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
Q

What cascades down the pyramid?

A

Objectives

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26
Q

What goes up the pyramid?

A

Measures

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27
Q

What is the performance pyramid a useful means to assess?

A

The drivers of value in an organisation and to adopt suitable measures of performance within the management system

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28
Q

What are the three building blocks of the Fitzgerald and Moon model?

A

Dimensions
Standards
Rewards

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29
Q

What is the dimensions building block?

A

Goals for the business and suitable measures

Six dimensions:
Profit
Competitiveness
Resource Utilisation
Quality Issues
Innovation
Flexibility

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30
Q

What is the standards building block?

A

Measures used

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31
Q

What is the rewards building block?

A

To ensure that employees are motivated to meet standards, targets need to be clear and linked to controllable factor

32
Q

What is top of the building block model?

A

Dimensions

33
Q

What is benchmarking?

A

Establishment, through data gathering, of targets and comparators, through whole use relative level of performance and can be identified.

34
Q

What are the three types of benchmarking?

A

Internal
Competitor
Process or activity

35
Q

What is internal benchmarking?

A

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
Q

What is competitor benchmarking?

A

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
Q

What is process or acitivity benchmarking?

A

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
Q

What will implementing a benchmarking system involve?

A
  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
Q

What will implementing a benchmarking system need?

A

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
Q

What are the problems of a benchmarking system?

A

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
Q

How can we examine divisional performance?

A

Economic value added
Shareholder value analysis
Triple bottom line

42
Q

What is EVA (Economic Value added)?

A

Estimate of true economic profit after making corrective adjustments to GAAP accounting

43
Q

What does EVA refer to?

A

Profit less a charge for capital employed in the period

44
Q

How do we calculate EVA?

A

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
Q

What is SVA (Shareholder value analysis)?

A

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
Q

In order to maximise future cash flows and reduce cost of capital what seven value drviers did Rappaport identify?

A

SLOW CAT
Sales Growth rate
Lift of the project
Operating profit margin
Working capital
Cost of capital
Asset investment
Taxation

47
Q

What did Rappaport suggest?

A

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
Q

What are the advantages of EVA/SVA approaches?

A

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
Q

What are the drawbacks of the EVA/SVA system?

A

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
Q

What is the triple bottom line (TBL)?

A

expands traditional accountancy reporting systems, Looking at social and environmental performance, rather than simply financial performance.

51
Q

What are the three areas of the triple bottom line model?

A

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
Q

What are the advantages of TBL?

A

Attracting ethically aware customers
Attracting better quality staff
Cost reductions
Reduced chance of government legislation

53
Q

What are the drawbacks of TBL?

A

Difficult to quantify
Management conflict

54
Q

What is the benefit of effectively communicating the performance measures?

A

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
Q

What are stretch targets?

A

Where the organisation sets goals for its employees that are possible, but very difficult for them to meet

56
Q

What are the problems with complex business structures where they are split into divisions?

A

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
Q

What does sub-optimisation refer to?

A

Actions taken to improve the divisional situation at the expense of the company as a whole

58
Q

What is short-termism?

A

Actions taken to improve the short-run performance at the expense of the long run

59
Q

What are the problems with sending the wrong signals?

A

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
Q

What is intergrated reporting seen as?

A

A key strategic communication tool, helps management adopt suitable incentives for good performance

61
Q

What information will the management accountant be expected to produce?

A

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
Q

What is the aim of the integrated reporting council?

A

Create a globally accepted framework for a process that results in communication by an organisation about value creation over time

63
Q

What does the integrated reporting framework set out?

A

Several guiding principles and content elements

64
Q

What are the seven guiding principles?

A

Strategic focus and future orientation
Connectivity of information
Stakeholder relationships
Materiality
Conciseness
Reliability and completeness
Consistency and comparability

65
Q

What are the six capitals?

A

Financial
Manufactured
Intellectual
Human
Social and relationship
Natural

66
Q

An emphasis on the capitals could result in more focussed performance management in what way?

A

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
Q

What is the most accepted framework for reporting sustainability?

A

GRI’s sustainability reporting guidelines

68
Q

What does the G4 guidelines consist of?

A

Principles and disclosure items

69
Q

What does the principles of the G4 do?

A

Help to define report content, quality of the report and give guidance on how to set the report boundary

70
Q

What does the disclosure items of the G4 do?

A

Disclosures on management of issues as well
as performance indicators themselves

71
Q

What are the principles for defining reporting quality given as?

A

Balance
Comparability
Accuracy
Timeliness
Clarity
Reliability

72
Q

What are some general standard disclosures?

A

Strategy and analysis
Organisational profile
Identified material aspects and boundaries
Stakeholder engagement
Report profile
Governance
Ethics and integrity

73
Q

What are some specific standard disclosures?

A

Disclosures on management’s approach
Indicators

74
Q

What are the three categories that G4 encourage disclosure in?

A

Economic
Environmental
Social

75
Q
A