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E3 - Strategic Management > Chapter 9: Developing strategic performance management systems > Flashcards

Chapter 9: Developing strategic performance management systems Flashcards

1
Q

What is performance measurement?

A

Process of assessing the proficiency with which a reporting entity succeeds, by the economic acquisition of resources and the efficient and effective development, in achieving its objectives

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2
Q

Why is it important to select the appropriate performance measurement?

A

Management must be able to identify whether the strategy is having desired effect on the organisations output
Way of communicating targets to staff and other key stakeholders

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3
Q

What are Critical success factors?

A

limited number of areas in which results, if they are satisfactory, will ensure successful competitive performance for the organisation

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4
Q

What should management be aware of when changing the performance measurement system?

A

Too many changes may lead to ‘indicator overload’, confusing employees
If you change the system, what are you telling people?
If a measure is dropped you are telling your staff that it’s not important. Is this what you want to achieve?

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5
Q

What are some typical financial performance measures?

A

Sales Margin
Net profit margin
ROCE

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6
Q

What are the advantages of financial measures of performance?

A

Culturally expected
Focus on financial objectives
Comparable across companies
Cheap
Established framework for preparation in many cases
Tend to focus onto resource generation and so survival in the long term

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7
Q

What are the disadvantages of financial measures of performance?

A

Inflation distortion
Leads to suboptimal and short-termist behaviour
Lack of comparability
Understood by the ‘select few’
Subjectivity can exist in calculation

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8
Q

What are non-financial performance measures?

A

Measures of performance based on non-financial information that may originate in and be used by operating departments to monitor and control their activities without any accounting input

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9
Q

What are the advantages of non-financial measures?

A

Wider view
Easier to calculate
Easy to understand
Not distorted by inflation
Can emphasis broad spectrum of management
Positive motivational implications

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10
Q

What are the disadvantages of non-financial measures?

A

Some can be difficult to calculate
Subjectivity exists in design, interpretation and calculation
Can lead to indicator overload
Costly
Culture clash implications
Constant change requires constant monitoring

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11
Q

What are the four parts to a balance scorecard?

A

Financial perspective
Internal business process
Learning and growth
Customer perspective

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12
Q

What are possible measures for the financial perspective part of the balanced scorecard?

A

Increased revenue
Improvements to ratios
Rising market share
Increased cash flow
Reduction or increase in gearing

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13
Q

What are possible measures for the internal business perspective part of the balanced scorecard?

A

Reduction in production time
Reduction in errors
Reduction in waste

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14
Q

What are possible measures for the customer perspective part of the balanced scorecard?

A

Increase in new customers
Increase in customer returns
Reduction in numbeer of complaints
Number of orders delivered on time

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15
Q

What are possible measures for the learning and growth part of the balanced scorecard?

A

Number of days of staff training
Number of new products launched
Increase in number of sales
Reduction in staff turnover

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16
Q

What are the main benefits of the balanced scorecard?

A

Avoids management reliance on short-termist of incomplete financial measures
May be able to identify problems earlier
Assist stakeholders in evaluating the firm

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17
Q

What are the drawbacks of the balanced scorecard?

A

Does not provide a single overall view of performance
There is no clear relation between the scorecard and shareholder analysis
Measures may give conflicting signals and confuse management

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18
Q

What is the performance pyramid designed to ensure?

A

The activities of every department, system and business unit support the overall vision of the organisation

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19
Q

What is the top level of the performance pyramid?

A

Corporate vision - how the organisation will achieve long-term success and competitive advantage

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20
Q

What is the second level of the performance pyramid?

A

Business Unit - Market, financial
Includes CSF’s in terms of market-related measures and financial measures that need to be acheived

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21
Q

What is the third level of the performance pyramid?

A

Business operating systems - Customer satisfaction, flexibility, Productivity

Measures which relate to the internal systems and processes which are needed to meet customer needs

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22
Q

What is the lowest level of the pyramid?

A

Department and work centres - Quality, Delivery, Cycle time, Waste
Day-to-day operational measures

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23
Q

What does the left hand side of the pyramid contain?

A

Measures which have an external focus and which are predominantly non-financial

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24
Q

What does the right hand side of the pyramid contain?

A

Focused on the internal efficiency and are predominantly financial

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25
What cascades down the pyramid?
Objectives
26
What goes up the pyramid?
Measures
27
What is the performance pyramid a useful means to assess?
The drivers of value in an organisation and to adopt suitable measures of performance within the management system
28
What are the three building blocks of the Fitzgerald and Moon model?
Dimensions Standards Rewards
29
What is the dimensions building block?
Goals for the business and suitable measures Six dimensions: Profit Competitiveness Resource Utilisation Quality Issues Innovation Flexibility
30
What is the standards building block?
Measures used
31
What is the rewards building block?
To ensure that employees are motivated to meet standards, targets need to be clear and linked to controllable factor
32
What is top of the building block model?
Dimensions
33
What is benchmarking?
Establishment, through data gathering, of targets and comparators, through whole use relative level of performance and can be identified.
34
What are the three types of benchmarking?
Internal Competitor Process or activity
35
What is internal benchmarking?
Another brand or department used as the benchmark Used where conformity of service is the critical issue Easily arranged, cheaper and culturally relevant Culturally distorted and unlikely to provide innovative solutions
36
What is competitor benchmarking?
Uses a direct competitor with the same or similar process Essentially aims to render the competition core competence as threshold Relevant for the industry and market Will the competitor really be keen to hand over their basis for success?
37
What is process or acitivity benchmarking?
Focus upon a similar process in another company which is not a direct competitor Looks for new, innovative ways to create advantage as well as solving threhold problems Takes time and is expensive Resistance likely to be less and can provide the new basis for advantage
38
What will implementing a benchmarking system involve?
1. Identifying what is wrong within the current organisation 2. Identifying best practice elsewhere 3. Contacting, preparing for a site visit 4. Gathering, evaluating and communication the results
39
What will implementing a benchmarking system need?
Key executive commitment from the outset Establishment of teams for those ranges of opinions and expertise Team to manage the project Team for the site visit Budget allocations and training to be given Formalised process
40
What are the problems of a benchmarking system?
Best practice companies unwilling to share data Costly in terms of time and money Provides a retrospective view in a turbulent environment Successful benchmarking firms can find themselves inundated with requests for information Managers may become demotivated if they are compared against a better-resourced rival
41
How can we examine divisional performance?
Economic value added Shareholder value analysis Triple bottom line
42
What is EVA (Economic Value added)?
Estimate of true economic profit after making corrective adjustments to GAAP accounting
43
What does EVA refer to?
Profit less a charge for capital employed in the period
44
How do we calculate EVA?
Conventional divisional profit measure +/- adjustments for any divisional profit measures arising from using GAAP for external reporting - Cost of Capital charge on divisional assets
45
What is SVA (Shareholder value analysis)?
Shareholder value is the total return to the shareholders in terms of both dividends and share price growth, calculated as the present value of the future free cash flows of the business discounted at the weighted average cost of the capital of the business less the market value of its debt
46
In order to maximise future cash flows and reduce cost of capital what seven value drviers did Rappaport identify?
SLOW CAT Sales Growth rate Lift of the project Operating profit margin Working capital Cost of capital Asset investment Taxation
47
What did Rappaport suggest?
Future cash flows should be discounted at a suitable cost of capital and that shareholder value would be increased if this measure were to increase
48
What are the advantages of EVA/SVA approaches?
Adjustements made to profit effectively mean we are looking at cash-flow based measures Consistent with NPV so should ensure better goal congruence between divisional performance and maximising shareholder value Cost of financing emphasised
49
What are the drawbacks of the EVA/SVA system?
Uses accounting data which has been prepared for other purposes Ignores items not on balance sheet Confuses management Costly to maintain and resistance is usually high when first deployed Assumes value can be measured in money terms Judgement involved by users in evaluation and selection of cost of capital rate to be used
50
What is the triple bottom line (TBL)?
expands traditional accountancy reporting systems, Looking at social and environmental performance, rather than simply financial performance.
51
What are the three areas of the triple bottom line model?
Profit (Economic prosperity) - economic value created by the company People (Social Justice) - fair and favourable business practices regarding labour and wider community Planet (Environmental quality) - Use of sustainable environmental practices
52
What are the advantages of TBL?
Attracting ethically aware customers Attracting better quality staff Cost reductions Reduced chance of government legislation
53
What are the drawbacks of TBL?
Difficult to quantify Management conflict
54
What is the benefit of effectively communicating the performance measures?
If employees understand the measures they are more likely to 'buy in' Employees will understand how to meet targets being set Employees aware of the advantages to them of conforming to the performance measurement system Getting feedback from employees can ensure that targets set are achievable
55
What are stretch targets?
Where the organisation sets goals for its employees that are possible, but very difficult for them to meet
56
What are the problems with complex business structures where they are split into divisions?
How to co-ordinate different BU's to acheive overall corporate objectives Goal congruence Performance of one unit may depend to some extent on others How head office costs should be reapportioned How transfer prices should be set
57
What does sub-optimisation refer to?
Actions taken to improve the divisional situation at the expense of the company as a whole
58
What is short-termism?
Actions taken to improve the short-run performance at the expense of the long run
59
What are the problems with sending the wrong signals?
Misrepresentations Gaming - deliberate distortion of a measure to secure strategic advantage Misinterpretation Short-termism Measure fixation Tunnel Vision Sub-optimisation - focus on some objectives so that others are not achieved Ossification - unwillingness to change the performance measure scheme once it has been set up
60
What is intergrated reporting seen as?
A key strategic communication tool, helps management adopt suitable incentives for good performance
61
What information will the management accountant be expected to produce?
Balance between quantitative and qualitative information Links past, present and future information Considers regulatory impacts on performance Provides and analysis of opportunities and risks that could impact in the future Considers how resources should be best allocated Tailored to the specific business situation but remains concise
62
What is the aim of the integrated reporting council?
Create a globally accepted framework for a process that results in communication by an organisation about value creation over time
63
What does the integrated reporting framework set out?
Several guiding principles and content elements
64
What are the seven guiding principles?
Strategic focus and future orientation Connectivity of information Stakeholder relationships Materiality Conciseness Reliability and completeness Consistency and comparability
65
What are the six capitals?
Financial Manufactured Intellectual Human Social and relationship Natural
66
An emphasis on the capitals could result in more focussed performance management in what way?
KPI's can be set up for each of the six capitals, ensuring that they are monitored, controlled and developed Developed further to show how the KPI's connect with different capitals Result in greater transparency of internal communications allowing departments to appreciate better the wider implications of their activities
67
What is the most accepted framework for reporting sustainability?
GRI's sustainability reporting guidelines
68
What does the G4 guidelines consist of?
Principles and disclosure items
69
What does the principles of the G4 do?
Help to define report content, quality of the report and give guidance on how to set the report boundary
70
What does the disclosure items of the G4 do?
Disclosures on management of issues as well as performance indicators themselves
71
What are the principles for defining reporting quality given as?
Balance Comparability Accuracy Timeliness Clarity Reliability
72
What are some general standard disclosures?
Strategy and analysis Organisational profile Identified material aspects and boundaries Stakeholder engagement Report profile Governance Ethics and integrity
73
What are some specific standard disclosures?
Disclosures on management's approach Indicators
74
What are the three categories that G4 encourage disclosure in?
Economic Environmental Social
75

E3 - Strategic Management (13 decks)

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