Performance Measurement & Management

Question 1

What do performance measurement systems allow?

Answer 1

Monitors organisations progress, efficiency & can identify issues.
Each division identifies its contribution to overall goal of entity and is evaluated on the basis of this contribution.

Question 2

Why evaluate performance?

Answer 2

• Monitor progress/identify problems.
• Feedback control
• Assess efficiency of managers/divisions
• Guide decision making/goal congruence

Question 3

What is Return on Investment?

Answer 3

ROI is a relative measure of performance that can be compared with other investments.

Question 4

ROI Equations:

Answer 4

ROI = (Divisional Profit / Divisional Investment) x 100
ROI = Profit / Investment
ROI = Investment Turnover x Profit Margin

Question 5

Issues with ROI:

Answer 5

Too many variations of calculations.
ignores absolute size.
May encourage suboptimal decisions, not goal congruence.
Managers may not be motivated to invest eve if it is above required rate of return.

Question 6

What is Residual Income?

Answer 6

RI measures net income of an investment/division after deducting amount representing required rate of return.

Question 7

ROI vRi

Answer 7

Managers focus on RI > ROI as it is an absolute figure, not a %, making it easier for comparison.

Question 8

Critical success factors for performance measurements:

Answer 8

• profitability
• market share
• productivity
• employee attitudes
• personnel development,
• customer satisfaction