Performance

Measurement
Chapter 11
Performance Measurement
System
• Objective – To implement strategy
• “A performance measurement system is a mechanism that
improves the likelihood the organization will implement its
strategy successfully”
• Strategy defines the critical success factors, if those factors
are measured and rewarded, people are motivated to achieve
them
Performance Measurement
System
• Framework for designing performance measurement system:
What gets
measured,
gets done

What counts,
gets What gets
Strategy done, gets
measured
rewarded

What gets
rewarded,
really counts
Limitations of Financial control
systems
• It encourages short term actions that are not in the company’s
long term interest
• Errors of commission
• Manager may not take useful long-term actions to obtain short
term profits.
• Errors of omission
• Using short-term profits as sole objective can distort
communication between a business unit manager and senior
management
• Tight financial control may motivate managers to manipulate
data.
• Falsifying data
General Considerations
• A single measure cannot control a complex system and too
many critical measures make the system uncontrollably
complex.
Balanced Scorecard Approach
• It is a performance measurement system
• In creating balanced scorecard, executives must chose a mix of
measurement that:
• Accurately reflect the critical success factors
• Show the relationship among the individual measures in a cause-
and-effect manner
• Provide a broad based view of current status of the company
Perspective of Balanced
Scorecard
• Revenue • Customer satisfaction
• Expenses • Customer retention
• Net income • Market share
• Cash flow • Brand strength
• Assets value

Financial Customer
Perspectiv Perspectiv
e e

Internal Learning /
Process Growth
Perspectiv Perspectiv
e e
•Inventory • Market innovation
•Orders • Continuous learning
•Resource allocation • Intellectual assets
•Cycle time
•Quality control
•Employee satisfaction
Additional Consideration
• Outcome and Driver measures:
• Outcome
• indicate result of strategy (eg. Increased revenue)
• Lagging indicators - tell what has happened
• Indicate only the final result

• Driver measures
• Leading indicators
• they show the progress of key areas in implementing a strategy
Eg. Cycle time
• Indicate incremental changes that ultimately affect “outcomes”
Additional Consideration
• Financial and non-financial measures:
• Organizations have developed many sophisticated systems to
measure financial performance
• But industries are being driven by Non-financial measures as well,
such as customer satisfaction, quality, innovation
• Non-financial measures eventually affect the financial
performance of the organization
Additional Consideration
• Internal and external measures:
• Companies too often sacrifice internal development for external
results or ignore external results altogether, mistakenly believing
internal measures are sufficient
• Companies must strike the balance between external measure
such as customer satisfaction, and measures of internal business
process, such as manufacturing productivity
• All the measures are interlinked i.e. nonfinancial measures
(product quality) drive financial measures(increased revenue)
Additional Consideration
• Measurements Drive Change:
• The important aspects is its ability to measures outcomes and
drivers in way that causes the organization to act in accordance
with its strategies.
Additional Consideration
• Cause effect relationships among measures
Perspectives Measures

Innovation and learning Manufacturing skills

perspective

First-pass yields
Internal business perspective Order cycle time

Customer perspective Customer satisfaction survey

Financial perspective Sales revenue growth

Key Success Factors
• Customer focused key variables
• Bookings

• Backorders

• Market share

• Key account orders

• Customer satisfaction

• Customer retention

• Customer loyalty
Key Success Factors
• Key variables related to internal business processes
• Capacity utilization

• On-time delivery

• Inventory turnover

• Quality

• Cycle time = process time + storage time + movement time +

inspection time
• Just-in-time – ideal ratio =1

• Process time / Cycle time

Implementing Performance
Measurement System
• Define strategy
• Single industry, multiple business & functional levels

• Define measures of strategy

• Focus on few critical measures cause & effect

• Integrate measures into the management system

• Integrate with formal/informal culture, structure

• Review measures and results frequently

Difficulties in implementing
PMS
• Poor correlation between nonfinancial measures and results
(cause effect)
• Fixation of financial results
• Measures are not updated (as strategies change)
• Measurement overload (losing focus)
• Difficulty in establishing trade off (assign weights)
Measurement Practices
• Type of measures:
• Financial, operating and customer satisfaction measures are
mainly included in regular reviews

• Quality of measures:
• Measures of employee performance and change& innovation
have generally been poorly defined and of poor quality

• Relationship of measures to compensation:

• Most of companies, according to survey, used innovation &
change measures for compensation
Interactive Control
• The primary role of management controls is to help execute
strategies.
• Control system as a strategy implementation tool:

Chosen Strategy

Critical success factors

Design and operation of MCS

Interactive Control
• Its main objective is to facilitate creation of a learning
organization.

Today’s Management Control

System

Tomorrow’s Strategies
Interactive Control
• It alert management to strategic uncertainties and, either
troubles or opportunities.

Strategic Uncertainties

Use of a subset of management control information

interactively

New strategies
Interactive Control
• Characteristics of IC
• Subset of management control information that has an effect on
strategic uncertainties facing business becomes the focal point
• Senior executives take information seriously
• Managers at all levels in organization focus attention on
information produced by system
• Superiors, subordinates and peers meet face-to-face to interpret
and discuss implications of the information for future strategic
initiatives
• Face-to-face meetings take the form of debate and challenge of
underlying data, assumptions and appropriate actions