Chapter-9

Strategic Performance Measures in Private Sector

Key Concepts

• CSFs & KPIs: Critical Success Factors (CSFs) are the essential areas where a business must excel to
achieve its objectives (e.g., product quality, customer service). Key Performance Indicators (KPIs) are the
speci c, measurable metrics used to track performance within these CSFs (e.g., defect rate, customer
retention percentage).

• Responsibility Accounting: This links performance measurement directly to organizational structure. It

holds managers accountable for the results of their speci c units (responsibility centers), which can be
designated as cost, revenue, pro t, or investment centers.

• Financial Measures: These are traditional metrics like Return on Investment (ROI), Residual Income (RI),
and Economic Value Added (EVA). While useful for assessing pro tability, they often focus on historical
data and can encourage short-term thinking if used in isolation.

• Balanced Measurement Frameworks: Models like the Balanced Scorecard and Triple Bottom Line
integrate crucial non- nancial indicators—such as customer satisfaction, innovation, and environmental
impact—with nancial ones to provide a more holistic and forward-looking view of performance.

Core Insights

• Relying only on nancial metrics is insuf cient for achieving long-term, sustainable success.

• Excessive focus on measures such as ROI can lead to goal incongruence.

• Goal incongruence occurs when managers optimize for their own division’s performance while harming
overall company performance.

• Example: A manager may reject a pro table project because it would reduce the division’s average ROI, even
though it bene ts the company.

• Non- nancial factors—such as customer loyalty, process ef ciency, and employee skill development—are
critical drivers of future nancial performance.

• These non- nancial measures act as leading indicators, predicting long-term nancial outcomes.

• An effective performance measurement system connects high-level strategy to concrete operational metrics.

• Such alignment ensures that what is measured directly supports and drives the organization’s strategic
objectives.

Financial and Non- nancial indicators

A. The Balanced Scorecard:

• The Balanced Scorecard is a performance management framework developed by Kaplan and Norton.
• It converts an organization’s vision and strategy into actionable and measurable targets.
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 • The framework evaluates performance using four strategic perspectives to provide a holistic view:
- Financial Perspective: Focuses on how the organization appears to shareholders, with measures such
as revenue, pro tability, and earnings.

- Customer Perspective: Examines how customers perceive the organization, emphasizing target
segments and value propositions like satisfaction, quality, and on-time delivery.

- Internal Business Perspective: Identi es the internal processes and activities the organization must
excel at to meet customer and shareholder expectations.

- Learning and Growth Perspective: Concentrates on continuous improvement and value creation
through employee capabilities, information systems, and organizational procedures.

• The Balanced Scorecard promotes strategic balance by:

- Combining nancial and non- nancial measures.
- Integrating internal and external performance dimensions.
- Linking long-term strategic goals with short-term operational objectives.

• It helps prevent short-termism by:

- Giving importance to non- nancial measures.
- Discouraging decisions that in ate short-term pro ts but harm long-term sustainability, such as
reducing R&D or employee training.

• The framework is built on a cause-and-effect chain:

- Learning and growth improvements enhance internal processes.
- Strong internal processes improve customer satisfaction.
- Higher customer satisfaction leads to improved nancial performance.

• Key implementation steps include:

- Clarifying the organization’s vision and strategy.
- Identifying Critical Success Factors (CSFs) for each perspective.
- De ning relevant Key Performance Indicators (KPIs).
- Developing action plans to achieve targets.

• Common challenges and reasons for failure include:

- Senior leadership delegating implementation entirely to middle management.
- Copying performance measures from other organizations instead of designing context-speci c ones.
- Using the scorecard only for external reporting rather than as an active internal management tool.

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 B. Performance Pyramid

• The Performance Pyramid, also known as the Strategic Measurement Analysis and Reporting
Technique (SMART), was proposed by F. Cross and R. L. Lynch in 1989.

• It is a performance management framework designed to connect high-level corporate strategy with day-
to-day operational activities.

• The framework follows a four-level hierarchical structure that translates vision into action:

◦ Level 1 – Corporate Vision: De nes how the organization plans to achieve long-term success and
competitive advantage.

◦ Level 2 – Business Units / SBUs: Focuses on achieving Critical Success Factors (CSFs) related to
market positioning and nancial performance.

◦ Level 3 – Business Operating Systems: Emphasizes strategic objectives such as customer

satisfaction, exibility, and high productivity.

◦ Level 4 – Operations: Tracks speci c operational measures like quality, delivery, cycle time, and
waste reduction.

• The Performance Pyramid operates through a bidirectional ow of information:

◦ Strategic objectives ow top-down, from corporate vision to operational activities.

◦ Performance measures ow bottom-up, from operations back to strategic decision-making.

• The model balances internal and external perspectives:

◦ External Effectiveness (left side): Focuses on non- nancial measures such as customer needs and
market share.

◦ Internal Ef ciency (right side): Focuses mainly on nancial performance, productivity, and
resource utilization.

• A key strength of the framework is the linkage of nancial and non- nancial measures:

◦ Improvements in operational non- nancial metrics (e.g., exibility or quality) strengthen market
position.

◦ A stronger market position ultimately leads to improved nancial performance.

• The primary limitations of the Performance Pyramid include:

◦ Narrow stakeholder focus, concentrating mainly on shareholders and customers.

◦ Potential con icts among internal performance measures, which can complicate decision-making.

C. Building Block Model

• The Building Block Model is a performance management framework proposed by Fitzgerald and Moon.

• It was designed primarily for the service industry, but is also applicable to manufacturing and retail
organizations.

• The model focuses on linking corporate strategy with the effective management of human resources.

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 • The framework is built around three core building blocks:

• Dimensions (The Goals)

◦ Dimensions represent the Critical Success Factors (CSFs) of the organization.

◦ They are divided into two categories:

▪ Determinants: Internal drivers of performance, including:

▪ Quality: Consistency and ability to meet customer needs.

▪ Flexibility: Responsiveness to changes in demand or environment.

▪ Innovation: Development of new products, services, or processes.

▪ Resource Utilization: Ef cient use of assets and resources.

▪ Results: External outcomes that re ect overall success:

▪ Financial Performance: Monetary indicators of organizational health.

▪ Competitive Performance: Performance relative to competitors.

• Standards (The Performance Measures)

◦ Standards act as Key Performance Indicators (KPIs) used to measure the dimensions.

◦ Effective standards must have three characteristics:

▪ Equity: Measures should be equally challenging across the organization to ensure fairness.

▪ Ownership: Employees should participate in setting measures so they feel responsible for
outcomes.

▪ Achievable: Targets must be realistic to maintain employee motivation.

• Rewards (The Incentives)

◦ This block ensures employees are motivated to meet performance standards.

◦ An effective reward system should be:

▪ Clear: Well-communicated so employees know what is rewarded and how.

▪ Controllable: Employees should only be accountable for results they can in uence.

▪ Motivating: Incentives should encourage goal achievement, such as bonuses linked to

sales growth.

• Strategic Importance

◦ In service organizations, human resources are the primary source of value creation.

◦ The Building Block Model explicitly links strategy to HR management.

◦ It ensures employees are motivated through clear, fair, and controllable targets, enabling them to
deliver the organization’s strategic vision effectively.
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 D. The Triple Bottom Line (TBL)

• The Triple Bottom Line (TBL) is a performance management framework coined by John Brett
Elkington in 1994.

• It emphasizes that businesses should focus on sustainability, not just pro tability.

• TBL expands traditional nancial reporting to include social and environmental performance.

• The framework is built around three core dimensions, known as the 3Ps:

◦ Pro t (Economic Bottom Line)

▪ Focuses on traditional nancial measures.

▪ Aims at maintaining or improving value creation for shareholders.

◦ People (Social Equity Bottom Line)

▪ Addresses corporate governance, ethics, and human rights.

▪ Includes employee motivation, health and safety, and human capital development.

◦ Planet (Environmental Bottom Line)

▪ Measures the organization’s environmental impact and ecological footprint.

▪ Tracks effects on air, water, land, and overall emissions.

• Sustainability and Decision Making

◦ TBL transforms conventional accounting into sustainability reporting.

◦ A business decision is considered truly sustainable only if it satis es all three bottom lines
simultaneously.

◦ Decisions meeting only two dimensions are classi ed as:

▪ Bearable: Acceptable for People and Planet, but not for Pro t.

▪ Equitable: Acceptable for People and Pro t, but not for Planet.

▪ Viable: Acceptable for Planet and Pro t, but not for People.

• Strategic Importance

◦ TBL promotes a stakeholder-oriented approach rather than a narrow shareholder focus.

◦ It encourages managers and divisions to act responsibly using a holistic perspective.

◦ The framework acts as a broad substitute for full cost accounting by capturing wider impacts.

◦ Many organizations now publish sustainability reports based on these dimensions, often aligned
with Global Reporting Initiative standards.

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