Nonfinancial and Multiple Measures of Performance

Chapter 18

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Learning ObjectivesL.O. 1 Explain why companies use nonfinancial performance measures.

L.O. 2 Recognize the reasons why performance measures differ acrosslevels of the organization.

L.O. 3 Understand when the use of a single measure or multiplemeasures of performance is appropriate.

L.O. 4 Understand how the balanced scorecard helps organizationsrecognize and deal with their opposing responsibilities.

L.O. 5 Understand how to apply the methods involved in an effectiveperformance measurement system.

L.O. 6 Identify examples of nonfinancial performance measures anddiscuss the potential for improved performance resulting fromimproved activity management.

L.O. 7 Explain why employee involvement is important in an effectiveperformance measurement system.

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Beyond the Accounting Numbers

L.O. 1 Explain why companies use nonfinancial performance measures.

Problems with financial measures:

• Often not useful in identifying the causeof operational problems

• Commonly reported only on a monthly,quarterly, or annual basis

• Many people in the organization do not seehow their work translates into financial results.

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Nonfinancial MeasuresLO1

• Nonfinancial measures direct employees’attention to those things they control.

• In the case of a desk clerk at a hotel, measuringthe clerk's performance in terms of customersatisfaction would be meaningful

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Organization Environmentand Business Strategy

LO1

• Mission:Organization’s purpose

• Mission statement:Description of an organization’s values,definition of its responsibilities to stakeholders,and identification of its major strategies

• Business level strategy:Organization’s plan to compete in eachof its businesses

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Responsibilities Accordingto Level of Organization

L.O. 2 Recognize the reasons why performancemeasures differ across levels of the organization.

• Stakeholders:Groups or individuals, such as employees, suppliers,customers, shareholders, and the community, whohave a stake in what the organization does.

• Business model:Description of how different levels and employees inthe organization must perform for the organizationto achieve its goals.

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Business ModelLO2

BranchLeadership

SatisfyEmployees

ExcellentAdvisers

EfficientOperations

BuildKnowledge

ActEthically

SatisfyCustomers

BuildRevenues

ControlCosts

ReturnProfits

JYC InvestmentsBusiness Model

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Multiple Measures or aSingle Measure of Performance?

L.O. 3 Understand when the use of a single measure ormultiple measures of performance is appropriate.

Single Measure

Profit

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Multiple Measures or aSingle Measure of Performance?

LO3

Multiple Measures

Employee satisfaction

Employee learning

Branch costs

Customer satisfaction

Regulatory violations

Branch profitability

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Balanced Scorecard

L.O. 4 Understand how the balanced scorecard helps organizationsrecognize and deal with their opposing responsibilities.

• Balanced scorecard:Set of performance targets and results that showhow well an organization has performed in meetingits objectives relating to its stakeholders

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Four BalancedScorecard Views or Perspectives

Financialperspective

Customerperspective

Internalbusiness

processesperspective

Learningand growthperspective

Strategy

LO4

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Four BalancedScorecard Views or Perspectives

LO4

• Many, if not most, organizations includethe four perspectives listed here.

Objectives

Measures

Targets

Initiatives

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Four BalancedScorecard Views or Perspectives

Financial To succeedfinancially, how

should weappear to our shareholders?

• Increased revenues• Reduced costs

Customer To achieve ourmission how shouldwe should appearto our customers?

• Relationships• Timeliness

Crown Castle's scorecard includes the following:

LO4

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Four BalancedScorecard Views or Perspectives

Internal To satisfy ourshareholders and

customers, in whatbusiness processwe must excel?

• Reduce cycle time• Manage projects

Learningand

Growth

To achieve our missionhow will we sustain our ability to change

and improve?

• Employee satisfaction• Improved global knowledge• Promote career development

Crown Castle's scorecard includes the following:

LO4

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Strategy MapLO4

FinancialPerspective

Addcustomers

Improvereturn

Growrevenue

Satisfycustomers

Reduceerrors

Controlcosts

Improveefficiency

Buildknowledge

Developleaders

Satisfyemployees

CustomerPerspective

InternalBusiness

Perspective

Learningand GrowthPerspective

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Continuous Improvementand Benchmarking

L.O. 5 Understand how to apply the methods involved inan effective performance measurement system.

• Continuous improvement:Continuous reevaluation and improvement ofthe efficiency of the organization’s activities.

• Benchmarking:Continuous process of measuring a company’sown products, services, and activities againstcompetitors’ performance.

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Nonfinancial MeasuresL.O. 6 Identify examples of nonfinancial performance measures

and discuss the potential for improved performanceresulting from improved activity management.

Customer Satisfaction Measures

Quality control

Delivery performance

Bookings and purchase orders

Market share

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Nonfinancial MeasuresLO6

• Quality control:Increase customer satisfaction.

• Delivery performance:Deliver goods and services when promised.

• Bookings and purchase orders:A decrease in booking and purchase orderssends a signal to management to devotemore marketing effort to sales.

• Market share:If the market is growing faster than the company'ssales, the company is, in effect, experiencing adecline in sales.

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Nonfinancial MeasuresLO6

• Functional performance measures keep processesefficient and effective.

• Manufacturing cycle time:Time involved in processing, moving, storing, andinspecting products and materials.

• Manufacturing cycle efficiency:Measure of the efficiency of the total manufacturingcycle; equals processing time divided by themanufacturing cycle time.

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Nonfinancial MeasuresLO6

Productivity• Productivity focuses on the efficient

conversion of inputs into outputs.

• Partial productivity measuresexpress the relation betweenoutput and only one input.

Output (quantity or value)Single input such as labor (quantity or value)

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Nonfinancial MeasuresLO6

Productivity• Total factor productivity:

the ratio of the value of outputto the value of key inputs

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Employee InvolvementL.O. 7 Explain why employee involvement is important

in an effective performance measurement system.

Why employee involvement?

• Many managers believe that when workerstake on real decision-making authority, theircommitment to the organization and itsobjectives increases.

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Employee Involvement

Why employee involvement?

• When decision-making responsibility lieswith workers closer to the customer, workersare more responsive to customer concernsand can make informed decisions.

LO7

• Giving decision-making responsibility toworkers uses their skills and knowledge andmotivates them to further develop those skillsand knowledge in an effort to improve theorganization’s performance.

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Employee InvolvementLO7

• For effective employee involvementthe evaluation system must:

Convey the organization’s objectivesand critical success factors

Promote goal congruence

Be applied consistently and accurately

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Difficulties in Implementing Nonfinancial Performance Measurement Systems

LO7

• Fixation on financial measures

• Reliability of nonfinancial measures

• Lack of correlation between nonfinancialmeasures and financial results

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End of Chapter 18

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin