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WEEK 12. CONTEMPORARY APPROACHES TO MEASURING AND MANAGING PERFORMANCE. WHY MEASURE PERFORMANCE. Communication Comparison Problems Evaluation & rewards Future strategies.

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week 12
WEEK 12

CONTEMPORARY APPROACHES TO MEASURING AND MANAGING PERFORMANCE

AF201 Lecture - S2, 2008

why measure performance
WHY MEASURE PERFORMANCE
  • Communication
  • Comparison
  • Problems
  • Evaluation & rewards
  • Future strategies

AF201 Lecture - S2, 2008

slide3
A Conventional accounting system assigns responsibility to organizational units and expresses performance measures in financial terms.

CONVENTIONAL ACCOUNTING SYSTEMS

It is the performance measurement system that was developed when most firms were operating in relatively stable environments.

AF201 Lecture - S2, 2008

conventional performance measures
CONVENTIONAL PERFORMANCE MEASURES
  • Not actionable
  • One perspective
  • Limited guidance
  • Dysfunctional

AF201 Lecture - S2, 2008

contemporary performance measurement systems
CONTEMPORARY PERFORMANCE MEASUREMENT SYSTEMS
  • Various measures
  • Strategic orientation
  • Benchmarks
  • Continuous improvement

AF201 Lecture - S2, 2008

advantages
ADVANTAGES
  • Value drivers
  • Actionable
  • Understandable

AF201 Lecture - S2, 2008

problems
PROBLEMS
  • Too many
  • Ad-hoc
  • Trade-offs
  • No integrity
  • Financial outcomes

AF201 Lecture - S2, 2008

slide8

Strategy-

Based Performance Measurement System

A strategic-based performance measurement system(Balanced Scorecard) translates the mission and strategy of an organization into operational objectives and measures for four different perspectives:

The financial perspective

The customer perspective

The process perspective

The infrastructure (learning and growth) perspective

AF201 Lecture - S2, 2008

slide10

Gain- Sharing

Process Measures

Financial Measures

Customer Measures

Infrastructure Measures

Link to Strategy

Customer

Financial

Process

Infrastructure

Communica-tion Strategy

Balanced Measures

Performance Measures Are Established

Alignment of Objectives

Performance Is Measured

Promotions

Individuals Are Rewarded Based on Multidimensional Performance

Bonuses

Salary Increases

Responsibility Is Defined

AF201 Lecture - S2, 2008

slide11

Strategy, according to Robert Kaplan and David Norton, is defined as

“. . . choosing the market and customer segments the business unit intends to serve, identifying thecritical internal and business processes that the unit must excel at to deliver the value propositions to customers in the targeted market segments, and selecting the individual and organizational capabilities required for the internal, customer, and financial objectives.”

AF201 Lecture - S2, 2008

slide12

Financial

Infrastructure

Customer

Process

Objectives

Strategy-Translation Process

Measures

Targets

Initiatives

Vision and Strategy

AF201 Lecture - S2, 2008

financial perspective
FINANCIAL PERSPECTIVE
  • What the shareholder thinks?
    • financial outcomes
    • range of measures

AF201 Lecture - S2, 2008

customer perspective
CUSTOMER PERSPECTIVE
  • How does the customer see us?
    • Outcome (lag) measures
    • Lead indicators

AF201 Lecture - S2, 2008

internal business processes
INTERNAL BUSINESS PROCESSES
  • What must we excel at?
    • Specific processes
    • Core competencies
    • Productivity and service
    • Product design and development
    • Competitive advantage

AF201 Lecture - S2, 2008

learning and growth
LEARNING AND GROWTH
  • How can we improve?
    • Growth and improvement
    • Technology leadership
    • IT capabilities
    • Employee capabilities
    • Employee satisfaction & training
    • Time-to-market

AF201 Lecture - S2, 2008

summary of objectives and measures financial perspective
Summary of Objectives and Measures:Financial Perspective

ObjectivesMeasures/Indicators

Revenue Growth:

Increase the No. of new Percentage of revenue products from new products

Create new applications Percentage of repeat customers

Develop new customers and Percentage of revenue markets from new sources

Adopt a new pricing strategy Product and customer profitability

AF201 Lecture - S2, 2008

slide18

Objectives Measures

Cost Reduction:

Reduce unit product cost Unit product cost

Reduce unit customer cost Unit customer cost

Asset Utilization:

Improve asset utilization Return on investment

Economic value added

AF201 Lecture - S2, 2008

slide19

Summary of Objectives and Measures:Customer Perspective

Objectives Measures/Indicators

Core:

Increase market share Market share (percentage of market)

Increase customer retention Percentage of repeat customers

Increase customer acquisition Number of new customers

Increase customer satisfaction Ratings from customer

surveys

AF201 Lecture - S2, 2008

slide20

Objectives Measures/Indicators

Performance Value:

Decrease price Price

Improve product quality Percentage of returns

Increase delivery reliability On-time delivery % Aging schedule

Improve product image and Ratings from customer

reputation surveys

AF201 Lecture - S2, 2008

slide21

Summary of Objectives and Measures:Process Perspective

Objectives Measures/Indicators

Innovation:

Increase the number of new Number of new products products vs. planned

Decrease new product Time to market (from start

development time to finish)

Break even time

AF201 Lecture - S2, 2008

slide22

Objectives Measures/Indicators

Operations:

Increase product quality Quality costs

Percentage of defective units

Increase process efficiency Unit cost trends

Output/input(s)

Decrease process time Production lead (cycle) time

AF201 Lecture - S2, 2008

slide23

Summary of Objectives and Measures:Learning and Growth Perspective

Objectives Measures/Indicators

Increase employee Employee satisfaction capabilities ratings

Employee turnover %

Employee productivity

(revenue/employee)

Hours of training

AF201 Lecture - S2, 2008

slide24

Objectives Measures/Indicators

Increase motivation and Suggestions per employee

alignment Suggestions implemented per employee

Increase information systems Percentage of processes capabilities with real-time feedback

capabilities

AF201 Lecture - S2, 2008

four perspectives
FOUR PERSPECTIVES
  • FINANCIAL PERSPECTIVE
  • CUSTOMER PERSPECTIVE
  • INTERNAL BUSINESS PROCESSES
  • LEARNING AND GROWTH

AF201 Lecture - S2, 2008

slide26

Increase Sales

Increase Profits

Increase Customer Satisfaction

Increase Market Share

Reduce Defective Units

Redesign Products

Quality Training

Infra-structure

Financial

Customer

Process

Testable Strategy Illustrated

AF201 Lecture - S2, 2008

measures indicators
MEASURES/INDICATORS
  • Lag indicators
    • Monitor progress
    • Indirect
    • Summary outcome measures
    • market share, customer satisfaction
  • Lead indicators
    • Drivers
    • Processes and activities

AF201 Lecture - S2, 2008

linking non financial measures to financial performance
LINKING NON-FINANCIAL MEASURES TO FINANCIAL PERFORMANCE
  • Why don’t they work sometimes?
    • Wrong critical success factors
    • Insufficient resources
    • Poor design

AF201 Lecture - S2, 2008

linking non financial measures to financial performance1
LINKING NON-FINANCIAL MEASURES TO FINANCIAL PERFORMANCE
  • Du Pont chart

AF201 Lecture - S2, 2008

slide30

Financial measures

KPIs (Lag Indicators)

KPDs (Lead Indicators)

No. of customers Average selling price Rev from top customers

No. of customer calls No of promotions Product Quality On-time delivery

Rev

Profit

Labour efficiency Quality of ore Power usage Absenteeism Cycle time Lost-time injuries

Labour costs per tonne % ore recovered Electricity per tonne Production costs as % of total cost

Costs

ROI

Inventory mgt policy Debtor mgt policy % assets idle Capacity utilisation

Inventory T/over Debtor collection days Fixed asset utilisation

Assets

AF201 Lecture - S2, 2008

slide31

Benchmarking uses best practices as the standard for evaluating activity performance.

AF201 Lecture - S2, 2008

benchmarking
BENCHMARKING
  • What is it?
  • External comparison

AF201 Lecture - S2, 2008

steps in the benchmarking process
STEPS IN THE BENCHMARKING PROCESS
  • What?
  • Partners?
  • Data ?
  • Goals?
  • Plans?

AF201 Lecture - S2, 2008

forms of benchmarking
FORMS OF BENCHMARKING
  • Internal
  • External
  • Public info
  • Industry Assn.
  • Stockbrokers
  • Consulting firms

AF201 Lecture - S2, 2008

inadequate performance measurement systems
INADEQUATE PERFORMANCE MEASUREMENT SYSTEMS
  • Performance profit 
  • Customers reaction
  • No one cares

AF201 Lecture - S2, 2008

inadequate performance measurement systems1
INADEQUATE PERFORMANCE MEASUREMENT SYSTEMS
  • Too much talk
  • Change
    • strategy - yes
    • measures - no

AF201 Lecture - S2, 2008

a good scorecard
A GOOD SCORECARD
  • Cause-and-effect
  • Communicate
  • What to emphasize?
  • Fewer is better
  • Trade-offs
  • Link to rewards

AF201 Lecture - S2, 2008

pitfalls
PITFALLS
  • Evolution
  • Seeking too much improvement
  • Subjective measures
  • Remember cost/benefits
  • Evaluate managers as well as units
  • Too many measures

AF201 Lecture - S2, 2008

effective performance measurement systems
EFFECTIVE PERFORMANCE MEASUREMENT SYSTEMS
  • Link to strategy and goals
  • Simple
  • Control
  • Positive vs Negative
  • Timely

AF201 Lecture - S2, 2008

effective performance measurement systems1
EFFECTIVE PERFORMANCE MEASUREMENT SYSTEMS
  • Benchmarking
  • Involvement
  • Not too many
  • Link to rewards

AF201 Lecture - S2, 2008

designing measures for continuous improvement
DESIGNING MEASURES FOR CONTINUOUS IMPROVEMENT
  • Continuous improvement
    • Relevant targets
    • Clear measures
    • Challenges

AF201 Lecture - S2, 2008

behavioural implications
BEHAVIOURAL IMPLICATIONS
  • Resistance
    • Fairness of measures
    • Punishment
  • Success
    • Widespread support
    • Not an ‘add on’
    • Rewards

AF201 Lecture - S2, 2008