation will be investigated in this paper. The responsible managers and their tasks in the post calculation process will be outlined and the aspect of gathering input for the framework is synthesized. Beside these research aspects there will be an outline of possible causes for deviations between the actual performances and the forecasted performances.
1.3 Formulation of the problem
The central question that will be the guideline through this paper is:
“In what way can post calculation of introduced projects of the LoB Shaving, of Philips DAP be optimized?”
This question can be approached from different fields and areas and in the paper the relevant information will be outlined and suggestions for the post calculation process are designed.
The conclusion and recommendations will be based on this leading question.
1.4 Research questions
In the paper some leading research questions about post calculations will be answered, and information will be given about subject related issues. These questions can be split up in two parts. The first part will be the theoretical part, and the second part will be a practical part accomplished at the Corporate Center of Philips DAP. The questions are summarized below.
Part A
1. What is performance management?
2. What is post calculation and organizational control exactly? What do different theoretical views state about this subject?
3. What is the Total Life Cycle of products, and what is its impact on post calculations?
4. Which measurements are important to take into account for the optimalization of the post calculation process?
Part B
1. What is the current way of working at Philips DAP, which tools are used and which approaches are there within products of the LoB Shaving, Philips DAP?
2. Who are the stakeholders in the post calculation process and what are their targets?
3. How can a standard procedure of performances control of new introduced products be developed? And how can performances of these products, inclusive procedure, tools, ownership and responsibility be evaluated and calculated?
4. Is the post calculation framework working? Test the post calculation framework on the Philips Cool Skin project.
For the answering of the questions many definitions and restrictions are used in the report.
These definitions and abbreviations can be founded in appendix 2.
1.5 The structure of the report
In chapter 2 the method of the research and the method of collecting data will be explained. In chapter 3 and 4 part A of the research questions will be described. In chapter 5 and 6, part B of the research questions will be discussed and outlined. In chapter 5 the field research at Philips DAP Amersfoort will be established. In this chapter there will be an abstract of the current situation of the LoB Shaving, the organization of tasks of the stakeholders, the key indicators for the evaluation process and some guidelines, like timing of the post calculation, are outlined. In chapter 6 a new framework for the post calculation process is developed. The framework is based on information gathered during the depth interviews with different managers and specialists of the BU Shaving and Beauty. Furthermore, information is gathered during the internship and is based on my own vision and insight. In chapter 7 there will be recommendations and a conclusion of the thesis will be described.
Chapter 2 Field of activities
2.1 Introduction
In this chapter an outline is given of the field of activities for the evaluation process and a description of the research is described. Some fields leading in the paper are discussed and the involved elements are explained. Furthermore, the research methodology and the method of the data collection are described.
2.2 Field of activities of the research
2.2.1 The management approach of the evaluation process
Management accounting is intended to help managers to make better decisions. Managers need an outline of performances to re-evaluate the design or operation activities of a product.
In this way an organization can become a serious market player. In a study of Horngren et al.
(1999, p.15), the authors clarified some key themes in a management approach. An overview of the themes is shown in figure 2.1.
Figure 2. 1 The key themes in a management approach.
Source: Horngren, et al. 1999. Management and Cost Accounting. P. 14.
1. Customer satisfaction is priority number one. To be successful, it is essential to know your consumers. Organizations need to be customer-driven. If managers have no insight in the needs of the consumer, the organization will never be successful.
2. Key success factors:
Costs, Time,Quality, Innovation
3. Total value- chain analysis
1. Customer satisfaction is priority one
4. Continuous
improvement 5. Dual
external/
internal focus
2. The key success factors are cost, quality, time and innovation. There is a trend of continuous pressure to reduce the product costs or services for organizations.
Customers expect higher levels of product quality during the years. The third success factor is the timing. The timing of developing and bring up of a new product has to be connected to the customers. All these activities go faster. The last key success factor is innovation. A continuous flow of innovative products is a prerequisite for the success of most organizations.
3. The total value-chain analysis (see figure 2.2 below) is related to two aspects. First, it is important to treat each area of the business functions as an essential and valued contributor. And second, integrate and coordinate the effort of all business functions to develop the capabilities of each individual business function.
4. Continuous improvement is a never-ending research for higher levels of performances within many organizations.
5. The internal and external focus means that managers should take into account that they operate in an internal and external environment. The internal environment covers each part of the value chain as well as the coordination of its components. The external environment includes customers, competitors, suppliers and government bodies.
In the paper all five key themes are included. Philips wants to decrease costs and timing, and improve the quality of its products. Therefore, the post calculation will be developed. In the evaluation process of Philips all phases of the value chain will be taken into account.
Continuous improvement and learning is very important for organizations like Philips, especially if they have to distinguish from the strong competition that there is in the field.
Furthermore, there will also be a focus on the internal and external environment of Philips.
With help of an internal and external focus the causes of the deviations in the post calculation are summarized. The Philips case is outlined in chapter 5 and 6.
2.2.2 The value chain of business functions
As already mentioned above, the third key factor, the total value chain analysis is a significant aspect, and all the phases have to be taken into account in the evaluation process. An arbitrary value chain is shown in figure 2.2.
Figure 2. 2 The value chain of business functions.
For the research of Philips all phases are absorbed in the business plans of projects. For Philips, the R&D, process design and production of products occurs in the Dutch factory Drachten. The product manager is responsible for activities and performances of the factory of Drachten and is positioned in Amersfoort at Philips DAP. Marketing, including marketing research, is committed in Amersfoort and distribution takes place at worldwide distribution centers. Customer service is carried out at sales points worldwide.
2.3 Qualitative research
2.3.1 Literature research
This graduation paper starts with a literature research about the subject. With the support of secondary information answers will found for the research questions. This literature is used during my study at the University of Groningen and other additional information was available in the University Library of Groningen. Furthermore background information is available at Philips DAP about the evaluation of projects and organizational control which is used during the literature research.
2.3.2 ‘Field’ research
The second part of the research is carried out in the ‘field’. The ‘field’ can be described here as the Corporate Center of the Philips DAP in Amersfoort. Especially the managers at the third and fourth floor are of great value for the research. On the third floor, the Business Unit Beauty and Shaving is located. Within this Business Unit, the three Lines of Businesses, Shaving, Beauty and Grooming are located, as explained in chapter 1. On the fourth floor the product division management and the strategic planning managers are positioned. For the accomplishment of the performances of the research the vision of the specialists on these floors is significant.
R&D Process Design
Production Marketing Distribution Customer Service
2.3.3. Depth interviews
The information of the respondents of the ‘field’ research is gathered by depth interviews.
Malhotra (2002) defined depth interviews as ‘an unstructured, direct and personal interview in which questions are asked to a single respondent to uncover underlying motivations, beliefs attitudes and recommendations of the subject’. This can also be implemented for the post calculation. Depth interviews are a direct form of a qualitative research procedure. A reason for the use of the qualitative method is that qualitative research provides insight and understanding of the problem setting. In this kind of research underlying reasons and motivations of a respondent can be found. Furthermore, it is not always possible to use a fully structured method to obtain information from respondents. Employees are maybe unable to answer certain questions. As for the rest, some parts in the subject can be discussed. There is not a right or wrong answer, for example, the timing of a post calculation and the discussion about the ‘good’ quality of a product. Another reason why qualitative research is suitable, if employees are unable to provide accurate answers to questions or if they interpret the question wrong. During the interview the interviewer can explain the question to get the useful and accurate information for the research.
In the direct form of gathering information the interviewer tries to provide primary information. The content of the depth interviews with the experts will exists of questions about the post calculation. For example, what is the exact goal of the post calculation, which financial variations should be in, how should the right information be gathered and by whom, at which time does the product manager get the information, in which period after introduction in the market should the post calculation be accomplished, and so on. The exact formulation of the questions of this depth interviews can be found in appendix 3.
2.4 Method of collecting data
The method used for collection data is, as mentioned above, by depth interviews. Three forms of depth interviews techniques have recently gained popularity. According to Malhotra (2002), three techniques can be differentiated, laddering, hidden issue questioning and symbolic analysis. Laddering is a technique for conducting a depth interview in which a line of questions proceeds from product or service characteristics to user characteristics. Hidden issue questioning is a type of depth interview that attempt to locate personal sore related to deeply felt personal concerns. The third technique is a symbolic analysis. This technique is a technique for conducting depth interviews in which the symbolic meaning of objects is analyzed by comparing them with their opposites. For the research described in this paper the first and second techniques were used during the interviews. An abstract of the functions of
Furthermore, the framework of the process of post calculations was developed with the help of background information of theories and literature about evaluation processes and organizational control. Other additional information was gathered during the internship at Philips DAP Amersfoort in the period of the 2nd of May until the 31st of July 2005.
2.5 The process of the research
The preparations of the research started in March and April of 2005. During that period some meetings occurred with the supervisor Mr. P.C.G. Molenaar, at the University of Groningen, and the supervisors at Philips DAP, Mr. H. Hanssen and Mr. J.W. Ruinemans. Mr. Molenaar gave his view on the research and noticed important aspects and criteria which should be taken into account during the research. Mr. Hanssen and Mr. Ruinemans also gave their opinion about the project and the criteria the research had to fulfill. These criteria were combined and formed a guideline during the research. Another preparation in the period of March and April of 2005 was the study of a lot of literature to get familiar with the subject.
The internship at Philips DAP officially started in May 2005. The exact planning for the research during the internship was the following. In May, the depth interviews were planned, and abstracted. Information was gathered and theories about the subjects were gathered. With help of the gathered information, in June a new framework for post calculation was developed for Philips projects. In July of 2005 the framework was tested on the actual performances of 2004-2005 of the Cool Skin project. In the end of July, the internship at Philips DAP was finished. During the internship part B of the research questions was answered. In September and October the finishing activities occurred. A lot of information about post calculation was gathered and many topics connected to the subject were studied. This resulted in an interesting research and is described in the following chapters in the paper in front of you.
Chapter 3 Organizational control
3.1 Introduction
Performance management is an important topic in the economic situation companies are in nowadays. The competition is high because of the still increasing internationalization and globalization. Consequently, it is important to manage the performances well. Performance management and evaluation processes can occur in different areas, like in the financial or in the societal areas and in different structures. In this chapter these aspects will be brought up.
Furthermore, a framework and some approaches with regard to evaluation processes and business performances are made explicit and a boundary is outlined for the research.
3.2 Performance management
The post calculation process is a form of performances management. Performance management is focused on the performances of projects and will evaluate the project management. Project management is studied by Meredith et al (2000) and within this thesis the project management will be bounded by performances management. Performances have to be evaluated and possibly improved. Performance management is studied in many ways last decades. According to Kaplan et al. (1998) performance management systems are used to signal if improvements are needed, to guide product mix and investment decisions and to assist front-line employees in their learning. According to a study by Ashton (1997), there are three terms selected to be important attributes of strategic performance measurement, namely focus, balance and integration. According to Ashton (1997) “‘Focus’ has strategic and operational dimensions in defining direction, capability and what the business or its activity is all about. ‘Balance’ seeks an equilibrium for making sense of the business and to strengthen focus. And the third element, ‘Integration’, is critical; ensuring the organizational effort knits into some form of sustainable response to strategic priorities and change”. With the use of a balanced framework the three attributes can be understand and pulled together. This is a first principle in attempting to rethink or introduce strategic performance measurement. Without the framework effort tends to dissipate and the outcome is diminished. Performances measurement frameworks are systematic and several perspectives are included. A good example of such a framework is the value performance scorecard of Paragon (1997). This framework is described in figure 3.1 below, and explains the interaction of different perspectives in an organization.
Four different perspectives that can influence the performances of a company, according to a study of Paragon Consulting Associates (1997), are;
1. Financial perspective: Business results are the axis here. And in this box, managers question themselves. How do stakeholders criticize the company?
2. Customer perspective: In this perspective the focus is on the customer’s satisfaction. How do the customers judge the organization?
3. Employee perspective: Analyze the people’s satisfaction. How do the employees analyze the organization?
4. Societal perspective: Research of the impact on society is the axis here. The central question here is; how does the society at large judge the organization?
Figure 3.1 Paragon’s Balanced Scorecard.
Source Ashton, C., 1997. Strategic Performance Measurement. London: Business Intelligence Ltd. P.26.
3.3 The post calculation
In the theoretical context post calculation is called variance analysis. The post calculation process is an evaluation process which compares the actual performances with the forecasted setting. The post calculation is a part of the performances management process. In the process it is significant to analyze the deviations in the results and find causes of the possible different performances. Post calculation is a part of process control.
According to a study by Schieman et al. (1998), process control can be described as:
”accomplish company targets by assuring an effective progress of the company processes”. It Employee perspective
Goals Measures
Societal perspective Goals Measures Financial perspective Goals Measures
Customer Perspective Goals Measures
is significant to pursue, because during the period of product market introduction many variables can influence the performances of the product. It is important to have an insight in the aspects that influences the performances and know the cautions of these deviations.
Changes can be caused by companies’ internal and external developments, by the impossibility to exclude all mistakes in human dealing and the requisite, to give employees an as large as possible independence in their tasks and to have a decentralized organization.
The process control exists of four phases according to Schieman (1998):
1. Determine a plan of performance norms and standard.
2. Determine the progress of the achievement, measurement of the results.
3. Compare the results with the norms and standards of the plan and judge the size of possible deviations.
4. Perform corrections activities, if the deviations cross the line.
In the first phase, a company mainly builds a business plan to summarize the information and give an overview of the forecasting based on information from the market, like the needs of the consumers and the trends that are familiar with the manager. In the second phase, the manager should gather information that is available some time after the product introduction.
In the third phase, an important one, the actual performances are compared with the forecasting performances, and the post calculation process starts. The manager will analyze possible causes if deviations exist. Possible organizational causes for deviations are discussed in paragraph 3.4.2. Other details and causes of deviations are discussed in chapter 4. The last phase is the phase of performing correction activities. The correction activities are possible if the evaluation phase (phase 3) takes place in an early stage of the product life cycle. The new information can be used for the new product generation. The structure of the four phases, according to Schieman (1998), will be used in the Philips business case.
3.4 Different point of views
In this paragraph some different schools about organizational control are explained and a framework for organizational control will be outlined. Furthermore, some general aspects that can optimize post calculation and the advantages and disadvantages of post calculation are clarified.
3.4.1 Different schools of organization control
3.4.1.1 The Traditional approach
The traditional approach to organizational control exists, according to Holloway et al. (1995) of a classical approach and a neoclassical approach. There is an important difference between the classical approach and the neoclassical approach. The neoclassical approach is more focused on the social and psychological aspects of organizations. Principles of autonomy, hierarchy and impersonality are held, and so employees will take more responsibility. Job enlargement programs are used to increase the size, scope and variety of work. Job involvement and self-control is central in the human resource analyses of the neoclassical organizational control. The classical approach on the other hand, is more structural and economical orientated.
3.4.1.2 System-cybernetics approach
The essential elements for cybernetic design can be identified as self-regulation and self-veto, according to the Ashby analysis (1956, 1960). According to the author “a necessary condition for self-regulation is the error-controlled negative feedback loop”. This mechanism is capable to monitor constantly the state of a process. Furthermore the mechanism is able to feed back corrective signals automatically. The self-veto system is sufficient to guarantee coordination and stability.
The cybernetic design offers some insight into the problems of organizational control. The concept serves to structure effective stabilization schemes. This kind of concept is the basis for many more traditional controls, for example, budgetary process control, explained in the paragraph 3.4.3.1. As systems exhibit a greater degree of variety, they become more difficult to control. The cybernetic design emphasizes the importance of control structuring from within the organization.
3.4.2 Framework of organizational control
Organizational control is an important issue, especially for a company like Philips. The company is active in a dynamic, very global orientated environment. Constantly, Philips DAP has to improve its products and has to compete for its market shares with its competitors. This results in a lot of pressure on the financial results. Organizational control and the corresponding elements are essential to construct good performances. The Philips case about the organizational control will be described in chapter 5 and 6. The process of organizational
control and the five elements that influence the process are outlined in a framework by Dent and Ezzamel (1986).
Figure 3.2 Framework by Dent and Ezzamel.
Source: Performance measurement and evaluation, 1986, p. 34. Holloway, J., Lewis, J., Mallory, G., 1995. Performance measurement and evaluation. London: SAGE Publications Ltd.
The five elements in figure 3.2 influence the organizational control in different ways. The elements are explained below, starting in the center, and then following to the right clockwise.
Dent and Ezzamel (1986) separated the following elements;
1. The organizational activity refers to the actual working of the organization. In this part of the model attributes, such as anxiety within the organization, the dimensions of organizational effectiveness and also measures of economic efficiency, like profitability and stock market performance, are included. Also the socio economic indicators, like employee earnings and satisfaction are taken into account here.
Contingency factors e.g. environment.
Technology.
Age and size.
Power distribution.
Organisational goals.
Type of personnel
Ownership characteristics, etc.
Managerial choice Strategic choice.
Structural choice.
Tactical choice.
Information system e.g. orientation.
Sources of data.
Structure.
Scope.
Diversity or ambiguity of data.
Extent of predictive data.
Timeliness and frequency of reporting, etc.
Organizational activity e.g. cohesiveness and moral of informal groups.
Levels of conflict.
Dimensions of effectiveness:
Productivity.
Profitability.
Stock market performance.
Socio-economic indicators.
Structural configuration
e.g. job specialisation.
Individual responsibilities.
Organisation of tasks.
Differentiation.
Lines of formal authority.
Organisational reward structures.
Informal organisation.
Formal and informal decentralisation.
2. The managerial choices. In this part of the model the managerial input is demonstrated. These input aspects encompass three broad types of decision: strategic, structural and tactical choices. The managers attempt the three factors to influence an organization’s functioning.
3. Structural configuration. Three related sets of characteristics can be identified here.
A) The individual level, attributes like job specification, individual responsibilities, the organization of tasks and the degree of differentiation. B) The organizational attributes which include the lines of formal structure, organizational reward structures, the informal organization and the extent of integrating mechanisms. C) The decision-making and leadership level, like the extent of formal and informal decentralization and the decision style.
4. Information system characteristics. This part of the model can be divided in A) structural characteristics, for example, the orientation of the information system (internal/external), the sources of data (internal/external), the structure of the information linkages (lateral/ vertical) and the scope of the information (global /localized). B) Characteristics referring to the nature of information, like the diversity or ambiguity of information and the timeliness of the data.
5. Contingency factors. This part denotes the impact of unsuspected factors in an organization, like, the environment of the organization, its technology, its age and size, its internal and external power distribution and so on.
3.4.3. General organizational conditions for organizational control
Already mentioned in the paragraph above, organizational control changes over time. A company deals with a lot of effects, both internal and external. Organizational control can be accomplished in different ways, explained in the section below. According to studies by Ezzamel (1992), by Schieman et al. (1989) and a study by Kaplan (1982) some general organizational conditions have to be taken into account for an enterprise to implement an organizational control process:
1. Work accurate.
2. Work at the right time.
3. Take care that every stakeholder is understandable.
4. Be focused on the progress of the companies’ process.
5. Be economic responsible, (be focused on the margin).
6. Take care that the control process conforms in the organization structure.
7. Be flexible.
8. All conditions should be accepted by all stakeholders involved.
9. Give instructions for all stakeholders involved for correction activities.
10. In the evaluation process the controllability principle should be included.
The contingence factors have to be taken into account here. This is also recommended by Verbeeten (2001). Results of organizational control depend on different situations the companies operate in and depend on the specific targets of the company. Also the general organizational conditions mentioned above will be different per company. There are different forms for the implementation of the control process. The first form is the Budgetary Process Control and the second implementation form is Systematic Quality Control. The systems are discussed below.
3.4.3.1 Budgetary Process Control
In the budgetary process most attention is paid to the costs budgeting within the budget analysis. According to Schieman et al. (1989, p. 261), costs budgeting can be defined as “the formal setting of the norms and standard based financial sources, who are adjudged to specific activities that will be provided in some period”. The budget analysis is an analysis of the comparison of the costs conform the budget and the actual costs made in one period. The causes of important deviations between the actual performance and the afforded costs can be analyzed. These causes will be discussed further in chapter 4. Budget analysis is focused to pilot the end results of the business processes and its specific conduct on costs control. A cost budgeting is not actually useful as tool of process control during the company’s process end to correct activities and results. Because most information out of a budget analysis can also be called post calculation, it is not frequent enough and is mostly too late available to make an adaptation.
3.4.3.2 Systematic Quality Control
To continue, according to Schieman et al. (1989, p. 262), “systematic quality control is an example of a control process that is focused on the creation of opportunities to correction during the process by direct action by establishing of relative important deviations between plan and enactment”. By a study of Schieman et al (1989) quality is defined as: “the rate wherein the complete characteristics of a product, process or service performs to the formulated charges, which succeeds out of the user’s target”.
In other words, quality is a criterion for the capability of the product-, process- or service performances during the lifecycle.
A target of the systematic quality control as defined by Schieman (1998) is the lowering production costs. This is possible by a reduction of drop outs, a reduction of waste, a higher production at the same effort, fewer distortions in the production, an enlargement of the uniformity of the products and an enlargement of the trust in the company.
This kind of control is necessary, because in the first place the purchaser will determine the quality of the product. This can be the consumer or producer. High quality criteria will raise the costs of production, and this causes an increase in the sales price. The target of the company is to fulfill the needs of the purchaser, to deliver the right quality, at the lowest possible costs. For this reason systemic quality control is very important.
3.5 Concluding remarks
In chapter 3 the research question 1 and 2 of part A, are discussed. Performance management is outlined and it can be concluded that four different perspectives are involved in the performance management. Post calculation is a form of performances management.
Furthermore, post calculation and organizational control are explained supported by the corresponding theoretical approaches, like the Traditional approach and the System- Cybernetics approach. Deduced these theoretical elements will form the base for the remaining research. The framework for organizational control is discussed and will be a guideline for chapter 5. In the end of chapter 3 some general organizational conditions for organizational control are outlined. Some forms of implementation of the control processes, like the Budgetary Process Control and the Systematic Quality Control, are explained. These elements contribute to the formulation and development of a new evaluation process.
Chapter 4 Evaluation indicators
4.1 Introduction
In chapter 4 the research question 3 and 4 of part A, will be answered. The product Total Life Cycle Costing of a production process is discussed and its impact in performance and influences on the post calculation process is shown in paragraph 4.2. In paragraph 4.3 possible internal and external causes of deviations in performances of a company are outlined.
Furthermore, an organizational aspect like the agency problem in companies is discussed and it's impact on the performance of an organization and its influences in the post calculation process. Also the learning aspect is discussed and the learning curve is reproduced. In paragraph 4.5 the cost-volume-profit analysis is outlined. Next, the variances for sales, profit and analysis are explained and some significant variables of the total life cycle costing are set.
These variances and the variables can have a large influence on the evaluation performances.
4.2. The Total Life Cycle Costing
Product costs have to pass some phases in the production process before they can be brought onto the market. Different resources are used in this process depending on the specifications of the products. In a study by Atkinson et al (2001) the product flow value chain can be split up in three elements. The product flow starts with the research development and engineering activities. In the second step, the product will be manufactured. The process continues and turns into the last step, the sales to the customers. In all business activities different costs are committed. Every phase has a different impact in the performances of an organization and therefore it is important to take this into account.
According to Atkinson et al (2001), Total Life Cycle Costing (TLCC) can be described as
“the process of managing all costs during a product’s lifetime”. According to the authors, “the TLCC system provides information for managers to understand and manage costs through a product’s design, development, manufacturing, marketing, distribution, maintenance, service and disposal stages”. The system shows an overview of the product costs performance. The allocation of resources in the life cycle usually is an iterative process. Opportunity costs play a large role in a total life cycle cost perspective, because it is possible to develop only a limited number of products over a particular period of time. As already mentioned above, according to Atkinson et al. (2001) there is a distribution in TLCC, in three functional areas.
This is shown in figure 4.1.
1. Research Development and Engineering Cycle (RD&E). In a life-cycle concept the RD&E Cycle exists of three phases:
• Market research. The new customer’s needs and new ideas are generated for new products.
• Product design. The technical aspects of product will be developed.
• Product development. The features critical to customer satisfaction are developed.
2. Manufacturing Cycle. According to Atkinson et al. “in this cycle the costs are incurred inside the factory associated with transforming raw materials into a finished product”.
3. Post-Sale Service and Disposal Cycle. If the consumer has the first product in hands, then the cycle begins. Note that this stage can overlap the manufacturing cycle; these costs are already committed in the RD&E stage.
In figure 4.1 the weight of the costs of the different phases are shown. The committed costs are defined by Atkinson et al. (2001) as “those costs that a company incurs before knowing actual production or sales volumes”. The incurred costs are those costs that incur per stage in the Total Life Cycle.
Figure 4.1 Stages of the Total Life Cycle.
Source: Atkinson, et al. 2001. Management Accounting. 3rd ed. New Jersey: Prentice Hall, Inc.
P. 372.
A remark for the total life cycle costing is that the progress of costs for each functional life cycle differs. The weight of costs depends on the industry and the specific products produced.
Philips absorbs these stages in different business plans of a project. These business plans are
explained in chapter 5. In the Philips case a choice can be made in which business plan forecast the company should use for the post calculation process. If the first business plan is chosen, there will be many uncertainties in the business plan. If an organization chooses a business plan further in the process, more information is available and less uncertainty is involved in the forecasting and a more realistic comparison can be made in the evaluation process.
4.3 Causes of deviations in the performance
The total life cycle, discussed in paragraph 4.2 is one of the issues that has to be taken into account in the evaluation framework. Another issue of great impact on the evaluation process is finding causes of deviations in the performances. It is very important for a company, if the organization wants to optimize their evaluation process, to have an indication of the causes of deviations. Possible causes are outlined per life cycle phase below. The causes can be split up in internal and external causes. Furthermore, there are non-financial variables that can possibly influence the performances. A summary is outlined in appendix 5.
4.3.1 Internal causes of deviations
An internal cause of deviations can be defined as a deviation that exists because of unexpected mistakes or unexpected courses of a process within an organization. In this paragraph possible internal causes are mentioned per product life cycle phase.
In the R&D phase some internal aspects can influence the organizational performances. A cause can be the number of loops necessary for the quality design of the product. That means more test cases are necessary to create the right quality. Another cause is the design of a product. This means, the design takes more time than expected, because for example, new quality criteria are set up. A third reason for deviations in the performance is that the organization made another investment deal then expected. This can be positive or negative for the evaluation results. Another aspect can be the unexpected but necessary purchase of new machines because of a new design of the product.
In the production phase some other general causes can influence the financial numbers of the organization. One cause can be the drop out of machines. Old machines have to be replaced.
A second reason can be the higher or lower costs of materials, caused by, for example, the oil price. Third, there are problems in the inventory storage room, therefore, extra storage space have to be hired, costs increase. In the third phase, the post-sale service and disposal, there are also reasons to be mentioned that influences the performances and causes deviations compared to the forecasting. One cause can be transport and distribution problems. A second
reason is a bad timing of the product launch in the market. Thirdly, a shortcoming or overload in advertising and promotion of the product can be reason for deviations in performances. A last reason that can be mentioned is that the specific product simply is (not) successful in the market.
Some internal causes, general and not specified to a life cycle phase that influences the performance are, for example, poor decision management and conflicts within the organization. These causes have to be taken into account and can be a reason for deviations in the performances.
4.3.2 External causes of deviations
External causes can influenced the organizational performances too. A company has no power to control these variables, but it is important to have in insight in the variables. The company can make anticipation plans for different scenarios if these variables change. The R&D, production and sales phase performances can be influenced by unfavorable exchange rates.
An organization can have different production facilities in countries located worldwide.
Therefore, exchange rates can have a large influence on the performances. A second external effect is the current situation of an economy in a country. This situation has leverage on the sales results. If the average income level of households is low, then prices of products have to decrease otherwise the volumes of sales will be disappointing. Besides the variables above, (aggressive) competition is a variable to take into account. The competitors can over take some parts of the market and in this way a company loses her market share. For example, at operational level, the product of the competitor has a more prominent shop position for their products. This can influence the sales and market share of the competitors. Furthermore, other variables to pay attention to are legislation, a chance in fiscal policy of a country and the political situation of a country. These variables can restrict the production or sales situation in a country. The sales will be put to a stop, because of the changing legislation, the increasing prices, because of the increasing taxes or because of political turbulences in a country.
And to continue, some last external aspects that can delay numbers of a product and decline the performances, are infrastructural problems in a country and bad news about the company in the media. This can damage the image of the brand of the product and can, in the worse scenario, decrease the sales for years. Or worse, forever. Some other external variables to take into account are an unexpected raise in interest costs and a high depreciation of machines.
These variables will increase the price of production. A consequence will be an increase in the consumer price or a decrease in the margin of a product.
4.4 General organizational aspects
4.4.1 Agency problems
In large multinational organizations many people are involved in the process of performances of the organization. Behind the performances a large network of people and stakeholders are hidden. All stakeholders involved have their own opinion and have different interests within the organization. The network of different interests is also called agency relationships according to Brickley et al (1997). An exact definition of the agency relationship according to Brickley et al, (1997, page 154) is;
“An agency relationship consistent of an agreement under which one party, the principal, engages another party, the agent, to perform some service on the principal’s behalf.”
There are many agency relationships within businesses. All the parties have different interests in the business. This can cause agency problems. That means that after a contract is signed, the agent has incentives to take action for his own utility. This will be a disadvantage for the principle. Often asymmetric information comes into existence in these cases. This behavior can be reduced by monitoring the agents by the principal. Another aspect that can reduce this problem is by making some incentives for the agents to strive for the same performances as the principal. Then both, principal and the agent have incentives to solve the problems.
Agency problems that cause problems like, increasing of the costs and reducing the value of the company, will be solved. A practical example of the agency problem is explained in chapter 5. An example from a theoretical point of view of a struggle between the interests of a principle and an agent in an organization is explained in distinguished Prisoners’ Dilemma.
According to Cooter et al. (2004) and Brickley et al. (1997) the Prisoners Dilemma’, a game theory, two suspects are arrested for a crime. The Justice Department does not have enough evidence to convict the suspects. This is only possible if one of them confesses. There are different options for the suspects to take into account.
-Option 1: Suspect 1 will not confess, and suspect 2 will not confess either. This will cause both suspects 6 months of imprisonment.
-Option 2: Suspect 1 will confess and suspect 2 will not confess. This will cause suspect 1 an imprisonment of 2 months and suspect 2 an imprisonment of 20 years.
-Option 3: Suspect 1 will not confess and suspect 2 will confess. This will cause for suspect 1 an imprisonment of 20 years and suspect 2 an imprisonment of 2 months.
-Option 4: Both suspects will confess and get imprisonment of 15 years both.
The options are outlined in figure 4.2. The Nash equilibrium can be found in the orange cell.
Here both suspects confess. However, this confession causes the highest punishment in total.
By cooperation with each other, both will not confessing the crime, the situation would be much better for them, and the punishment would be the lowest.
Figure 4. 2 The Prisoners Dilemma.
Source: Brickley, J.A., Smith, C.W., Zimmerman, J.L., 1997. Managerial Economics and Organizational Architecture. Boston, USA: The McGraw-Hill Companies, Inc. p 139.
This is also an important issue within large multinationals. Local concerns have to be as small as possible, and the interests of the employees have to be the same. In this way an organization will get the best performances. In chapter 5, some agency problems at Philips BU Shaving and Beauty are discussed.
4.4.2 Learning curve
The learning process is one of the main objectives for an organization in the evaluation process of project performances. According to Kaplan (1982) learning causes nonlinear costs in the production process, because the more products are produced, the less direct labor-hours are needed to produce a product unit. This phenomenon is caused by the experiences of people. Tasks can be realized quicker and are easier to produce, therefore, costs decrease in the process. Most experience curves indicate that costs decline 20 to 30 percent each time accumulated experience doubles, according to a study by Kaplan. The author notices five factors that lead to this long run decline in costs. They include:
