Now let's turn to accounting's role in the strategic decisions that go on inside of an organization. In particular, accountants help to assess strategy. They use performance measures in particular and that enables managers' assessment of the effectiveness and efficiency of the strategy. It allows us to address a couple of questions. First of all, we can address via performance measures whether the current strategy is actually successful. The performance measures tell us whether or not we need to ultimately change our strategy. Second, we might have a good strategy in spirit, but we want to know whether or not that strategy is being implemented effectively. Obviously, organizations have a lot of choices regarding the tactics and other procedures it takes to implement a strategy, and some may be better than others. Accounting measures, performance measures, help us to make these assessments. So any time that you rely on performance measures for decision making purposes, you're going to face a host of issues. Ideally, you want accurate and timely performance measures. But inherently, these two features trade off against one another. In order to get the most accurate information, you might have to expend a lot of effort, which takes a lot of time to get that information. So accuracy comes at the cost of timeliness. Many decisions require a much more timely decision, and so you only have a small set of information which may not be the most accurate. So ideally, while you want both of these features, you oftentimes have to trade them off. There are a host of other issues as well that especially arise when we're talking about strategy. Those are controllability, interdependence and alignment. Let's first talk about Controllability. Controllability is the extent to which a performance measure reflects the efforts or actions of the employee or manager or division. Essentially, controllability relates to performance measure noise. And performance measure noise come from one of two places. First of all, there is the influence of other factors besides just the effort or action of the employee. And second, is the inherent imperfections in the measurement process itself. The key issue here is that the strategy assessment could be inaccurate if performance measure of noise is prevalent. A second issue is Interdependence. Interdependence is actually a specific type of controllability but because its source is different, we classify it separately. Interdependence is the extent to which a performance measure reflects the effort or actions of a particular employee, and not the actions of other employees. The primary example that comes to mind here is restaurants. Imagine yourself sitting down for dinner and the face of that restaurant for you, for most of your experience, is the wait staff. They're the ones who come in and take your order. They bring you your food. They bring you the bill at the end. At the end of the meal, you essentially pay for the meal and then add a tip onto the bill for the wait staff. That tip is the performance measure of that waitperson. Now the waitperson's performance is a function of not only their own effort and actions, but those of the other employees in the restaurant. You can think of the host or hostess that sat you at the table originally, and what the experience like was with that person, as well as the quality of food which is a function of the effort and actions of the kitchen staff. So obviously the performance measure, the waitperson's tip, is a function of more than just their effort in actions and also a function of the effort and action of others. Inside of an organization, to the extent that a performance measure is a function of many people's efforts and actions, it requires that they all implement a strategy in the same way for that performance measure to be useful to assess the effectiveness of that strategy. And finally, we have Alignment. Alignment refers to the extent to which a measure induces behavior that achieves firm's goals. There are two examples of alignment failure. First of all, a measure can be incomplete. That is a measure can be overly focused on some aspects of the strategy to the detriment of others. In other words, it might lack a holistic perspective. And in that case, the measure may not induce actions that fully implement the strategy, but rather just actions that are specific to that portion. There's a second part of alignment failure, and that is that measures can often induce dysfunctional behavior. Take for instance the division profit. Division profit is certainly affected by the strategy that's being implemented. But it's also being affected by a host of other factors as well. Employees might take actions that are not really strategic, but instead are designed to maximize the current quarter's division profit. In that case, we're not able to diagnose from that performance measure whether or not the strategy is truly affected. Now let's look at these issues in our GnG Landscapes setting. The managers of the landscape design division are adopting a differentiation strategy. They're using financial performance measures to assess strategic success. And initially, they are using division profit as the key performance measure. Thinking about the issue of controllability, one can assume that division profit is affected at least in some way by the implementation of the differentiation strategy. But as I mentioned before, it's influenced by a host of other factors as well. You can think of the general economic environment in which GnG operates, whether that environment is in a recession will influence the division profit, for example. Also, competitors' actions and customers preferences might influence division profit. For instance, assume a main competitor retires and closes up their business. That leaves a lot more marketshare for us which means that division profit during that period will increase but not necessarily due to our strategy. Also, there's the measurement issue. Accounting is an imperfect science inside of organizations. For example, each month a corporate cost allocation is made to the landscape design department. Well, if that corporate cost allocation changes from period to period, then division profit is fluctuating. Again, not due to the strategic effectiveness but rather due to the measurement issue. Now let's turn to interdependence. The design service division relies on other divisions for the products that they install as part of their design. If there is poor quality in the plants and flowers that the design service division eventually installs, then that's an issue for those particular customers. That has the effects of word of mouth reputation for the design service and eventually future profits. This is a perfect analogy to the waitperson in the restaurant example from earlier. It's not necessarily the design service division's fault but they're the one's that feel the brunt of a customer who had a poor experience. And in this case, division profit for the design service division is not a clear indicator of whether or not the strategy is truly effective. And finally, there is Alignment issues. Division profit focuses on financial outcomes, which forgoes other aspects of the firm that are not perfectly captured in those financial measures. Also, it induces potential short-term tactics that increase current year profit, potentially at the expense of future year profit. So ultimately, any time an organization relies on performance measures to assess strategic success, it faces a variety of different issues. These relate to accuracy and timeliness, controllability or performance measure noise, the level of interdependence inside of the organization, and the alignment of the performance measures with the strategy being implemented.
