Chapter 9: Developing strategic performance management systems Flashcards
What is performance measurement?
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
Why is it important to select the appropriate performance measurement?
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
What are Critical success factors?
limited number of areas in which results, if they are satisfactory, will ensure successful competitive performance for the organisation
What should management be aware of when changing the performance measurement system?
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?
What are some typical financial performance measures?
Sales Margin
Net profit margin
ROCE
What are the advantages of financial measures of performance?
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
What are the disadvantages of financial measures of performance?
Inflation distortion
Leads to suboptimal and short-termist behaviour
Lack of comparability
Understood by the ‘select few’
Subjectivity can exist in calculation
What are non-financial performance measures?
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
What are the advantages of non-financial measures?
Wider view
Easier to calculate
Easy to understand
Not distorted by inflation
Can emphasis broad spectrum of management
Positive motivational implications
What are the disadvantages of non-financial measures?
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
What are the four parts to a balance scorecard?
Financial perspective
Internal business process
Learning and growth
Customer perspective
What are possible measures for the financial perspective part of the balanced scorecard?
Increased revenue
Improvements to ratios
Rising market share
Increased cash flow
Reduction or increase in gearing
What are possible measures for the internal business perspective part of the balanced scorecard?
Reduction in production time
Reduction in errors
Reduction in waste
What are possible measures for the customer perspective part of the balanced scorecard?
Increase in new customers
Increase in customer returns
Reduction in numbeer of complaints
Number of orders delivered on time
What are possible measures for the learning and growth part of the balanced scorecard?
Number of days of staff training
Number of new products launched
Increase in number of sales
Reduction in staff turnover
What are the main benefits of the balanced scorecard?
Avoids management reliance on short-termist of incomplete financial measures
May be able to identify problems earlier
Assist stakeholders in evaluating the firm
What are the drawbacks of the balanced scorecard?
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
What is the performance pyramid designed to ensure?
The activities of every department, system and business unit support the overall vision of the organisation
What is the top level of the performance pyramid?
Corporate vision - how the organisation will achieve long-term success and competitive advantage
What is the second level of the performance pyramid?
Business Unit - Market, financial
Includes CSF’s in terms of market-related measures and financial measures that need to be acheived
What is the third level of the performance pyramid?
Business operating systems - Customer satisfaction, flexibility, Productivity
Measures which relate to the internal systems and processes which are needed to meet customer needs
What is the lowest level of the pyramid?
Department and work centres - Quality, Delivery, Cycle time, Waste
Day-to-day operational measures
What does the left hand side of the pyramid contain?
Measures which have an external focus and which are predominantly non-financial
What does the right hand side of the pyramid contain?
Focused on the internal efficiency and are predominantly financial
What cascades down the pyramid?
Objectives
What goes up the pyramid?
Measures
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
What are the three building blocks of the Fitzgerald and Moon model?
Dimensions
Standards
Rewards
What is the dimensions building block?
Goals for the business and suitable measures
Six dimensions:
Profit
Competitiveness
Resource Utilisation
Quality Issues
Innovation
Flexibility
What is the standards building block?
Measures used