Chapter 9: Performance Management Systems Flashcards
what is corporate strategy
- Describes a company’s long-term future vision, its purpose, outlines target customers, and the product and/or services it offers
- Strategy sets out how a company will take advantage of its strengths to provide better “value” to its target customers compared to its competitors
what are 3 possible strategic avenues to companies can take to provide better value
- product differentiation
- cost leader
- customer experience
A company would only choose either product differentiation or cost leader to provide value, not both
what are some questions corporate strategy answers
- What the company wants to become
- Why the company exists
what does it mean to give value through product differentiation
- Offer better products and/or services
- Can be more user-friendly, better technology, etc.
- Usually at higher prices customers are willing to pay
what does it mean to be a cost leader
- Offer better prices compared to its competitors
- Like offering similar products and/or services at lower price points
- Usually they try to have lower prices rather than higher prices compared to their competitors
what does setting strategic goals and objectives and measure its performance against them do
helps companies to understand it the decisions made are helping their strategic position
what does performance management systems start with
strategy
what is does it mean to provide value through customer service
Offer better customer service than its competitors
what is performance management system
- A system that monitors and measures a company’s overall performance
- After management has set a corporate strategy that was approved by the BOD and established good corporate governance, they can establish how they will measure performance
what does management teams do in terms of corporate strategy
set strategy and make big and small strategic decisions that are aligned with its corporate strategy to advance its strategic position and achieve a competitive advantage over their peers
what does companies need to do towards corporate strategy
set strategic goals and objectives and measure its performance against them
from a strategy perspective what does the company know
- Industry key success factors
- Strategic avenue management
- Business model
what are industry key success factors
Includes things a company must do really well to gain a competitive advantage in the industry in which they operate
what is a business model
Outlines how the company will make money
what is strategic avenue management
- Taking to differentiate its product and/or services from its competitors
- how they can provide better value than their competitors
what are examples of potential KPIs for Air Canada’s corporate strategy in strategic avenue
- Air Canada (service differentiation); customer satisfaction
- Air Canada Rouge (cost leader); variable cost per passenger
what are examples of potential KPIs for Air Canada’s corporate strategy in industry key success factors
- Timely; on-time arrivals and departures
- Utilization; % of seats occupied by passengers
what are examples of potential KPIs for Air Canada’s corporate governance in ESG
Fuel efficiency; emissions per seat
what are examples of potential KPIs for Air Canada’s corporate strategy in their business model
Transactional revenue stream; customer safety
from a corporate governance perspective, what else should the company know/prioritize & do
- should know what its priorities are from an environmental and social perspective, and financial expectations of external shareholders
- From this, top management can identify the key performance indicators that the company should measure
what are examples of potential KPIs for Air Canada’s corporate governance in shareholder’s expectations
Year-over-year growth; YoY revenue growth of 5%
what is an example of a financial KPI
gross margin % is a financial KPI to understand how much revenue is left over after considering all product costs
what are Key Performance Indicators (KPIs)
- Important metrics which help executive management teams understand a company’s overall performance
- Are financial and non-financial, which are both important to assess a company’s performance
what are employee rewards systems
- Programs which companies put in place to incentivize and motivate their employees to achieve company targets
- If targets are met or exceeded, programs would reward employees to encourage them to continue to delivering good results
what is an example of a non-financial KPI
customer satisfaction is a non-financial KPI used to understand how satisfied clients are with products/services and customer experience
what do companies do to understand which KPIs matter from different perspectives
they make a modified balanced scorecard
what does companies do after knowing which KPIs they should measure and monitor
they set goals and objectives for each KPI
what is a balance scorecard
A tool that assists management teams assess performance from different perspectives
what is a goal/objective
What the company targets the KPI to be over a short or long-term period
what is an example of a goal for a KPI
a company might set a goal to achieve 40% gross margin by the end of a fiscal year or achieve a customer satisfaction score of ⅘ stars in Google reviews
when do management set goals and objectives
periodically (monthly or quarterly)
what happens after management sets goals and objectives
they will measure and monitor performance (compare the actual results of KPIs and compare them against the targets they set)
what is an example of how a company will motivate their employees
Many companies provide employees with bonuses if they meet certain targets by the end of a period (ex. quarter, or fiscal year)
what do good management teams continuously do and what
continuously monitor the industry, competitors, and other factors to make sure the KPIs they are focusing on remain relevant
what is a result of management focusing on actual important KPIS and motivate employees
they are likely to achieve high performance
what are the five perspectives of the modified balance scorecard
- Financial
- Customer
- Environmental
- Internal Business Processes
- Learning and Growth
are KPIs and corporate strategy just set once
- no
- are constantly revisited to ensure they are identifying relevant KPIs, and if they are significant changes to the industry or competitive environment
what is the financial perspective of the modified balance scorecard + example
- Measures and monitors business performance from a financial perspective
Ex. how is the company doing from doing financial statement analysis?
what is a modified balance scorecard
A tool that is used by management teams to understand company performance from the following perspectives: financial, customer, environmental, internal business processes, and learning & growth (including social)
what is the customer perspective of the modified balance scorecard + example
- Measures and monitors business performance from a customer perspective
Ex. how satisfied/happy are the customers with the company’s product/services?
what is the environmental perspective of the modified balance scorecard + example
- Measures and monitors business performance from an environmental perspective
Ex. how is the company doing at being eco-friendly, achieving net-zero, and operation sustainably?
what is the internal business processes perspective of the modified balance scorecard + example
- Measures and monitors business performance from an efficiency perspective
Ex. how efficient are the company’s internal processes? (like collecting receivables, or dealing with lawsuits)
what is the learning and growth perspective of the modified balance scorecard + example
- Measures and monitors business performance from an employee perspective, including the ‘social’ aspect of ESG
Ex. how happy and engaged are the company’s employees? Do they have proper facilities to grow? Is there a high retention rate?
what is an example of a KPI and target for it for the financial perspective in the modified balance scorecard
KPI: Revenue growth
Target: Increase YoY revenue by 10%
what kind of KPI is the financial perspective of the modified balance scorecard
financial
what kind of KPI is the customer perspective of the modified balance scorecard
non-financial
what is an example of a KPI and target for it for the customer perspective in the modified balance scorecard
KPI: Customer satisfaction
Target: Increase Customer service rating of 8/10
what kind of KPI is the environmental perspective of the modified balance scorecard
non-financial
what is an example of a KPI and target for it for the environmental perspective in the modified balance scorecard
KPI: Carbon emissions
Target: Reduce carbon emissions by 2% in a year
what kind of KPI is the internal processes (including governance) perspective of the modified balance scorecard
financial & non-financial
what is an example of a KPI and target for it for the internal processes (including governance) perspective in the modified balance scorecard
KPI: Employee CEO approval rating
Target: 90% of employees approve of CEO
what kind of KPI is the learning and growth (including social) perspective of the modified balance scorecard
non-financial
what is an example of a KPI and target for it for the learning and growth (including social) perspective in the modified balance scorecard
KPI: Employee turnover
Target: Employee turnover rate of 5% or less
what do companies have balance scorecards for
- for the company overall
- and for each business segment
why does each business segment require its own balance scorecard
- to measure and monitor segment performance
- Important that employees within each segment can make decisions and influence KPIs for them to feel motivated and engaged
what are responsibility centres
Segments within a company that are expected to effectively manage revenue, profit, investments and/or costs
what should management ask to understand the segment’s responsibilities that will influence the KPIs that should be used to measure the performance
What can the management team within the segment control and influence?
answer: Revenue, costs, and investing decisions
what is a revenue centre
- If management can only control and influence revenue
Ex. make pricing, sales decisions
what is a cost centre
- If management can only control and influence costs
Ex. make costing decisions
what is a profit centre
If management can control and influence both revenue and costs, but doesn’t have the authority to approve investment decisions
what is an investment centre
If management can control and influence revenue and costs, and has the authority to approve investment decisions
why is understanding a business segment’s responsibilities useful for
- useful to make sure the KPIs that are being used to measure its performance makes sense
- Ex. the last thing a company should do is measure a revenue segment that can only control pricing and sales, with a profitability KPI like operating margin
- If they can’t control costs, then they will feel measuring with this metric is unfair since they can only make decisions that influence revenue
what is an example of a sample metric for a KPI that can be used to measure the revenue centre
of products/services sold
what is an example of a sample metric for a KPI that can be used to measure the cost centre
Actual cost vs. budgeted cost
what is an example of a sample metric for a KPI that can be used to measure the profit centre
Gross margin
what is a management reporting cycle
A process that involves setting budget targets, producing management reports, making decisions to improve performance and continuously motivating employees to meet company targets
what is an example of a sample metric for a KPI that can be used to measure the investment centre
Return on assets (ROA)
what is a responsibility of management teams
to effectively manage a company’s performance by establishing a management reporting cycle
when are budgets made for most public companies
by month before the fiscal year begins to set financial targets for the fiscal year
when are segmented and company level management financial reports done and for what
Usually done on a monthly basis to compare actual vs budget for the month
what happens when teams are comparing financial reports
- The finance team works closely with operations team to understand WHY the results are better or worse than the budget
- Based on the analysis, management teams would make informed decisions to keep the company on track and meet the budgeted targets for the fiscal year
- They also need to motivate employees to work towards these goals
what is variance analysis
Compares actual result against:
- Budget
- Prior period
- Other (ex. forecast)
when are variances of revenue, CM, GM, operating income, and net income variances considered favourable
when actual result > budget
when are variances of revenue, CM, GM, operating income, and net income variances considered unfavourable
when actual result < budget
when are expense variances considered favourable
when actual expenses < budgeted expenses
when are expense variances considered unfavourable
when actual expenses > budgeted expenses
how is variance calculated on management financial reports
actual - budget
how is variance % calculated on management financial reports
variance/budget
what should also be done in the variance analysis
Should also look at the previous years actuals
Ex. even though the amount of revenue was less than what was budgeted, it increased from the previous year
why do companies make budgets
- Planning this ensures no surprises when things arise
- Helps make important business decisions (like investment decisions)
- Motivate employees towards a goal
- Influences people in the company to act
- Used to compare with actual results
