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PERFORMANCE MEASUREMENT

Performance Measurement Systems


Goal of such systems is to implement strategy. A performance measurement system is simply a mechanism
that improves the likelihood that organization will implement its strategy properly These measures can be seen as current and future critical success factors. If they are improved, the company has implemented its strategy.

Limitations of Financial Control Systems: It may encourage short-term actions not in the companys long
term interests Business unit managers may not undertake useful long-term actions, in order to obtain short term profits, e.g. investments promising long-term benefits may not be undertaken

Limitations of Financial Control Systems

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. For eg. Managers may choose accounting methods that may choose from future earnings to meet current period targets. General observations:
A single measure cannot control a complex system and too many critical measures make the system uncontrollably complex. Companies have used financial & non-financial measures in the past Non-financial measures have been used at lower levels in the organization for task control and financial measures at higher organization at all levels for management control

Performance Measurement Systems


General Considerations: this system has a series of measures to provide information about operation of many different processes e.g. equity of company, inventory level of finished goods etc. all these measures have implicit interactions & changes in one reflect changes in another Balanced Scorecard Approach: business units must be assigned goals and then measured from the following four perspectives:

Performance Measurement Systems


Financial e.g. profit margin, cash flow Customer e.g. market share, customer satisfaction Internal business e.g. employee skills Innovation and learning e.g. new product research in creating balanced scorecard, executives must choose a mix of measurements that: accurately reflect critical factors for the company show relationships among individual measures provide a broad-based view of current status of the company

Performance Measurement Systems


Additional Considerations: outcome and driver measures: Outcome lagging indicators indicate results of a strategy e.g. revenue from new product Driver leading indicators progress of key areas in implementing a strategy e.g. R & D cost by focusing management attention on key aspects of business, drivers affect behaviour in the firm financial and nonfinancial measures: sophisticated systems have developed to measure financial performance

Performance Measurement Systems


even though nonfinancial measures are seen as important, many organisations have failed to incorporate them into their executive-level performance reviews internal and external measures: Companies must strike a balance between external measures like customer loyalty and internal measures like manufacturing efficiency measurements drive change: Organisation achieves goal congruence by linking overall financial objectives with lower-level areas

Performance Measurement Systems


as various measures are explicitly tied to an organisations strategies, they should be strategyspecific in scorecard and therefore organisation specific scorecard measures are linked from top to bottom and tied to specific targets throughout entire organisation scorecard emphasizes idea of cause-and-effect relationships among measures scorecard measure relationships should be understood in a better way for firms success

Performance Measurement Systems


Key Success Factors: Customer-focused key variables: Bookings Back orders Market share Key account orders Customer satisfaction Customer retention Customer loyalty

Performance Measurement Systems


Key Variables related to Internal business processes: capacity utilisation on-time delivery inventory turnover quality cycle time: it is equal to = processing time+storage time+movement time + inspection time Progress can be measured by observing ratio of process time to cycle time

Performance Measurement Systems


Implementing a Measurement System: define strategy process of defining a scorecard begins by defining organisations strategy define measures of strategy integrate measures into management system review measures and results frequently ensure successful implementation of strategy show management seriousness about measures keep measures aligned to ever-changing strategies

Performance Measurement Systems


ensure that measurements are improved Difficulties in implementing system: poor correlation between nonfinancial measures and results fixation on financial results measures are not updated measurement overload difficulty in establishing trade-offs scorecards need to assign explicit weights across measures to establish such trade-offs

Performance Measurement Systems


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
Its main objective is to facilitate creation of a learning organisation In industries that are subject to very rapid environmental changes, management control information can also provide basis for thinking about new strategies; this is interactive control there is a fundamental difference between critical success factors and strategic uncertainties Interactive controls alert management to uncertainties, either troubles like complaints or opportunities like a new market

Interactive Control
It has the following characteristics: 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 organisation focus attention on information produced by system superiors, subordinates and peers meet face-toface to interpret and discuss implications of the information for future strategic initiatives

Interactive Control
face-to-face meetings take the form of debate and challenge of underlying data, assumptions and appropriate actions Firms should monitor following technological discontinuities: internet an e-commerce growth have potential implications for many firms emergence of ubiquitous point-and-click interfaces based on open standards increasing power of computing and communication technologies

Interactive Control
growth in mobile communications for both voice telephony and internet access development and deployment of speech recognition and machine-based language translation technologies convergence technologies will have effects such as blending of hardware and software, integration of chemical and digital technologies etc. miniaturization can provide opportunities for firms in consumer electronics and appliances shifts from physical goods to services

Interactive Control
Following discontinuities have potential to create new opportunity due to globalisation: liberalisation, deregulation and privatisation have potential to create huge new customer segments in emerging markets like India & China new competitors from emerging markets may become global players in the future interactive control information usually, but not exclusively, tends to be nonfinancial interactive controls are an integral part of the management control system

Interactive Control
Subsystem should satisfy following conditions before being used as an interactive system: data contained in the subsystem should be unambiguous & simple to understand & interpret the subsystem must contain data on strategic uncertainties data in subsystem should help the firm to develop new strategies Mittal Steel wants to expand its customer reach across the world, necessary data has to be collected

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