Performance Measurement Flashcards

1
Q

Difficulties in measuring performance

A

If measures are not aligned to overall organisational aims, it could result in dysfunctional behaviour.

How do we measure group performance - problem with free-riders.

Although bonuses are awarded (in Western world) on individual performance, the performance has in most cases been earned as part of a team effort.

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2
Q

COST CENTRE MANAGER VIEWPOINTS

A
  1. Infatuation with cost control - budget data used inflexibly. Wouldn’t it be better to use budget data with intelligence? This is a budget constrained style.
  2. Profit conscious style - far more attention paid to long term cost control. Requires that accounting data are used flexibly. Performance of cost centre unit is appraised in the context of the organisation as a whole.
  3. Non-accounting style - accounting data plays a rather less important role in appraising performance.
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3
Q

BUDGET CONSTRAINED STYLE

A

Rather “behaviourist” - there is a system of rewards and penalties for performance measured against the budget.

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4
Q

PROFIT CONSCIOUS STYLE

A

Much more flexible and reasons for poor or good performance are sought before any appraisal or managerial action is taken.

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5
Q

NON-ACCOUNTING STYLE

A

Not influenced by the budget - the manager is appraised according to a wide range of metrics. Far less importance is attached to cost control, compared to the other methods.

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6
Q

POSITIVES OF USING THE BUDGET TO MOTIVATE AND TO CONTROL

A

Imoisili (1989) - a prescriptive budget can be a good thing if managers believe they can significantly control or alter their tasks.

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7
Q

NEGATIVE OF USING THE BUDGET TO MOTIVATE AND TO CONTROL

A

Study by Hopward (1976) - budget constrained style led to stress and a feeling of injustice.

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8
Q

DISADVANTAGES OF BUDGET CONSTRAINED STYLE

A

-Inter-divisional relationships can suffer - a manager can be under pressure from superiors and react by exploiting the immediate subordinates. Makes for unhealthy working environment.

Accounting information may not be changed merely to attain a bonus - it may be done to ensure divisional survival.

Otley suggested that managers in an environment which faces high levels of uncertainty tend to react worse with a budget constrained style.

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9
Q

THE BALANCED SCORECARD

A
  • A way of balancing financial performance measures with non financial measures.
  • Quality, delivery times, reliability, after-sales service and customer satisfaction cannot be measured from the proxy of financial performance.

Must be a cause and effect relationship in the chosen measures.

Some measures will LAG and will tell the story of what has happened. Mainly applies to financial measures.

Other measures will LEAD - principally the non financial measures. These will DRIVE future financial performance.

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10
Q

What does the balanced scorecard enable organisations to do?

A

1) Bridge the gap between strategy and action.
2) Engage a broader range of users in organisational planning.
3) Reflects the most important success factors of the business.
4) Respond immediately to progress, feedback and changing business conditions.

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11
Q

How does learning improve financial results?

A
  • Learning improves business processes.
  • Improved business processes improve customer satisfaction.
  • Improving customer satisfaction improves financial results.
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12
Q

ADVANTAGES OF BALANCED SCORECARD

A
  • Simple identification of key matters.
  • Less infatuation with financial measures.
  • Difficult for junior managers to “bury bad news”.
  • Much easier to track performance throughout the value chain.
  • Encourages a strongly customer oriented view, linkage into reward system.
  • Aiding coordination and communication in the business.
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13
Q

Implementation issues of a Balanced Scorecard

A
  • The non-financial information used is not subject to control or audit and may be unreliable or inaccurate.
  • Non-financial information is often prepared on a weekly or daily basis while performance reviews are generally conducted quarterly or annually.
  • Concern arises related to the timeliness and reliability of non-financial data prepared by external courses.
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14
Q

NON-FINANCIAL PERFORMANCE INDICATORS

A
  • Like the annual budget, it’s a manifestation of strategic aims into the every day activities of the business.
  • Performance measures are devised for four perspectives.
  • The scorecard can be adapted then to ask the questions which management thinks need to be asked, and it gives top management a very quick and insightful summary of business performance.
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15
Q

What are the four perspectives of performance measures?

A
  1. Financial perspective
  2. The customer perspective
  3. The internal business perspective
  4. The learning and growth perspective
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16
Q

FINANCIAL PERSPECTIVE

A

K&N identify three principal financial drivers of successful business strategy - these are

  • REVENUE GROWTH (existing/new customers and markets, changing to more profitable mix of products)
  • COST REDUCTION (product cost, process cost, admin cost, use of ABC, JIT, CPA, etc0

-ASSET UTILISATION
a problem here is that measures such as RoI might be used, and there could (again) be problems of under-investment. This could lead to difficulty in meeting the NFPI of the BS.

17
Q

CUSTOMER PERSPECTIVE

A

Linkage to revenue element of the financial perspective.

Improvements shouldn’t’ just be confined to “core” areas- there should be improvements in metrics which customers value, but which don’t explicitly link into the finance function.

5 core objectives
Measures include:
Percentage market share
Percentage growth in existing customer business
Sales to new customers
Improvement in customer satisfaction surveys
Better results in customer profitability analysis

CUSTOMER VALUE PROPOSITIONS:
Improve product functionality

Decrease price relative to competitors

Improve quality

Improve delivery time

18
Q

INTERNAL BUSINESS PERSPECTIVE

A

Three process value chain identified by K&N:
Innovation, operation, post-sales.

INNOVATION PROCESS:
The process of researching customer wants and designing and introducing new services to meet customer needs.
Measures include:
1) percentage of sales from new products
2) ratio of own new products to those in competition
3) percentage of sales from new products, and time it takes to get new products to the market.

OPERATION PROCESS:
Operations represents the present.
Traditionally attracts the most attention.
Most measures operate on efficiency and quality.

POST SALES SERVICE PROCESS:
How responsive is the entity to its customers’ demands following the sale?
Concern with warranty and service issues and repair and replacement.

LEARNING AND GROWTH PERSPECTIVE:
long term.
Per K&N - three major enablers leading to key objectives of:
1. increase employee capabilities (satifaction, key staff, sales revenue per employee)
2. increase information system capabilities (real-time feedback on activities)
3. increase motivation, empowerment and alignment (Improve motivation, empowerment, and employee number)

19
Q

Typical operation process measures

A

PRODUCT EFFICIENCY RATIO (std hours of output/ actual hours of input)

CAPACITY USAGE RATIO (actual hours used/budgeted hours)

QUALITY MEASURES (total quality costs/sales, percentage returns, percentage of internal rejections)

MANUFACTURING CYCLE EFFICIENCY based on the idea that processing (manufacturing) time is the only revenue-generating activity -other time spent should be minimised.
Processing time/ (processing time + inspection time + waiting time + moving time)

20
Q

BENCHMARKING

A

Refers to policy of comparing with best practice.
Avoids duplication of effort.
best if we benchmark with a business which isn’t a competitor.
Encourages best practice.

Consultants often brought in.

21
Q

What are the stages of benchmarking?

A
  1. Internal audit of process; take stock of current situation, using available published materials.
  2. Formation of a team to oversee process. Good leadership, and training, are essential.
  3. Finding partners for the exercise. It’s best to identify a number of partners, and to develop a sense of co-operation between all partners.
  4. Getting the information.
  5. Adjusting processes and systems to make improvements.