U6 Performance Measurement Concepts Flashcards
Theoretically, a performance measurement system might consist of three interrelated elements:
==individual measures which quantify the efficiency and effectiveness of actions
==a set of combined measures to assess the performance of an organization as a whole
==a supporting infrastructure which enables an association to acquire data which is later collected, sorted, analyzed, interpreted, and disseminated
The performance measurement system can be:
==the information system which is the key to
the performance management process.
==It also integrates all relevant information from all the other management systems.
It also integrates all relevant information from all the other management systems.
==formulate a strategy in order to determine what the objectives of the organization are and how the organization plans to achieve them.
manage the strategy implementation process by examining whether an intended strategy is being put into practice as planned
challenge assumptions by focusing not only on the implementation of an intended strategy but also on making sure that its content is still valid
check progress by looking at whether the expected performance results are being achieved
comply with non-negotiable parameters by making sure that the organization is securing its survival by achieving the minimum standards needed (e.g. legal requirements, environmental parameters, etc.)
communicate direction to the rest of the employees by passing on information about what the strategic goals are and how individuals are expected to achieve them
communicate with external stakeholders
provide feedback by reporting to employees how they, their group and the organization as a whole are performing in comparison to the expected goals
evaluate and reward behavior in order to focus employees’ attention on strategic priorities and motivate them to take action and make decisions that are consistent with organizational goals
benchmark the performance of different organizations, plants, departments, teams and individuals
inform managerial decision-making processes
encourage improvement and learning
The roles of the performance management system can be defined by three key categories:
Strategy:
Communication:
Motivation:
Strategy:
Comprises the roles of managing strategy implementation and challenging assumptions.
Communication:
Comprises the role of checking progress, complying with the non-negotiable parameters and the communicating direction as well as providing feedback and benchmarking.
Motivation:
Comprises the role of evaluating and rewarding behavior and encouraging improvement and learning.
Unlike a management control system, a performance management system is meant to?
be interactive, since its main goal is to facilitate the implementation of the organizational strategy and to challenge strategic assumptions.
In addition to the strategic purpose of the performance management system, its motivational purpose has also been stressed as?
a critical factor for its effectiveness.
A performance management system can be used as a motivational device when ?
it is integrated in the compensation system.
Traditionally, evaluation and reward programs have been linked exclusively to ?
organizational financial measures.
But more and more organizations are using different performance management models to
?
calculate their rewards.
The use of the scorecard framework helps ?
managers’ judgement
and also strengthens their focus on what is important.
It also helps to avoid information overload.
Theoretical research and practical experience suggest a number of processes which have been developed to?
design and implement performance measurement systems.
A large number of theoretical accounts have been proposed to?
support these processes.
The objective of such accounts is?
to help organizations to determine their performance in a way that objectives are reflected as well as to assess organizational performance appropriately.
A majority of the identified performance frameworks display certain characteristics which help an organization to identify an appropriate set of criteria against which the organization can assess and manage their performance:
A set of measures which provides a ‘balanced’ picture of the organizational activity. That set of measures should reflect financial and non-financial measures, internal and external measures, and efficiency and effectiveness measures.
A framework of measures which provides a succinct overview of the organization’s performance. For example, the simplicity and intuitive logic of the balanced scorecard has been a major contributor to its widespread adoption, as it is easily understood by users and applied to their organization.
A set of performance measures which is multi-dimensional. This reflects the need to measure all the areas of performance which are important to the organization’s success. However, there is no consensus on what the dimensions of performance are.
Check the book
For example, the EFQM model, which we will discuss later, provides the broadest indication of dimensions of performance to be measured.
All possible measures of an organization’s performance have to be mapped onto the applied theoretical account in order to identify where there are omissions or where there is a need for greater focus.
Check the book
For example, the performance measurement matrix (PMM) provides comprehensiveness. However, the performance measurement matrix provides little indication of the different dimensions of performance which should be measured.
Performance measures should be integrated both across the organization’s functions and through its hierarchy, encouraging congruence of goals and actions.
Results need to be measured in a way that the performance measurement system can provide data for monitoring past performance and planning future performance. This demonstrates the way in which measured internal processes and the respective results contribute to an organization’s planning (i.e. feed forward) and control (i.e. feedback) system.
The Balanced Scorecard
Traditionally, financial parameters get a lot of attention for?
determining the level of organizational performance.
Intensive research in the 1990’s created awareness that many companies focus too much on?
financial indicators such as return on investment (ROI)
or earning per share (EPS) in their performance measurement and reporting systems.
These measures can give misleading signals for?
continuous improvement and innovation as we discussed in connection with the economic value added and customer lifetime model and are ‘incomplete’ as shown when discussing the importance of intellectual capital.
In summary, they lack strategic performance measurement component and are?
one-dimensional.
Additionally, increasing competition has created the need to develop a variety of?
other metrics in order to determine the status of additional areas of importance for business activity which could not be covered and reported by financial indicators.
Basic Idea of Balanced Scorecard
In an attempt to better align performance measures to?
a strategy Robert Kaplan and David Norton developed the balanced scorecard (BSC).
It is a framework which helps to develop a set of measures which gives?
the executive management a fast but comprehensive view of the business.
With a strategy-centric approach, it supports?
the translation of the organization’s mission and vision into multidimensional actionable goals and objective measures.
The balanced scorecard tries to link ?
strategic initiatives with operational activities.
It complements financial measures with ?
operational as well internal aspects.
Additionally, the balanced scorecard provides a basis for ?
describing,
communicating,
and managing the strategy in an explicit and consistent way.
The balanced scorecard approach is one of several highly popular theoretical accounts for performance measurement which suggests that financial indicators need to be?
accompanied by a measured view of operational status, customer perception, and capacity for innovation within the organization.
In the centre of the balanced scorecard is the vision of the organization’s future. This includes:
strategy, mission, and goals.
In order to achieve its objectives, the organization needs to satisfy ?
shareholders and customers and has to manage internal processes as well as innovation and learning.
The balanced scorecard tries to give all of these four perspectives?
the required attention
and aims to derive critical success factors and critical measures for each of these dimensions.
Figure 13: The Balanced Scorecard
Figure 13: The Balanced Scorecard
Figure 13: The Balanced Scorecard
Figure 13: The Balanced Scorecard
The Four Perspectives of the Balanced Scorecard
After discussing the basic idea of the balanced scorecard we want to look into the four perspectives in more detail. We will see that the balanced scorecard does not introduce new indicators, but tries to combine and ‘balance’ —————————————————–
existing performance measures.
The Four Perspectives of the Balanced Scorecard:
Financial perspectives (or shareholder value):
Customer perspective:
Internal perspective (or business process):
Innovation and learning perspective (or growth):
Financial perspectives (or shareholder value):
This perspective is supposed to address two questions: “What needs to be done to succeed financially?” and “How the organization needs to appear to shareholders?”.
It includes strategies for revenue growth and changes in the revenue mix or cost reduction and productivity improvement.
Asset utilization and investment strategies are also part of the financial perspective.
Additionally, the balanced scorecard is a :
communication tool which is used to tell how value is created for the organization.
It can show a logical step-by-step connection between strategic objectives in the form of a cause-and-effect chain.
Kaplan and Norton refer to a case where the Texas Eastman company used a daily estimated financial report to give tangibility to the quality of the company’s output.
This helped employees to understand the implications of reduced quality in output on a daily basis and that any interruption in output would be reflected in the financial report.
Typical financial perspectives include:
measures such as cash flow management, sales growth and profitability.
Other commonly used measures in this context are return on investment (ROI),
economic value added (EVA),
and return on capital employed (ROCE).
Customer perspective:
When choosing measures for the customer perspective, businesses need to answer two critical questions:
“Who are the target customers?”
and “What is the value proposition in serving them?”
Especially the second question on choosing an appropriate value proposition encompasses a fundamental strategic decision.
Management literature has identified three basic approaches in this context:
Operational excellence.
Product leadership.
Customer intimacy.
Operational excellence.
Businesses pursuing an operational excellence strategy focus on low price, convenience, and often a ‘no frills’ approach.
Wall-Mart, IKEA, McDonald’s, and Ryanair provide excellent examples of operationally excellent companies.
Product leadership.
Product leaders push the envelope of their company’s products.
Constantly innovating, they always strive to be ahead of the curve and offer the best products in the market.
The consumer electronics, fund management, automotive and pharmaceutical industries include many companies pursuing a strategy of product leadership.
Examples of such companies include Apple, Fidelity Investments, BMW, and Pfizer.
Customer intimacy.
Doing whatever it takes to provide solutions for unique customer requirements defines customer-intimate businesses.
Their focus is not high volume one-time transactions, but instead long-term relationships through deep knowledge of their customers’ needs.
Examples of companies who pursue this type of strategy include IBM, Lexus, Virgin Atlantic, and Amazon.
No matter what the overall strategic approach is, recent management philosophy has shown an increasing realization of the importance of ?
customer focus and customer satisfaction in any business.
These are leading indicators; if customers are not satisfied, they will eventually?
find other suppliers who will meet their needs. Poor performance from this perspective is thus a leading indicator of future decline, even though the current financial picture may look good.
In developing metrics for satisfaction, customers should be analyzed in terms of ?
various categories and according to the kinds of processes for which an organization is providing a product or service to those customer groups.
Internal perspective (or business process):
This perspective refers to internal business processes and identifies the key processes at which the organization must excel in order to add value for customers and shareholders.
The internal processes have a direct link to the customer strategy chosen. Each of the strategic approaches entails the efficient operation of specific internal processes in order to serve customers.
Metrics based on this perspective allow managers to get an idea of how well their organization is running and whether its products and services conform to customer requirements (i.e. the mission).
These metrics have to be carefully designed by those who know these processes most intimately. Service development and delivery are examples of items which may be represented in this perspective.
Innovation and learning perspective (or growth):
This perspective includes employee training and a corporate cultural attitude related to both individual and corporate self-improvement.
In a knowledge worker organization, people, the only repository of knowledge, are the main resource.
Hence, measures and activities in this perspective become the enablers of the other three perspectives.
In other words, the innovation and learning perspective is the foundation on which the other perspectives are built.
Initiatives for improvement identified from the customer and internal learning perspective will necessarily reveal gaps between ?
the current organizational infrastructure including employee skills, information systems and culture, and the level necessary to achieve the set goals.
In general, to improve performance in reaching the objectives found in?
the learning and growth perspective enables the organization to improve its internal process perspective objectives, which in turn enables the organization to create desirable results in the customer and financial perspectives.
In the current climate of rapid technological change, it is becoming paramount for knowledge workers to be?
in a continuous learning mode.
A mix of core outcome measures (lag measures) and performance drivers (lead measures) can be put into place to guide managers in focusing funds where they can help the most.
Employee skill level, employee satisfaction, and availability of information are metrics which have a place in this perspective.
These four perspectives demonstrate the need to?
balance financial and non-financial measures, internal and external measures, and leading and lagging measures as well as short and long-term measures.
This approach encourages managers to overcome the shortcomings of ?
traditional financial measurement and ensures that administrators include various indicators when assessing performance.
In a short period of time, the balanced scorecard has become?
common terminology among executives.
However, since its introduction, the concept has evolved. That evolution highlights some important issues regarding?
the management of organizational performance.
In the time of Kaplan and Norton, less emphasis was placed on?
the exact balance of measures.
There was a general desire to explicitly link desired performance results to ?
the motives and drivers which enable realization of those targets.
Since that time, the focus of the balanced scorecard has shifted from?
performance measurement to strategy development and strategic control (i.e. a broader performance management view).
A balance in the number of measures was no longer considered strictly ————————. In fact, ————————————— who developed the first scorecard, which Kaplan and Norton found in——————————————, argues that balance is actually harmful and that good scorecards will be ————————————————————————————————————————————————————————————————-.
necessary
Art Schneiderman
Analog Devices
unbalanced, containing mostly non-financial, internal, leading, short-term measures.
Within the framework of the balanced scorecard, Kaplan and Norton proposed?
the use of strategy maps (or success maps) to understand how the goals of performance affect the top-level objectives.
Figure 14: Corporate Strategy Map
Figure 14: Corporate Strategy Map
Figure 14: Corporate Strategy Map
Figure 14: Corporate Strategy Map
A success map (see above) clearly demonstrates:
non-financial,
internal,
leading,
short-term measures
and long-term measures
short-term measures such as?’
employee development or employee satisfaction and how they affect financial, external, lagging.
and long-term measures such as?
return on capital employed or profit growth.
On a single piece of paper, a success or strategy map provides?
a model of the performance of the organization which covers all aspects of the organization’s strategy.
To conclude this section on the theoretical description of the balanced scorecard, the following table gives an overview of the strength and weaknesses of this approach.
Table 7: Strengths and Weaknesses of Balanced Scorecard
Table 7: Strengths and Weaknesses of Balanced Scorecard
Table 7: Strengths and Weaknesses of Balanced Scorecard
Case Study on Balanced Scorecard
To illustrate the application of the balanced scorecard, we conclude this unit with a simple case study. The Fly High Airline Inc. plans to review its strategy as a regional airline.
After a workshop, the top management agrees to the following overarching mission and vision of the company:
Mission:
Vision:
Mission:
Dedication to the highest quality of customer service delivered with a sense of warmth, friendliness, individual pride, and company spirit.
Vision:
Continue building on the unique position as the only short-haul, low-fare, high-frequency, point-to-point carrier in Central Europe.
The next step after formulating the mission statement and vision of the organization is to ?
build a strategy map.
The strategy map is supposed to identify the main drivers for?
increased profitability across the four perspectives of the balanced scorecard.
The strategy team identifies the following drivers and connections:
Increased profitability can be achieved by lower costs and higher revenues.
An internal study and comparison with competitors has shown that there is huge potential to lower costs by improving the turnaround time of landing and departure. This requires training and faster passenger processing by the ground crew.
An improved turnaround time also aims at more on-time flights making the airline more attractive for business travelers and, in turn, increasing the revenues.
Some of the savings from the improved turnaround time can be passed on to the customers by lower prices. Lower prices will attract more customers which will increase revenue.
Once the main drivers are identified, a strategy map can be drawn, which involves ?
assigning the main drivers to their corresponding perspective.
The next step includes deriving appropriate performance measures and targets per perspective.
=Financial perspective:
=Customer perspective:
=Internal perspective:
=Internal perspective:
Financial perspective:
The objective of increasing the organization’s profitability is consistent with the performance measure and overall goal of increasing the company’s market value. An increase in revenues can be measured by seat revenue. Since plane lease costs are the main cost driver, this is an appropriate measure to lower costs.
Customer perspective:
The degree of on-time flights can be measured on time arrival ratings provided by airline industry associations (benchmarking). Additionally, customer ratings help to identify customer satisfaction. The number of customers measures the goal of serving more customers.
Internal perspective:
The main target of this perspective is to improve turnaround time. The success can be measured by on-ground time and percentage of on-time departure.
