Budget Targets and Performance Evaluation

Question: Discuss about theBudget Targets and Performance Evaluation. Answer: Relationships Between Budget Targets and Performance Evaluation Procedures of HCC Industries Under any normal circumstance, no profits making organization would want to have a disparity between their budget targets and their performance evaluation procedures. These should always go hand in hand if the purpose of the business, that is generating profits for the owners and having a general positive performance (Sitkin, Cardinal and Bijlsma-Frankema, 2010).HCC is a profit making organization that has been operating in a largely competitive industry, requiring adoption and use of best practices for survival purposes. An organization is defined by its ability or inability to meet its set targets. If there is a positive trend where targets are being met, the organization is said to be performing well while if there is a negative trend where targets are not being met, it is said to be performing poorly (Collier and Agyei-Ampomah, 2006). In HCC there was setting of budget targets for each division, these were in the form of quarterly and monthly budget targets which were supposed to be met failure to which the division manager concerned would have a hard task of explaining why they were not met. These budget targets were the force what guided the performance of various stakeholders .The company used meeting of these targets as an evaluation tool. A division was evaluated on its ability to generate profits and meet or exceed its targets or inability to meet these targets in the long run. Essentially, this evaluation was not based on how low or high these profits were .Rather it was based on the relationship between the profits for each division and its initial targets. Each division had its targets which were defined by its previous performance record. Apart from evaluation based on profits, the company also used other techniques to evaluate its performance. Evaluations such as bookings for each division, shipments, returns, efficiency, shipments, rework aging and delinquencies were also used .These standards of performance was negotiated upon by the management and managers were tasked with the responsibility of ensuring that they monitored the whole process so that everything went on as expected. Reasons for Abandoning of Stretch Budgeting Concept by HCC Corporate Managers Budgeting is the process of planning for future income and expenditure that is used as a guide for spending and saving budgeting is an important component in every business (Thygesen, 2012).Business that operate with budgets have the ability of monitoring their operations hence performance unlike those that operate without budgets. However there are different budget types that that can be used .Among them is a stretch type of budget. A stretch budget involves setting of sales and marketing forecasts that are higher than the possible estimates .The corporate managers believed that by setting aggressive targets, the division managers would be motivated to work with more zeal towards realization of organizational goals. However, they had to abandon it for a number of reasons. The technique makes people to always think optimistically. Optimism is an important component in any endeavor but the level and nature of optimism is what brings the difference. The level of optimism that is emphasized by stretch technique is quite high (Pickett, 2001) This technique is therefore good for large organizations that and which are in apposition of understanding their markets well as well as influence them. However this was not the case with HCC industries. One factors that made it inappropriate for them was the fact that they did not understand their markets well which was a requirement for those organizations that aimed at benefiting from the stretch budgeting method. Additionally it was designed by a large consulting firm that did not quite well understand the working of smaller companies. It was suitable for organizations that had already established themselves and HCC Industries was not yet there so this was just the wrong budgeting method for the company because no matter what effort was put it would not work very well. The old process was undesirable because it allowed laxity among Divisional manager and their staff. One component of the old technique was the fact that it was characterized by high levels of optimism. It involved setting of unrealistic targets so that performance would be a notch higher .this was very well known to the Divisional managers and their staff as well. This was a basis for underperformance because it made it okay to perform poorly because after all the targets set by the corporate were too optimistic and unachievable Another factor that led to the abandonment of this plan was the fact that for quite some time the corporate had been missing its plans .There was therefore the need of having in place a concept that would make it possible for the corporate to achieve its plans with ease. The company had also been recording a negative performance trend for quite some time. A change of concept was therefore necessary for doing away with this negative with this negative trend. Usually, any there is no business that aims at making losses. It is the desire of every other organization to make as much profit as possible. Continued negative performance might have had significant impact on the image of the company so a change was necessary. The change was also necessitated by lack of uniformity in performance across the various departments .For a number of years the company was used to the fact that there were those divisions that would always perform well and those that would always perform poorly. This lack of uniformity makes it hard for the corporate to make plans touching on the whole Company because the strengths and the abilities of different department s were the same. It was therefore necessary to have in place methods that would place the various divisions at the same level so that the company would move forward as a whole instead of having some divisions lag behind others in as far as achievement of budget targets was concerned. The New Processes and Strengths and Weaknesses The new philosophy laid its emphasis on the possible minimum performance standards. It would require people to hit minimum performance standards then their performance would be rated based on their ability to hit these targets. The earning of bonuses and other extra rewards will therefore be based on the ability to meet minimum standards .The new process will also require managers to submit budgets that are realistic and achievable. A pool bonus would be instituted and offered if a department was able to achieve all its targets such as profits and delinquencies. However, the importance of set targets would differ from time to time. Advantages There are a number of advantages that would result from the new philosophy. First and most important is the fact that it would enhance the general performance of the organization. Having in place realistic goals and achievable targets has the possibility of motivating people towards the achievement of organizational goals .Unlike the old system that involved unrealistic targets which to some extend allowed people to choose to perform or fail to perform, with the new philosophy there was no two way about it as everything was tied on performance and meeting of set targets. The process allowed for budget negotiation process. This means that the corporate and division managers could meet sit together and agree on budgets for each division. These agreed upon budgets would then be used as the basis of evaluation depending on the extent to which they have been achieved or not achieved. The new philosophy allowed thorough monitoring of performance. Division managers were tasked with the responsibility of ensuring that their particular departments met the agreed upon targets .so they had to closely monitor the performance of their staff members to ensure that these requirements were met. On the other hand corporate managers were required to monitor the activities of individual departments to ensure that they were working towards the achievements of their targets. The other advantage of this new philosophy was the centralization of research, advertising and promotion. Previously departments worked independently without any form of interrelationships with the adoption of the new philosophy, a corporate marketing function was established to assist in research, marketing and promotion. This was to cater for such needs for the whole organization .this was advantageous is in that it was possible to balance the performances of different departments so that performance related disparities were minimized Additionally a corporate engineering service function was started with the aim of coming up with new product designs usable by the connector divisions .This was likely to improve the prospect of the Organization. Disadvantages Although there were numerous advantages associated with the new philosophy, there were disadvantages as well. One is that the initial independence of individual divisions would be lost with the new philosophy because it allowed the corporate to dictate terms to individual divisions although this was negotiated upon. This also disadvantaged the divisional managers in that their bonuses would not be automatic as they were before but they had to be worked for. Evaluation of the decision to use minimum performance standard (MPS) targets instead of stretch targets The decision to abandon the old method of stretch targets to the new method of Minimum performance standard was quite informed and appropriate for the company. Based on the fact that the company had not been doing quite well before, there was a need of changing their tactic so that they could improve their chances of competing favorably against other competitions in the market. Minimum performance standards would give the company a real chance of having a control over their performance across various departments .This was a positive move given the disparities that had been there in as far as performance of different divisions was concerned. I think this was in order for the purposes of having all departments work on the same footing. Its also important that any organization that aims at motivating its employees towards achievement of certain goals focuses on how realistic their achievement is. If they are realistic, the employees will be motivated to achieve them but if they are not, they will be demoralizing. The old philosophy can be said to have had negative impact on the performance of the organization, besides setting targets that were unrealistic, it was not motivating enough for the achievement of the same and encouraged employees not to exploit their full potential .However with the new system, it allowed performance based incentives .This was not only likely to encourage performance under different divisions .It was also capable of improving business prospects if it was handled appropriately. Should HCC managers have expected that the MPS target-setting philosophy would be equally effective in all four operating divisions? Based on this question, a no would have been most appropriate. Based on the performance history of the organization, there had existed disparities in as far as performance by different divisions .This meant that the individual strengths for each division was different. This being the case, it was not appropriate to imagine that just because the philosophy was considered appropriate it would bear the same results for was not a guarantee. Therefore the managers had no absolute reason of expecting that the philosophy would have been equally effective in all divisions. Additionally even with the new philosophy, the individual capabilities of division managers and their staff would have a significant role to play in the outcome .Its true that different individuals possess different capabilities and abilities .This is to mean that in a given similar task there are those who are likely to perform better than others and vice versa .This is what would have to happen in this case too. The performance of each division would depend on the ability of the manager to mobilize his staff towards achievement of set goals. It would also depend on the individual abilities of the staff members and their general commitment towards their assigned tasks and the achievement of organization goals. With this as the case therefore disparities would still be there in as far as the performance was concerned Also because this was a new philosophy that had not been tried before chances of it succeeding or failing were in equal measure so there would be no guarantee that it would be effective for all the departments in equal measure. What could have been done to Improve the Implementation Implementation of the new philosophy would have been improved by first trying it on one or two departments first before rolling it out to the whole organization, this could have given the corporate a rough picture of what to expect under the new philosophy .If there was a positive outcome they could then be able to implement it in other divisions. Sufficient consultation with the various stakeholders would also have improved implementation. There was a general feeling among the Division managers that the new philosophy was being forced on them. They even compared it to someone dictating to them when to brush their teeth. That could only mean one thing, that there were no sufficient consultations with them. Had there been a platform for this their fears and worries could have been addressed and they could be able to adopt and implement fully. 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