Chapter 11: Performance MeasurementThe goal of PF is to implement strategy, therefore must select systems that best reflect

strategy. There is always a need for short-term/ongoing feedback to managers which

contradicts the fact that short-term focus tends to erode long-term shareholder value. Relying

solely on financial measures can be dysfunctional to the organiation for four reasons!

". Errors of commission: #ncourages short-term actions $costly actions that are good in

the short run to ma%imie profits/bonuses&

'. Errors of omission: (ot undertake useful long-term actions $in order to obtain short-

term profits, e.g. not doing sufficient R)*&

+. Distorted communication: setting targets they can easily meet which leads to

erroneous planning data, reluctant to admit that they will miss their targets etc.

. Data manipulation: orrow from future earnings, falsify data $cf. article&.

Therefore, one needs to use multiple measures at all levels in the organiation. istorically,

non-financial measures $leading indicators of future performance& have been used at lower

levels in the organiation $task control& and financial at higher $management control&.

Framework for designing a reward system

 

The Balanced Scorecardusiness units should be assigned goals and be measured from the following perspectives

$that each addresses an aspect of the companys strategy&!

Financial

0nternal business

0nnovation and learning

1ustomer 

Fosters balance to achieve goal congruence, encouraging employees to act in the companys

 best interest. 0t helps the companys focus, improves communication, sets organiational

ob2ectives and provides feedback on strategy $cf 3aplan ) (orton $"445&&. #%ecutives must

choose a mi% of measures that!

". 6ccurately reflect the critical factors that will determine the success of the companys

strategy

7ophia 7kogetun, '889-"8-": "

strategy

;hat

counts, gets

measured

;hat gets

measured,

gets done

;hat gets

done, gets

rewarded

;hat gets

rewarded,

really counts

 

'. 7how the relationships among the individual measures in a cause-and-effect manner

$show how short-term affect long-term& and

+. Provide a broad-based view on the current status of the company.

A blend of different strategic measures<to address the need of different stakeholders!

Outcome and driver measures! =utcome measures/lagging indicators tell whats

happened. *river measures/leading indicators show the progress of key areas in

implementing a strategy. These are ine%tricably linked.

Financial and nonfinancial measures! many organiations have failed to incorporate

nonfinancial measures into their performance reviews because they are less sophisticated

than financial measures.

Internal and external measures! needs balance between e%ternal $customer& and internal

$manufacturing&.

Measurements drive change! most important aspect is the systems ability to measure

outcomes and drivers that direct the company towards its strategies.

>easures must be<

7trategy- and organiation specific

?inked from top to bottom $tied to specific targets and clarified by ob2ectives&

7how cause-and-effect relationships

<and measures should not be a laundry list, but linked together. Relationships must be

understood

Process for implementing a performance measurement system (iterativeprocess:". Define strategy: 71 is a link between strategy and operational action. Single industry

 firm! should be developed at the corporate level and cascaded down. Multi-business firm!

should be developed at the business unit level and aggregated in a corporate-wide 71.

'. Define measures of strategy: focus on a few, linked measures that support the strategy.

=ne single measure is not sufficient, and too many measures make the system too

comple%. y making trade-offs, the manager can choose btw behaviours that benefit the

short- or long-term success.

3. Integrate measures into the management system

. Revie measures and results fre!uently: to be able to revise the strategy. >ost

important, the reviews should i& tell how and whether the strategy is working, ii& show

that the measures are really important, iii& keep the measures aligned and iv& improve

measurement.

7ophia 7kogetun, '889-"8-": '

 

Possible implementation problems<which could limit the usefulness!

"oor correlation #eteen nonfinancial measures and results: hard to determine the

cause-effect relationships/pro%y measures for nonfinancial ob2ectives.

Fixation on financial results: < due to short-term pressure. This overwhelms the long-

term, uncertain payback of nonfinancial measures. 6n incentive system that only rewards

financial results creates additional pressure.

Measures are not updated

Measurement overload $"@%@98&

Difficulty in esta#lishing trade$offs! could give weights to the individual measures in the

71. ;ithout them, it is more difficult to establish trade-offs between financial and non-

financial measures.

!nteractive control"#earning organi$ations0n industries that are sub2ect to rapid environmental changes, it is important that the

organiation can continuously adapt to the changes through interactive controlsA a way of

using the management control system as a source of information. 0nteractive controls alert

management to strategic uncertainties, which forms the basis for managers to adapt to the

changing environment by creating new business models. #%amples are technological

discontinuities $internet, e-commerce growth, shifts from physical goods to services<& and

globaliation discontinuities $deregulation, competition moving freely across borders<&.

Chapter 1%: Service &rgani$ations>1 differs in service organiations from manufacturing organiations!

6bsence of an inventory buffer between production and sales

*ifficulty of measuring Buality

?abor intensive

Professional service organiations!

 (o dominant goal of return on assets employed

ehavioural characteristics do not include attention to costs

=utput measures are sub2ective

 (o clear line between marketing and production

Performance appraisal by peer revivews which are sub2ective

Financial services organiations!

Raw material is money C the value in each unit of money in inventory is the same for all

organiations $cost of using money of course varies&

Profitability cannot be measured until several years after a commitment has been made C

continual periodic audits are necessary

ealthcare organiations!

1urrent control and deliver system is unworkable. 1osts cannot be standardied.

 (onprofit organiations!

1annot use the profit measure for control but must account for contributed capital instead

#%penditure decisions are sub2ective $are becoming more effective due to shrinking

sources of funds&

7ophia 7kogetun, '889-"8-": +