June 26, 2008

Kofenya: The Role of Accounting Information in Managing the Risks of a New Business

By Ballou, Brian Heitger, Dan L

ABSTRACT: With its focus on two student entrepreneurs who successfully opened an espresso cafe, this case illustrates how accounting information can be used to measure performance and control business risks with respect to new businesses. Also, this case encourages you to consider the potential financial outcomes of various risk response options linked to strategic and operating decisions. By completing this case successfully, you should develop a better appreciation for business model development, business process identification, performance measurement, and risk assessment.

Keywords: business model development; business process analysis; risk management; strategic cost management.


This case describes the experiences of Nicole Ayers and Liz Snyder, two liberal arts students from Miami University in Oxford, Ohio, who successfully opened Kofenya espresso cafe during their senior year. Kofenya was an instant success, noticeably affecting the business of the only other major cafe in town (an international chain featuring coffee and espresso drinks). Through research, reliance on mentors and city planners, and hard work, Nicole and Liz moved from idea generation to grand opening in approximately 15 months. This process was challenging, and the founders often had to make decisions in an environment of significant uncertainty. Further, as college students, Nicole and Liz had to overcome the obstacles associated with their age and lack of experience.


Entrepreneurism in Action: Formulating a Business Idea

Prior to opening Kofenya, Nicole and Liz worked part-time in the summers for an independent espresso cafe, Kidd Coffee, at one of their stores in Lebanon, Ohio. Kidd's owners were expanding to a new location, and the students strongly encouraged the owners to select Oxford, the location of Miami University. The two believed that the town's student enrollment of approximately 15,000 and an additional 15,000 permanent residents provided an ample market for a cafe.

The other espresso cafe located in Oxford is an outlet of an international coffee and espresso drink chain. That cafe is small, with only five small tables, a cumbersome retail display, a narrow aisle, and public display of excess inventory storage near the one, unisex bathroom. Although the cafe has heavy traffic, students, and townspeople often complain about the size. The manager of the store said that the corporation chose to have a small location because of its concern that students sitting at tables would not purchase enough to justify the overhead associated with a larger space. Also, the cafe had yet to offer wireless Internet service, even though many locations throughout the country were providing that service.

Nicole and Liz believed that opening a spacious cafe with many tables and lounging furniture, live music, free wireless Internet, and an expanded menu would be successful in a college town known for its liberal arts programs and business school. The two students obtained demographic information about Oxford, including the number of employees at Miami University and surrounding businesses, the number of students in the local school district, and information about available real estate in Uptown Oxford, the town square located adjacent to campus.

While Kidd Coffee was intrigued by the idea of opening a store in the area, the owners concluded that 45 minutes was too far away and decided to open the new store closer to their other locations. While disappointed, Nicole and Liz decided that their idea for an independent espresso cafe in Oxford was still viable. Liz's father had opened his first business when he was fairly young, so the two decided that they should pursue the idea and become espresso entrepreneurs. The owners of Kidd Coffee believed that Nicole and Liz should pursue their idea and even offered to help them become independent espresso cafe owners.

From Idea to Reality: Developing A New Store

In any entrepreneurial venture new business owners must perform many tasks to move from a business idea to a business opening. In this case, Nicole and Liz (hereafter, the founders) needed to develop a deeper understanding of the espresso cafe industry, identify and obtain sources of capital, secure a location, and perform the necessary start-up activities to convert available space into a cafe. In this section, each of these tasks is described in detail.

Developing a Deep Understanding of the Industry

To develop a deep understanding of the industry and what is required to run a successful independent espresso cafe, the founders relied on two primary sources of information beyond their previous experiences. One source was books and online materials, while the other more important source involved mentoring from Kidd Coffee's owners. The founders' research reinforced their assumption that the restaurant industry is a difficult market for many reasons, including location, food and beverage quality, customer trends and preferences, facilities management and atmosphere, employee dependability, supply chain management, and cash flow, among other factors. Moreover, the founders quickly learned that operating an espresso cafe in a college town presents an additional challenge, because there is more pedestrian traffic relative to vehicle traffic (which increases the importance of location), periods of heavy volume (e.g., evenings) and light volume (e.g., weekend mornings), and a significant drop in business during holiday breaks and the summer months.

The founders developed an understanding of the capital requirements associated with opening a new business. They investigated the average costs of construction for leasehold improvements and the cost of equipment needed to open and operate a new store. Relatively small costs included tables and chairs for external sidewalk seating, while couches, coffee tables, and tables and chairs for interior use were a bit more costly. Examples of the more expensive purchases included the espresso machine, the refrigerator and freezers, and cooking equipment.

Perhaps the most important decision facing the founders was beverage pricing. The margins (i.e., sales minus cost of goods sold) on beverages are the primary source of cash flow to cover the many overhead expenses because the margins on food products are very low. While beverage margins can be improved by increasing prices or reducing cost of goods sold, increasing prices is not practical given the well-established competitor in town. Reducing cost of goods sold also is challenging. Kofenya attempts to reduce cost of goods sold through effective supply chain management and keeping operations as efficient as possible. Reducing product costs (e.g., coffee beans) is difficult, given that customers are heavily influenced by the quality of the coffee and espresso beverages.

Employees are an important input to creating quality products, which limits Kofenya's ability to minimize labor costs. For example, baristas, the beverage preparers, require extensive training because they must possess skills similar in nature to bartending (except that products must be heated, etc.). Another challenge of operating a business in a college town is scheduling the many part-time college student employees during exam periods (when customer traffic is heaviest), holidays, and summers. Maximizing labor efficiency and effectiveness is even more challenging considering that Kofenya's chief competition (the national espresso chain) is noted for innovative and effective employee training and compensation initiatives. Small independent cafes often lack the resources and economies of scale to provide such human resource initiatives. The owners of Kidd Coffee provided advice regarding payroll and training issues, but many of the issues caused by Kofenya's college town location are different from those facing Kidd Coffee, which is located in a busy suburban community.

Identifying and Obtaining Sources of Capital

To obtain the capital necessary to equip and open the cafe, the founders needed to convince someone either to invest in the business or to provide collateral or guarantee for a loan. The founders obtained the necessary capital from a confidential source to cover foreseen costs associated with securing a site, developing the site as an espresso cafe, and opening the restaurant. In addition, the founders were able to obtain a $10,000 line of credit from a bank for use in cash flow emergencies.

The founders obtained another unexpected source of capital from the city of Oxford. The city offered a revolving loan fund (RLF) at low interest rates for new businesses. The only stipulation for using the RLF was that the founders had to guarantee a certain number of full-time-equivalent employment positions. Therefore, the founders used this fund to cover unforeseen start-up costs, so they could operate the business during the first semester of operations without using the $10,000 line of credit from the bank.

As is the case with any small, start-up businesses, cash flow from operations is critical for staying in business. Obtaining capital from a RLF or line of credit only enables Kofenya to address short-term liquidity issues-the borrowed amounts must be paid back with interest. Kofenya's ability to generate cash flows sufficient for long-term survival are tested during holiday breaks and summer months, when cash flows from operations might be insufficient to cover committed operating costs. Securing a Location

The founders were fortunate when searching for a location because there were several available locations on High Street, which is the street with the most pedestrian traffic. One drawback was that these locations were in the west end of Uptown Oxford, and there is more morning pedestrian on the east end, which is where the main competitor is located.

The most attractive location was a corner store with 7,000 square feet. The landlord told the founders that the space was being split and offered to lease them 3,500 square feet. Based on the cash flow from operations needed to cover overhead associated with that large of a space, the founders decided to pursue other opportunities. However, the town's largest bicycle shop decided that it wanted to lease 5,000 of the 7,000 square feet and wanted the back part of the store, which freed the front 2,000 square feet that included the portion on High Street. Although 2,000 square feet was a more challenging size than the founders had originally envisioned, it offered them a better opportunity to achieve the business objectives of the store. Thus, they entered into a five-year lease for the property and the business venture was officially under way.

Performing Necessary Start-Up Activities

The founders converted the 2,000-square-foot space into an espresso cafe to achieve the overall goal of developing customer loyalty. Specifically, the founders worked carefully on various floor layouts that offered enough space for customers to converse, work, and lounge while enjoying the cafe's products. The founders and landlord were pleased to learn that there was a 100-year-old, solid maple floor underneath the flooring used by the prior tenants. The landlord agreed to pay for the costs to uncover and restore the maple floor and the original ceiling, which saved a significant amount in leasehold improvement costs. However, the tenants had to pay for all other costs, some of which were unforeseen. Based on research, mentoring, and discussions with contractors, the founders were aware of the many costs associated with purchasing a refrigerator and freezer (which they bought used), an espresso machine, countertops, tables and chairs, and lounging furniture (couches, lounging chairs, etc.). The founders also had to pay for improvements to the heating and air conditioning system and additional plumbing that were not part of their original budget.

Because of the committed costs associated with these start-up activities and the lower margins earned on food products, the founders decided that they would not be able to invest in ovens for preparing baked goods, an important feature for attracting customers during morning hours. Instead, they decided to prepare only soups and sandwiches at the cafe and to form alliances to obtain baked goods products from nearby bakeries. The town's only doughnut shop (not located in the Uptown area) agreed to supply doughnuts in exchange for Kofenya supplying gourmet coffee at the doughnut shop. Also, the founders purchased muffins and other pastries from a bakery distributor.

One of the most important decisions the founders made was the selection of a coffee supplier. Other local merchants serving gourmet coffee mostly used the same supplier from Cincinnati. However, the founders decided that they would use another roaster to differentiate their product and selected Coffee True Roasters located in Pittsburgh. While the founders were initially concerned about shipping costs, they learned that shipping costs for coffee are relatively low and have been satisfied with this supplier. However, because some patrons prefer fair trade coffee, the founders decided also to purchase fair trade coffee beans from the Cincinnati supplier.1

Another important decision was the beverage selection, typically a key source of differentiation across espresso cafes. The founders used some of the specialty drinks that Kidd Coffee offered, but the founders developed a few drinks on their own. In addition to hot espresso drinks, the founders also offered ice-blended and ice cream versions of all drinks. Some of the drinks Kofenya initially offered included the Milky Way (chocolate and caramel), Zebra (white and dark chocolate), and S'more (graham cracker and marshmallow). Also, other beverage offerings, such as iced and hot teas, apple cider, and hot chocolate, were selected for those who do not prefer coffee or espresso.

Since beverage sales generate the most significant profit margin and comprise the majority of Kofenya's total sales, one of the most important decisions facing the founders involved beverage pricing. Initially, the founders wanted to charge a sufficiently low price to attract customers to the store and generate customer loyalty. Pricing is even more important in a college town, where students may have less disposable income than would customers in a thriving community inhabited by young professionals. Therefore, the founders adopted lower prices than those of the international competitor. However, implementing this policy was not necessarily sufficient for success, because patrons often are willing to pay a slight premium for a known brand. Further, because coffee beans are a commodity, the price can fluctuate greatly. Retailers have a more difficult time than suppliers changing prices in response to market fluctuations, resulting in more uncertainty surrounding expected profit margins. Fortunately, soon after Kofenya's opening, its competitor announced its first major price increase in over three years.

Prior to opening, Kofenya's founders also took several other steps to create customer loyalty. For example, they decided to offer customers free high-speed wireless Internet service. To prevent customers from loitering for extended periods of time, they supplied customers with a one-hour prepaid usage card upon purchase of any item on the menu. This process was less costly than simply providing free limitless Internet service and prevented the propensity of customers sitting at one table too long only to surf the web (although, for an extra dollar, a customer could purchase a bottomless cup of coffee with a one-day unlimited usage prepaid card). This decision was effective because no other business in town offered free Wi-Fi access except for a sports bar, typically not frequented for the same purposes as an espresso cafe. However, after learning that the hourly cards were problematic because the Internet provider was undependable, the founders decided to offer continuous free wireless access.

The founders also wanted to ensure a comfortable atmosphere for their loyal customers by offering live music on weekend evenings, allowing student groups to meet in the cafe and to advertise campus events, displaying local artwork that could be purchased directly from the area artists, employing workers who interacted well with customers, and encouraging students and townspeople to relax and congregate in the store. These personal touches are not costless to the business (e.g., they encourage customers to remain in the store for longer periods of time, thereby limiting the amount of turnover). However, they generate tangible and intangible long-term benefits, including strong customer loyalty and association of Kofenya as a meeting and gathering place, that the founders believe outweigh the costs.


Kofenya opened its doors for business in September, a few weeks after Miami's fall semester began. Two new sandwich shops opened next to Kofenya during the same time period, which created additional traffic to the portion of Uptown that had been under renovation for more than six months. Within only a few days, the founders saw that the cafe was going to be an instant success. While there were periods of the day when business was somewhat slow, the business on evenings and weekends was heavy soon after the store opened. The founders were pleased by the community response and hopeful that they would develop a loyal customer base quickly.

The founders also were pleased with the strong student patronage. For example, there seemed to be good word-of-mouth advertising throughout the university. Because the founders had been reasonably active on campus, diverse groups of students were supporting the venture. Liz even received a signed Pittsburgh Steelers jersey from Ben Roethlisbergerthe NFL quarterback who starred for Miami University, earned the NFL Rookie of the Year, and started at quarterback for the 2006 Super Bowl Champion Pittsburgh Steelers- that she hung on Kofenya's walls. To broaden and integrate community and student support of Kofenya, the founders allowed a local poetry group to hold a reading at Kofenya on the first Thursday evening of each month, during which time students could present their original poetry to store patrons. In addition to encouraging this community involvement, the founders were profiled in a large newspaper article in The Cincinnati Enquirer (2005).

Sales of products were strong from the beginning. The response to the various specialty drinks was positive, as was the response to the sandwich offerings. However, sales of baked goods were not as successful. In fact, the only disappointment after being open for several weeks was the less-than-expected traffic in mornings-a time that espresso cafes typically are quite busy. The founders believed that their location-on the west side of Uptownwas a likely reason, and that most students did not pass by the location on the way to class or between classes. However, the better-than-expected business in the evenings encouraged the founders to extend operation hours one hour each night (e.g., from 11:00 pm to 12:00 am on weeknights). In opening Kofenya, the founders experienced several challenges. For the first semester of operations, the founders were unable to establish a successful process for processing credit cards or the local debit card affiliated with the university; with these local debit cards, parents could deposit dollars in their children's account for use at local businesses. Also, the founders believed that their initial pricing was too low, so they raised prices by approximately ten cents per beverage, which they hoped would not negatively impact sales volume. Scheduling employees had proven more difficult than expected, partly because managing a staff of college student employees proved more difficult than expected and partly because the founders had prior friendships with many of the new employees. The founders overcame these challenges initially by simply working more hours. The founders also continuously attempted to improve their process for rearranging the store prior to music performances. Initially, they asked customers to move from tables that were located where musicians set up to play, which did not help in developing customer satisfaction. The founders quickly realized that they needed to understand and respond quickly to such challenges, because failure to do so would threaten Kofenya's future success.

The founders analyzed their financial soundness through several evaluations. They performed a cash flow analysis each week and are required to prepare quarterly reports under the financing arrangements established when the founders acquired capital. Also, a local CPA firm from an adjacent town performed an annual review, which is more limited than a financial statement audit, on Kofenya's financial statements.


At the end of the first semester of operations, Liz and Nicole signed a five-year lease with several additional options for continuing Kofenya at its present location. Both founders planned to remain in Oxford and operate the business for at least that time period. During the short-run, the major goal was to continue refining operations to develop and maintain customer loyalty. In fact, the two founders worked with a university business fraternity to help market the business. The group offered a slogan for Kofenya, "more than just coffee," which was adopted and used in marketing leaflets and T-shirts. In addition, given the numerous potential threats to success that Kofenya already encountered, the founders want to develop a formal business model and risk management approach for identifying and responding to these threats. With its current careful monitoring of operations, a competitive environment that remains stable, and some sort of risk management process, the founders believe that Kofenya should be able to survive and thrive in Oxford for at least the immediate future.


1. What is Kofenya's overall business objective? Also, write out the strategies it employs (or should employ) to try to achieve its overall business objective. For example, one important strategy for Kofenya's founders is to create a loyal following in the local community by keeping its coffee prices below those of its local, internationally known competitor.

2. An effective business model is crucial for long-term success. A business model is the recipe for putting together and running a business, including the impact of internal and external forces.

a. Based on the information contained in the case, design a business model for Kofenya as of the end of its first semester of operations (i.e., during January of year 2). For this business model, include external forces, markets served, core products and services, resources, suppliers, strategic alliances with other organizations, and competitors. [Use the blank template provided in Exhibit 1 to help complete the business model-see Ballou and Knechel (2002, Figure 1) for an example of a complete business model.]

b. A business model (Requirement 2a) helps individuals understand the importance of business processes in running a business successfully.2 For example, one important business process for Kofenya's founders is Brand and Image Delivery. Complete your business model by determining and including Kofenya's key business processes.

3. Refer to the strategies that you wrote down in response to Requirement 1. Copy your strategies into the first column of Exhibit 2, which provides a sample response for Requirements 3 and 4. For each strategy identified in your response to Requirement 1, identify the key strategic risk(s) that might prevent Kofenya from successfully achieving the given strategy.

4. In managing each of Kofenya's risks, the founders can choose to respond in one of the following manners-(1) accept the risk (i.e., do nothing), (2) avoid the risk (i.e., not conduct the underlying activity), or (3) reduce the risk. If the founders choose to reduce the risk, then they can do so through one of the following options: (a) share /transfer (i.e., insurance policy allows insurers to share the risk), (b) form an alliance (i.e., use alliance partners, outsource, etc.), or (c) implement a control (i.e., take internal action to control the risk). [See Exhibit 3 for COSO's (2004, 55) matrix of risk responses, which is very similar to the response options in this requirement.] How do you believe Kofenya has chosen (or should chose) to manage the risks you identified in Requirement 3? In other words, which response has it chosen (or should it choose) for each identified risk!


Kofenya Business Model and Business Processes Requirement 2


Objectives, Strategies, Risks, and Risk Responses for Kofenya

5. Risk managers view business processes as mechanisms for effectively implementing controlling risk responses to particular strategic risks (i.e., the risks for which they do not choose to "accept,""avoid,""transfer/share," or "form an alliance"). Although Kofenya is a start-up business largely operated by its two founders, identifying and managing appropriate business processes can reduce some of the cafe's strategic risks and help ensure proper resource allocation to improve its chances for sustainability. Find each risk that you chose to "implement a control" (i.e., any response other than "accept,""avoid,""transfer/share," or "form an alliance"). Select three of these "implement a control" reduce risk responses and perform the following tasks [use Exhibit 4, which also provides a sample response, to complete this requirement]:


Sample Risk Response Options(a)

Exhibit 6.1

Illustrative Risk Resprases by Response Type

a. Identify the business process to which the response relates, as well as the specific strategic risk that the business process attempts to reduce.

b. List the one most important process objective that should be pursued to help ensure that the identified business process is effective (i.e., either for helping Kofenya achieve its strategies or managing its business risks). A process objective defines the goal of each process, which must be accomplished for the process to effectively reduce the associated strategic risk.

c. Create one activity measure (i.e., a cost driver or revenue driver) for each process objective that Kofenya's owners should capture and manage to help assess how effectively the process objective is being met.3 For example, a business process that involves cost control (e.g., Supply Chain Management) is likely to rely on cost drivers (e.g., input prices per pound of coffee) as important quantitative measures. A business process that involves revenue growth (e.g., Brand and Image Delivery) is likely to rely on revenue drivers (e.g., sales per hour or sales per patron) as important quantitative measures.

6. Assume that you are an auditor or business consultant hired by Kofenya's founders. Given the business model and risk management process that you have developed in responding to Requirements 1-5, describe at least three specific suggestions that you would provide to the founders to improve Kofenya's business performance going forward.


Overview and Objectives

The case employs an actual start-up business opened by two liberal arts students in Ohio to lead students through an integrated approach to business process analysis, risk management, performance measurement, and cost driver identification. This approach helps students see how each area contributes to and informs the others. Specifically, this case integrates topics that normally inform one another, but either are ignored or studied in isolation of one another in most business and accounting curricula. By reading about a small entrepreneurial venture, students are able to see that integrating these topics is valuable to any organization.

This case extends the literature by linking the important, yet typically disparate, accounting disciplines of business process orientation, risk management, and cost/revenue driver identification in analyzing a business's strengths and weaknesses. Further, it emphasizes and reflects enterprise risk management's growing importance, as well as managerial accountants' role in managing risk. For example, Larry White, President of the Institute of Management Accountants (2003-2004), notes that "All management accountants need to understand this [Enterprise Risk Management- Integrated Framework by COSO (2004)] work, so they can help their companies analyze and manage financial and operational risk" (White 2004).

To successfully address the case requirements, students should possess a basic understanding of cost and revenue terminology and basic research and communication skills. Group interaction abilities are helpful should instructors use student teams to address the requirements. Because the case focuses on understanding business process performance as a means for responding to important business risks-an idea that is not commonly emphasized at the introductory level4-we recommend that introductory students (and students at other levels who have not been exposed to the topic of business processes) be assigned the brief Appendix to this case, which provides an overview of a business process organization. For a more detailed background reading involving the role of business processes within organizations, we suggest assigning Hammer and Stanton (1999). Completing the case should help students improve their research and analytical skills through using a holistic approach to viewing an organization. The case also helps students understand how to use accounting information to assess business process performance by linking business process performance to financial reporting through cost and revenue driver identification for specific business processes. The following specific learning objectives should be achieved by completing the requirements:

* An understanding of the process for planning and opening an entrepreneurial business venture, including the creation of a business model.

* Identification of the risks associated with opening an entrepreneurial business venture and how such risks can be mitigated by utilizing business processes.

* Development of research and application skills for identifying financial and nonfinancial measures that can be used to evaluate the performance of different business processes for a new business.

* Enhanced ability to think critically and analytically by integrating topics and philosophies that often are considered in isolation (e.g., the interrelatedness of business process identification and analysis, strategic cost management, risk assessment, marketing, finance, accounting).

Suggested Audience and Implementation Guidance

The primary audience for this case consists of students in any accounting course in which performance measurement, business processes, risk management, or business strategy are examined, regardless of level. Introductory managerial accounting students likely will be challenged by the case requirements. However, we believe that most students should be able to effectively complete the requirements, particularly given that the exhibits included in the case provide example templates that aid students in structuring their thinking. Master's or Executive M.B.A. fundamentals courses or other courses that emphasize business risk management (e.g., graduate enterprise risk management courses and advanced assurance courses) also might benefit from the case. Regardless of the specific audience, instructors have several pedagogical options in administering the case. Because the case likely introduces new information to students beyond what might be covered in other aspects of the course, we recommend assigning all or part of the case to groups of students. Student groups can develop formal reports for evaluation and/or lead class discussions on various requirements within the case.

For introductory courses, we recommend using the case after students have examined cost systems, so students understand the general idea of tracing and assigning costs and revenues to particular cost objects. In this case, the business processes in a sense represent cost objects for which Kofenya's revenues and costs should be related in order to evaluate each process' performance. Some universities have developed and required an Introduction to Business course for incoming freshman that adopts a business process perspective. This case would be effective in such courses. The placement of the case for all other levels is more flexible, such that it can be used at various junctures in the course to facilitate a realistic and integrative evaluation of business performance (e.g., business processes, business segments, etc.).

For courses that are not introductory in nature, the placement of the case is flexiblefor example, the case should be effective for underscoring the importance of understanding a business for decision- making purposes or when performing quantitative business evaluations (e.g., business segment profitability estimates). Also, the case should be effective early in the course to motivate the need for accounting-related performance measurement information to manage risks, evaluate specific business processes, or improve organizational performance.

For example, using the case in an intermediate cost accounting course after studying activity-based costing should be effective because it requires students (in Requirement 5b) to create cost drivers and revenue drivers that Kofenya might use in evaluating the profitability of each of its processes. Although not part of the case, this requirement could be extended by having students insert quantitative data into their cost and revenue drivers to analyze the profitability of each process and/or Kofenya as a whole. This extension should demonstrate even further the link between business process analysis in the case and cost system design.

Student Evaluation of the case

The case was pilot-tested in two sections of intermediate managerial accounting students (i.e., students had completed an introductory managerial accounting course in a prior academic year) at a large midwestern university. A total of 40 students participated in the pilot study, which involved performance of all requirements. On the day the case was assigned, a student group led a class discussion of the case. The presenting team turned in a copy of the materials used to lead the class discussion.5 Alternately, each case requirement could be presented by a different student group. The student presentation lasted 60 minutes, and the instructor debriefed students for the remaining 15 minutes for the total 75-minute class period. Students were able to effectively lead discussions of all requirements. The instructor previously led a class discussion on performance measurement, including the role of business processes. Should instructors wish to assign background readings beyond Hammer and Stanton (1999) or the Appendix, we recommend Ballou and Heitger (2005) for a basic understanding of risk management or the executive summary of the COSO ERM Framework (COSO 2004, 55-56; page 55 is provided in Exhibit 3 of the case) for a brief explanation of risk response alternatives.

At the end of the class discussion, the instructor distributed a questionnaire to assess the extent to which the case achieved the desired learning objectives and general student reaction to the case. Table 1 contains the questions and mean responses. All questions had mean responses between 4 (agree) and 5 (strongly agree) on a scale from 1 (strongly disagree) to 5 (strongly agree). Both authors attended the class discussions and reviewed the presentation materials and individual responses to the requirements for reasonableness and attainment of the objectives. Students appeared to have a clear understanding of the information in the case and generally provided solutions suggesting that learning objectives were being met. Based on these questionnaire responses, the class presentations, and the written responses to the requirements, we conclude that the case was effective at addressing the learning objectives. Several students also provided specific comments, including the following:

"[The case] involved a lot of critical thinking."

"[I] enjoyed working on [the case] to better understand how financial and nonfinancial information helps a start up company to make better decisions."

"It would be interesting to continue to track Kofenya's progress in the next few semesters."

"Very interesting case."

Based on students' written solutions to the case requirements and two student questions seeking clarification, the exhibits were changed slightly from the original version to include further guidance for students. Overall, the pilot of the case was effective for refining the requirements and assessing the extent to which it achieves the learning objectives.


Summary of Student Feedback from Pilot Study


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4 This assertion is supported by a review of introductory-level managerial accounting textbooks, which offer very little discussion on business process performance as a means of assessing attainment of overall business objectives (and the role of accounting information in helping to make such assessments).

5 The course requires groups to lead class discussions for several different cases assigned during the semester, which explains why a subset of students was assigned to present the case, while the remaining students prepared individual responses designed to prepare them for the case discussion. The individual responses were collected and graded for overall effort as part of a class participation grade.


Ballou, B., and D. Heitger. 2005. A building-block approach for implementing COSO's enterprise risk management-integrated framework. Management Accounting Quarterly 6 (2): 1-10.

Committee of Sponsoring Organizations of the Treadway Commission (COSO). 2004. Enterprise Risk Management-Integrated Framework: Executive Summary Framework. Washington, D.C.: Government Printing Office. Hammer, M., and S. Stanton. 1999. How Process Enterprises Really Work. Cambridge, MA: Harvard Business School Publishing Corporation.

White, L. 2004. Management accountants and enterprise risk management. Strategic Finance (November): 6-7.

1 Fair trade coffee means that a percentage of the proceeds will be directed to the coffee growers in an effort to improve their quality of life, since coffee growers are often located in economically depressed regions. These proceeds are made possible, in part, by charging a premium for the coffee beans. Typically, these premiums are not passed along to the customer when sold as beverages. Many of the major international coffee chains also participate in programs such as Fair Trade Coffee and Rainforest Alliance.

2 A business process can be defined casually as "the way work gets done" or formally as "a collection of processes that touches more than one department or group in the company and largely determines the company's overall effectiveness" (Spanyi 2003).

3 Note that, in reality, the analysis likely would identify multiple activity drivers for each process objective.


Ballou, B., and W. Knechel. 2002. Ceskoslovenska Obchodni Banka, a.s.: Applying business measurement audit techniques to a financial institution in the emerging Czech Republic market economy. Issues in Accounting Education 17 (August): 289-313.

Cincinnati Enquirer. 2005. Coffee Shop 101. (January 20): D1.

Committee of Sponsoring Organizations of the Treadway Commission (COSO). 2004. Enterprise Risk Management-Integrated Framework: Executive Summary Framework. Washington, D.C.: Government Printing Office.

Spanyi, A. 2003. Business Process Management Is a Team Sport: Play It to Win! Tampa, FL: Anclote Press.

Brian Ballou is a Professor and Dan L. Heitger is an Associate Professor, both at Miami University.

The authors express their gratitude to Nicole Ayers and Liz Snyder for their cooperation and willingness to share their experiences associated with starting their business and the 200 Miami University students who participated in pilot studies of the case.



Leaders of organizations of all sizes establish overall business objectives and establish strategies for achieving these objectives. Threats that prevent the attainment of these strategies are often referred to as strategic risks of the organization. The goal of the organization is to effectively execute its strategies to achieve its objectives. To accomplish this goal, organizational leaders must allocate available resources effectively and efficiently. One way to think about the concept of business processes is that they are allocations of organizational resources (e.g., human resources and capital) put in place to maximize the probability of achieving objectives.

Given this characterization of business processes, an excellent way to link them to strategies for achieving objectives is to describe them in the context of managing strategic risks. Consider that organizational leaders are held accountable by stakeholders for achieving their stated objectives. Threats to achieving business objectives often are described as strategic risks facing the organization. Therefore, organizational leaders design business processes to mitigate strategic risks. Most organizations will assign their best personnel and allocate greater amounts of capital to strategies that are most instrumental in helping them achieve business objectives. In other words, when strategic risks are high, leaders will allocate more resources to help minimize the risks of failure. Accordingly, organizations use business processes to manage their strategic risks.


Linking Business Processes, Process Objectives, and Activity Drivers

In today's real-time business environment, organizations are better able to use other organizations to help them manage strategic risks when the right people or sufficient resources are not available within their own organizations. The ability to connect an organization to other organizations for critical strategies creates strategic alliances that replace internal business processes. The trade-off in forming strategic alliances is that the alliance partner shares in the returns generated, and both organizations assume some degree of the strategic risks of the other organization, particularly if one organizations supply parts that become part of a product of another organization. For example, when Sony- manufactured batteries were causing certain Dell computers to catch fire, both organizations' reputations experienced negative impacts.

Overall, effectively designed business processes and strategic alliances allow organizational leaders to minimize strategic risks by allocating available resources effectively and efficiently. Specifically, successful organizations monitor the progress of achieving business objectives and continually alter their strategies and resource reallocation, so they may reconfigure business processes and adapt strategic alliances to better manage strategic risk.

Copyright American Accounting Association May 2008

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