The before tenta lecture Flashcards
Define the Key principles for BSC
- Balanced Scorecard starts with the strategy
- Link performance measurements to the strategy
- Only measures connected to strategy should be included
- Strategy is everyone’s assignment
- Holistic approach and balance
- Balance between perspectives, financial/non financial, leading/lagging indicators
- The big picture, but are all targets as important?
- Link unit scorecards with the organizations scorecard
- Set motivational, both individual and team based, targets
- Feedback processes encourage learning
The relationship between intangibles assets and future value – findings from research
* What’s the findings from the study and what difficulties did they see?
Larckner et al.
Intangible assets: expenditure on and development of non-physical assets that are drivers of future economic performance and firm value. E.g. software, licences, trademarks, goodwill, human capital etc.
Cross sectional studies
* There are some evidence that non-financial measurement is associated with higher performance
* Greater satisfaction with or higher perceived performance with BSC
* Over-reliance on perceived performance outcomes (rather than actual outcome)
* Inadequate control for contingency factors (e.g. ineffective strategy, poor measures, gaming of measures and targets)
* Limitation is the potential lag between measurement implementation and performance effects (time and causality)
* Simple variables for capturing complex measurement practices
Quasi-experimental studies (compare before and after implementation and non-adopters)
* Mixed evidence on the relationship between non-financial measurement and economic performance
* Organizations find it difficult to link improvements in non-financial measures to financial gains
* Hawthorne effect? (We think we are measuring the right things, but cause and effect are difficult to separate????)
Difficulties of linking non-financial measures to future value may have to do with implementation problems
* Technical factors, for instance choice of measure, weighting of measures, setting targets, information system e.g. 100% customer satisfaction?
* Organizational factors, for instance internal politics of performance measures choice, use and design. Resistance to change, management commitment
The association between customer satisfaction and accounting measures
* Business unit level: Customer satisfaction are leading indicator of future revenue
* Firm level: Association between customer satisfaction and accounting measures varies by industry
Conclusion?
* How can we know which one leads to what (in financial vs non-financial)
5 different types of “Use of performance measurement systems”
Operational use:
* Operational planning
* Process monitoring
* Measure performance
* Diagnostic use
- Controlling behaviour, not trying to understand, controlling purpose
Incentive use:
* Target setting
* Incentives
* Rewards
* Influence behaviour
Try to influence us and motivate us
Exploratory use
* Prioritory setting
* Double loop learning
* Policy development
* Strategy management
* Learning & Improvement
* Interactive use
Communication
Legitimization
Describe the historical development of performance measures
1900-1940: Productivity Management
1930-1970: Budgetary control
1970-2000: Integrated Performance Measurement
* Environmental & social performance
* People and teams perspective of PM
* Performance measurement in public sector and non-profit org
* Inter-organisational performance measurement
1990-2020: Integrated Performance Management
* Performance measurement as a social system
* Performance management in SME
* Inter-organisational performance measurement
* Performance measurement for Innovation and intellectual property
Trends in performance measurements
The critizism has motivated a variety of performance measurements innovations. Define these
From “improved” (new) financial metrics
* Residual income
* Economic Value Added (EVATM)
* Cash Flow Return on Investments (CFROI)
* Shareholder Value Added (SVA)
* etc.
To focus on future oriented non-financial measurements
* BSC
* Integration of financial and non-financial
Define the “new” financial measures
EVA = NOPAT - (Capital invested * WACC)
* Measures income in relation to cost of capital
* Absolute measure
* Simple indicator
* Related to NPV (Net Present Value)
* “Accounting based”
* Very complexed measure for control purposes
* Dependent on accounting measures of operating income and invested capital
* Restricted to one year (calculates how much value an investment adds to the business for one year (each financial year) )
CFROI = (Gross Cash Flow – Economic Depreciation) / Gross Investment
* Focuses on Cash Flows
* Avoids accounting distortions
* Better measure than ROI because it focus on gross investment
* Related to IRR (Internal Rate of Return) (CFROI includes sunk costs. IRR includes only future cash flows)
* Accounting based
* Rate based measure - does not measure change in value
* Less useful for corporate planning
* Does not focus on future growth
* Complex measure
SVA = Gross corporate value – The market value of debt
* Avoids accounting distortions
* Measures change in value
* Focuses on future cash flows
* More appropriate for corporate planning
* Related to NPV (Net present Value)
* Use a DCF (discontinued cash flow) computation
* Subjective approach (judgement about factors (cash flow) into the future)
* Has shortcommings as compensation system compared to EVA
* Complex - Number of inputs can be many
Are value based measures a better predictor of stock returns than accounting measures?
- It seems that value added measures have a stronger statistical relation with stock returns
- However, research findings are inconclusive
Does value based measures improve internal decision-making?(planning and control)? I.e. what are the effects of adopting EVA, CFROI and SVA
EVA:
* - Strong incentive to keep the capital invested down (dissortion of assets)
* - Managers may trade off EVA from future growth for higher EVA from assets in the future
* + Can lead to greater awareness of cost of capital, increased use of debt, increase sales revenues and a longer accounts payable cycle
CFROI:
* - Managers of firms judged on the basis of CFROI, will try to keep the gross investment as small as possible
* - CFROI is increased while the gross investment is reduced (a firm can increase CFROI and end up with a lower value)
SVA
* + Motivate managers to focus business opportunities that have an impact beyond the performance evaluation period (value creation in the long run)
* - Difficult to use for performance evaluaton when measuring historical performance since SVA focuses on future performance
* - Managers who perform extraordinarly in low return business units will be rewarded, while those who do poorly in high-return business will be punished
c) Decision-makers in firms often tend to focus more on financial performance measures rather than non-financial performance measures. Why? (4p)
Discuss/explain the findings in for example Ittner D. (2008), Kraus, K. & Lind, J. (2010) but also cognitive traps. For example:
* Lack of simplicity and comparability (non-financial measures)
* Technical factors (choice of measures, setting targets, weighting measures)
* Organizational resistance (management commitments and organizational resistance)
* Capital market pressure
* Framing
* Endowment effects and status-quo
* Short-termism
* Confirmation bias and sunk costs
What are the different types of measures & target?
- Lagging and leading measures
- Financial and non-financial measures
- Other dimensions (e.g BSC)
- Absolute and relative measures and targets
- Input/Structural, Process, Result, Outcome (production
model)
What is a good measure and target? (SMART)
- Specific
- Measurable
- Achievable/attainable (or assignable)
- Relevant (or realistic)
- Time-bound.
You should understand the meaning of each of the five
components of the framework and also how they are interrelated.
Based on what you want to achive, which measures should you choose
- Structure and Process measures focus on introducing
methods/practices - Result and Outcome measures might enhance innovations (new ways of reaching targets)
- Continuous learning and improvement (relative targets) or absolute level (absolute targets)
What are the risks when implementing PMS
However SMART (Doran 1981) your measures are there is a risk of reaching the target but missing the point when implementing PMS due to
* Poor alignment between individual goals and organizational objectives because PMS are fouled up: they reward the types of behaviour that the rewarder is trying to discourage while
the desired behaviour is not rewarded at all (Kerr 1995)
» folly of rewarding A while hoping for B
* Poor alignment between PMS and organizational objectives: little benefit from non-financial measures due to poor links between measures and strategic objectives (Ittner and Larcker
2003)
How to mitigate risks when designing and
implementing PMS?
- Align non-financial measures with strategic objectives in design of PMS (Ittnerand Larcker 2003).
- Involve employees in the development of PMS to influence
employee motivation and organizational performance
(Groen et al 2012; 2017)
