Chapter 9 - Developing strategic performance management systems Flashcards
What is performance measurement?
Process of assessing the proficiency with which a reporting entity suceeds, by the economic acquisition of resources and their efficient and effective development, in achieving its objectives
What are the fours ways in which performance measures could act to control the behaviour of people within the organisation according to Neely (four CPs)?
Confirm Priorities
Compel progress
Check position
Communicate position
What should management be aware of when changing the performance measurement system?
Too many changes may lead to ‘indicator overload’
If something is highlighted in the system the importance of it is being highlighted to staff
If something drops from system you are telling staff it is no longer important
What are some financial performance measures?
Sales margin (gross profit margin)
Net profit margin
ROCE
What are the advantages of financial measures of performance?
Culturally expected
Focus on financial objectives
Comparable against 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 select few
Subjectivity can exist in calculation
What are the advantages of non-financial measures?
Wider view
Easier to calculate
Easy to understand
Not distorted by inflation
Can emphasise 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 is strategy mapping?
Developed by Kaplan and Norton as an extension to the balanced scorecard to make implementations of scorecard more successful
What are the steps involved with strategy mapping?
- Identifying overriding objective of organisation
- Determine main way organisation will create value, given overriding objective
- Identify financial strategies to support this = financial perspective
- Identify skills and competencies needed to support strategies = learning and growth perspective
- Identify how internal processes will support strategies = internal perspective
- Clarify customer-orientated strategies supporting overall strategy = customer perspective
What are the benefits of the balanced scorecard?
Avoids management reliance on short termist or incomplete financial measures
Managers may be able to identify problems earlier
Ensure that divisions develop success measures for their division that are related to the overall corporate goals of the organisation
Assist stakeholders in evaluating the firm if measures are communicated externally
What are the drawbacks of the balanced scorecard?
Does not provide a single overall view of performance
No clear relation between scorecard and shareholder analysis
Measures may give conflicting signals and confuse management
Often involves a substantial shift in corporate culture in order to implement it
What is at the top of the performance pyramid?
Corporate vision
What is at the second level of the performance pyramid?
Business unit - Market and financial measures
What is at the third level of the pyramid?
Business operating systems - Customer satisfaction, flexibility and productivity
What is at the lowest level of the performance pyramid?
Departments and work centres - contains day to day operations
Quality, delivery, cycle time, waste
What does the left hand side of the pyramid focus on?
External focus, predominantly non-financial
What does the right hand side of the pyramid focus on?
Internal efficiency, predominantly financial
Who created the building block model?
Fitzgerald and Moon
What are the three building blocks?
Dimensions
Standards
Rewards
What was the building block model first devised as?
Solution to performance measurement problems in service industries
What is included in the dimensions block?
Goals for the business
Measures include:
Profit
Competitiveness
Resource Utilisation
Quality Issues
Innovation
Flexibility
What is the standards block?
Measures used
To ensure success it’s vital that employees view standards as achievable and fair and take ownership of them
Ownership
Achievability
Equity
What is the rewards block?
To motivate employees to meet standards, targets need to be clear and linked to controllable factors
Clarity
Motivation
Controllability
What is benchmarking?
Establishment, through data gathering, of targets and comparators, through whole use relative levels of performance can be identifies. By the adoption of identified best practices it is hoped that performance will improve.
What are the three basic types of benchmarking identified by Seber?
Internal
Competitor
Process or activity
What is internal benchmarking?
Another branch or department used as the benchmark
What is competitor benchmarking?
Uses a direct competitor with the same or similar process
What is process or activity benchmarking?
Focus upon a similar process in another company which is not a direct competitor
What does implementing a benchmarking scheme involve?
- Identifying what is wrong within the current organisation
- Identifying best practice elsewhere
- Contacting, preparing for a site visit
- Gathering, evaluating and communicating the results
What do you need to implement a benchmarking scheme?
Key executive commitment
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
What are the problems associated with a benchmarking scheme?
Best practice companied unwilling to share data
What is ‘best practice’?
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
What are three methods of examining divisional performance?
Economic value added (EVA)
Shareholder value analysis (SVA)
Triple bottom line
What is EVA?
Estimate of true economic profit after making corrective adjustment to GAAP accounting
How do we calculate EVA?
Conventional divisional profit measure +/- Adjusments for any divisional profit measures arising from using GAAP for external reporting - Cost of capital charge on divisional assets
What is SVA?
Variation along the same theme as EVA
Shareholder value is the total return to the shareholders in terms of both dividends and share price growth, calculated as the PV of the future free cash flows of the business discounted at the WACC of the business less the market value of its debt
What are the seven key drivers that Rappaport identified to maximise future cash flows and reduce the cost of capital?
SLOWCAT:
Sales growth rate
Life of project
Operating profit margin
Working capital
Cost of capital
Asset investment
Taxation
What are the advantages of EVA/SVA approaches?
Adjustments 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
What are the drawbacks of the EVA/SVA systems?
Uses accounting data which has been prepared for other purposes
Ignores items that don’t appear on balance sheet
Confuses management as they are seldom trained fully in its operation and varies from one company to another
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
What are the three areas of the triple bottom line?
Profit (or economic prosperity) - economic value created by the company
People (social justice) - fair and favourable business practices regarding labour
Planet (environmental quality) - use of sustainable environmental practice
What is triple bottom line?
Expands traditional accountancy reporting systems, looking at social and environmental performance, rather than simply financial performance
What are the advantages of TBL?
Attracting ethically aware customers
Attracting better quality staff
Cost reductions
Reduced chance of government legislation
What are the drawbacks of TBL?
Management conflict
Difficult to quantify
What is a stretch target?
Where organisation sets goals for its employees that are possible, but very difficult for them to meet
What is sub-optimisation?
Refers to actions taken to improve the divisional situation at the expense of the company as a whole
What are some reasons for why sub-optimisation arises?
Short-termism
Problems intrinsic to the targets used
Wrong signals
What information would the management accountant be expected to produce for the IR?
Balance between quantative and qualitative information
Links past, present and future performance
Considers regulatory impacts on performance
Provides an analysis of opportunities and risks that could impact in the future
Considers how resources should be best allocated
Tailored to specific business situation but remains concise
What are the seven guiding principles of the IR framework?
Strategic focus and future orientation
Connectivity of information
Stakeholder information
Materiality
Conciseness
Reliability and completeness
Consistency and comparability
What are the eight content elements of the IR framework?
Organisational overview and external environment
Risks and opportunities
Strategy and resource allocation
Business model
Future outlook
Performance
Governance
Basis of preparation and presentation
What are the six capitals?
Financial
Manufactured
Intellectual
Human
Social and Relationship
Natural
What are the principles for defining report content?
Stakeholder inclusiveness
Sustainability context
Materiality
Completeness
What are the principles for defining report quality?
Balance
Comparability
Accuracy
Timeliness
Clarity
Reliability
What are the general standard disclosures of the global reporting intiative?
Strategy and analysis
Organisational profile
Identified material aspects and boundaries
Stakeholder engagement
Report profile
Governance
Ethics and integrity
What are the specific standard disclosures of the GRI?
Disclosures on management’s approach
Indicators
What are the three cateregories that the G4 guidelines encourage disclosure of?
Economic
Environmental
Social
