Professional Documents
Culture Documents
Summary:
Performance
Measurement
&
Control
Systems
for
implementing
Strategy
Robert
Simons
(2000)
1.
2.
3.
4.
Customers
Suppliers
Substitute
products
New
entrants
Competitive
rivalry
Strategy
as
perspective
As
position
As
plan
As
patterns
of
actions
Mission
refers
to
the
broad
purpose
or
reason
that
a
business
exists.
Good
missions
inspire
and
provide
sense
of
direction
for
the
future
Chapter
3:
Organizing
performance
Organizational
structure
are
the
basic
building
blocks
of
the
organization,
the
grouping
of
the
people
into
work
units
and
the
working
relationships
among
these
group
that
collectively
comprise
a
business.
Two
reasons
to
impose
structure:
1. To
facilitate
work
flows
2. To
focus
attention
A
work
unit
represents
a
group
of
individuals
who
utilize
the
firms
resources
and
are
accountable
for
performance.
Two
types:
1.
Engaged
in
similar
work
process
and
2.
Focused
on
a
specific
market.
Accountability
defines
(1)
the
output
that
a
work
unit
is
expected
to
produce
and
(2)
the
performance
standards
that
managers
and
employees
of
that
unit
are
expected
to
meet.
Market
focus
are
found
in
three
basic
configurations:
1. Units
clustered
by
products
2. Units
clustered
by
customer
3. Units
clustered
by
geography
Clustering
units
by
function
or
market
brings
different
benefits
and
costs.
Managers
cluster
units
by
function
when
the
benefits
of
specialization
are
greater
then
the
benefits
of
market
responsiveness.
Span
of
control
indicates
how
many
(and
which)
subordinates
and
functions
report
to
each
manager
in
the
organization.
But
span
of
control
does
not
tell
us
what
they
are
accountable
for.
Span
of
accountability
describes
the
range
of
performance
measures
and
evaluates
a
managers
achievements.
Cost
centre
accountability:
managers
of
cost
centres
are
only
accountable
for
their
units
level
of
spending.
Profit
centre
accountable:
Broader
span
of
accountability.
Not
only
accountable
for
costs
but
also
for
revenues
and,
often,
for
assets
as
well.
Three
structural
design
levers
to
organize
business:
1. Work
units
2. Span
of
control
3. Span
of
accountability
These
design
levers
have
the
purpose
to
influence
the
Span
of
attention:
refers
to
the
domain
of
activities
that
are
within
a
managers
field
of
view.
Within
centralized
firms
managers
have
a
narrow
span
of
attention.
In
decentralized
firms
managers
have
a
wide
span
of
attention.
Chapter
4:
Using
information
for
performance
measurement
and
control
One
of
the
primary
purposes
of
performance
measurement
and
control
is
to
allow
fact-
based
management:
management
that
moves
from
intuition
and
hunches
to
analysis
based
on
hard
data
and
facts.
In
terms
of
implementing
strategy
the
information
is
of
two
types:
1. Information
about
progress
in
the
achievement
of
goals
2. Information
about
emerging
threats
and
opportunities.
Both
types
provide
useful
feedback
which
is
essential
for
conducting
and
update
SWOT
analysis
based
on
changing
competitive
dynamics
and
internal
capabilities.
Organizational
process
model
All
organizational
processes
can
be
decomposed
into:
input
process
output.
To
gain
control
over
this
process
the
following
things
are
needed:
1. A
standard
or
benchmark
which
to
compare
actual
performance
2. A
feedback
channel
to
allow
information
on
variances
to
be
communicated
and
acted
upon.
Managers
must
focus
their
performance
measurement
and
control
activities
on
either
the
transformation
process
itself
or
the
outputs
being
produced.
In
order
to
make
a
choise
the
following
four
criteria
must
be
considered:
1.
2.
3.
4.
Total
Quality
Management
(TQM)
is
a
approach
that
represents
the
standardization
and
streamlining
of
key
operating
processes
to
ensure
high
levels
of
quality
and/or
low
defect
rates.
Five
categories
of
information
purposes:
1.
2.
3.
4.
Decision
making
Control
Signalling
Education
and
learning
5. External
communication
The
profit
wheel:
Value
creation
is
measured
by
profit.
The
profit
plan
summarizes
the
expected
revenue
inflows
and
expense
outflows
for
a
specified
future
accounting
period.
Five
steps
for
creating
a
profit
plan
using
the
profit
wheel
as
illustrated
above:
1.
2.
3.
4.
5.
Forecasting
cash
needs
is
important
for
all
businesses
because
companies
have
limited
cash
reserves
and
borrowing
capacity.
The
most
intuitive
way
to
estimate
cash
requirements
is
to
forecast
the
cash
inflows
and
cash
outflows
for
each
specific
time
period.
Operating
cash
needed
during
a
period
=
cash
received
from
customers
-
cash
paid
to
suppliers
and
operating
expenses.
(direct
cash
flow
method).
To
estimate
cash
needs
over
longer
periods
of
time
companies
generally
use
the
indirect
method:
1.
2.
3.
4.
ROE
wheel:
Businesses
that
earn
the
most
profit
will
be
better
off:
they
have
more
resources
to
invest
in
future
opportunities,
they
will
be
able
to
pay
higher
dividends
to
investors,
their
stock
price
will
be
higher
and
their
cost
of
debt
will
be
lower.
The
single
most
important
measure
for
investors
is
the
Return
on
Investment
(ROI),
which
is
a
ratio
measure
of
the
profit
output
of
the
business
as
a
percentage
of
financial
investment
inputs.
If
we
adopt
the
perspective
of
managers
then
the
appropriate
internal
measure
for
return
on
investment
is
Return
on
Equity
(ROE).
To
calculate
the
ROE
wheel:
1. Calculate
the
overall
return
on
equity
ROE
=
Net
income
/
Shareholder
equity.
2. Estimate
the
asset
utilization
3. Compare
the
project
ROE
with
industry
benchmarks
and
investor
expectations
Managers
must
use
the
three
wheels
to
evaluate
the
economics
and
internal
consistency
of
each
of
these
strategies.
Chapter
6:
Evaluating
Strategic
profit
performance
To
analyse
profit
performance,
the
three
conditions
enumerated
in
chapter
4
must
be
present:
1. Ability
to
measure
outputs
2. Existence
of
a
predetermined
standard
of
performance
3. Ability
to
use
variance
information
as
feedback
to
adjust
inputs
and/or
process.
The
four
perspectives
of
the
balanced
scorecard
permit
a
balance
(1)
between
short
and
long-term
objectives
(2)
between
external
measures
for
shareholders
and
customers
and
internal
measures
for
critical
business
processes,
innovation
and
learning
and
growth
(3)
between
desired
outcomes
and
performance
drivers
of
those
outcomes
and
(4)
between
hard
objective
measures
and
softer,
more
subjective
measures.
The
balanced
scorecard
is
a
complement,
not
a
supplement,
for
an
organizations
other
performance
measurement
and
control
systems.
-
-
Interactive
control
systems
give
managers
freedom
to
concentrate
on
growing
the
business,
enhancing
profitability,
and
positioning
products
and
services
in
rapidly
changing
markets.
They
are
the
formal
information
systems
that
managers
use
to
personally
involve
themselves
in
the
decision
activities
of
subordinates.
They
provide
the
information
that
the
boss
pays
a
lot
of
attention
to
and
are
used
to
create
an
ongoing
dialogue
with
subordinates.
They
are
designed
by
how
managers
use
these
system.
To
focus
the
organization
on
these
strategic
uncertainties,
managers
chose
one
or
more
performance
measurement
and
control
systems
and
use
it
in
a
highly
interactive
way.
Strategic
uncertainties
are
the
emerging
threats
and
opportunities
that
could
invalidate
the
assumptions
upon
which
the
current
business
strategy
is
based.
By
focussing
on
strategic
uncertainties
managers
can
use
the
interactive
control
process
to
guide
the
search
for
new
opportunities,
stimulate
experimentation
and
rapid
response,
and
maintain
control
over
what
could
otherwise
be
a
chaotic
process.
An
interactive
control
system
is
not
a
unique
type
of
control
system:
any
control
system
can
be
used
interactively
by
senior
managers
if
it
meets
certain
requirements:
1. The
information
contained
in
an
interactive
control
system
must
be
simple
to
understand
2. Interactive
control
systems
must
provide
information
about
strategic
uncertainties
3. Interactive
control
systems
must
be
used
by
managers
at
multiple
levels
of
the
organization
4. Interactive
control
systems
must
generate
new
action
plans.
Factors
that
influence
the
choice
of
system
to
which
managers
devote
their
attention:
1.
2.
3.
4.
Technical
dependence
Regulation
Complexity
of
value
creation
Ease
of
tactical
response
Managers
choose
to
use
only
one
system
interactively
for
three
reasons:
(1)
economic,
(2)
cognitive
and
(3)
strategic.
Incentives
for
interactive
control
systems
must
be
designed
to
reward
an
individuals
innovative
effort
and
contribution.
This
can
only
be
done
by
subjective
assessment.
Subjective
rewards
yield
three
outcomes
that
help
organizational
learning:
1. Reward
contribution
and
effort
provides
incentives
for
employees
to
make
their
effort
visible
to
their
superiors
2. Rewarding
contribution
and
effort,
rather
than
result,
reduces
information
biasing
that
is
a
constant
concern
in
diagnostic
control
systems
2. The
can
assure
attention
to
gaol
achievement
through
a
formal
incentive.
That
is
a
reward
or
payment
that
is
expected
to
motivate
performance
(bonus
pool,
allocation
formula)
3. Types
and
mix
of
incentives
(gifts,
prizes,
awards
of
company
stock).
Chapter
12:
Identifying
strategic
risk
Strategic
risks
is
an
unexpected
event
or
set
of
conditions
that
significantly
reduces
the
ability
of
managers
to
implement
their
intended
business
strategy.
There
are
three
basic
sources
of
strategic
risk
that
potentially
affect
every
business:
1. Operations
risk,
results
from
the
consequences
of
a
breakdown
in
a
core
operating,
manufacturing
or
processing
ability.
Often
triggered
by
employee
errors.
2. Asset
impairment
risk,
an
asset
becomes
impaired
if
it
loses
a
significant
portion
of
its
current
value
because
of
a
reduction
in
the
likelihood
of
receiving
those
future
cash
flows.
a. Financial
impairment,
results
from
decline
in
market
value
b. Impairment
of
intellectual
property
rights,
unauthorised
use
of
intellectual
property
by
competitors
c. Physical
impairment
3. Competitive
risk,
results
from
change
in
the
competitive
environment
that
could
impair
the
businesss
ability
to
successfully
create
value
and
differentiate
its
products
or
services.
Franchise
risk
is
not
a
source
of
risk,
instead
it
is
a
consequence
of
excessive
risk
in
any
of
the
three
basic
risk
dimensions.
It
occurs
when
the
value
of
the
entire
business
erodes
due
to
a
loss
in
confidence
by
critical
constituents.
Many
of
the
pitfalls
of
risk
management
can
be
avoided
if
early
warning
systems
are
in
place
to
warn
managers
of
impending
problems.
Three
main
causes
of
risk:
Risk
due
to
growth,
risk
due
to
culture,
risk
due
to
information
management.
The
risk
exposure
calculator
analyses
the
pressure
points
inside
a
business
that
can
cause
strategic
risk
to
blow
up
into
a
crisis.
One
special
case:
misrepresentation
due
to
fraud
can
occur
when
three
conditions
exist
simultaneously:
1.
Pressure,
2.
Opportunity
and
3.
Rationalization
Chapter
13:
Managing
strategic
risk
Much
of
the
risks
that
are
described
are
caused
by
the
managements
use
of
aggressive
performance
goals
and
incentives
to
get
the
organization
up
to
speed,
just
like
a
driver
who
steps
hard
on
the
gas
pedal.
Strategic
risks
are
managed
primarily
by
communicating
effective
boundaries-
both
business
conduct
and
strategic
and
installing
good
internal
control
systems.
Core
values
are
the
beliefs
that
define
basic
principles,
purpose
and
direction.
They
are
needed
to
inspire
commitment
and
stimulate
engagement
in
the
right
type
of
activities.
Belief
systems
are
the
explicit
set
of
organizational
definitions
that
senior
managers
communicate
formally
and
reinforce
systematically
to
provide
basic
values,
purpose
and
direction
for
the
organization.
Basic
ways
for
controlling
human
behaviour:
1
telling
them
what
to
do.
2
Hold
people
accountable
for
outcomes.
Managers
must
go
one
step
beyond
missions
and
inspirational
beliefs:
they
must
install
brakes
by
clearly
communicate
to
all
employees
the
behaviour
and
opportunities
that
are
off-limit.
To
implement
strategy
successfully
managers
inspire
their
employees
to
maximize
effort
and
innovation
by:
(1)
creating
shared
beliefs
and
mission,
(2)
setting
challenging
goals,
(3)
linking
incentives
to
accomplishment
and
(4)
declaring
certain
actions
off-limit.
Three
categories
of
internal
controls:
1. Structural
safeguards,
are
designed
to
ensure
clear
definition
of
authority
for
individuals
handling
assets
and
recording
accounting
transactions
(i.e.
segregation
of
duties,
defined
levels
of
authorization,
physical
security
for
valuable
assets,
independent
audit).
2. System
safeguards,
are
designed
to
ensure
adequate
procedures
for
transaction
processing
as
well
as
timely
management
reports
(i.e.
accurate
record
keeping,
restricted
access,
timely
management
reporting).
3. Staff
safeguards,
are
designed
to
ensure
that
accounting
and
transaction
processing
staff
have
the
right
level
of
expertise,
training
and
resources
(i.e.
rotation
in
key
jobs,
adequate
expertise
for
accounting
and
control
staff).
Strategic
boundaries
implicitly
define
the
desired
market
position
for
business.
They
are
essential
to
achieve
maximum
performance
potential
but
any
static
strategy
is
doomed
to
failure
over
time.
The
brakes
must
be
adjusted
periodically
to
ensure
that
they
are
properly
aligned
with
changes
in
technology,
industry
dynamics
and
new
ways
of
creating
value
in
the
market
place.
They
are
often
communicated
as
part
of
a
formal
planning
process:
1.
2.
3.
4.
Chapter
14:
levers
of
control
for
implementing
strategy
Control
of
business
strategy
is
achieved
by
integrating
the
four
levers
of
belief
systems,
boundary
systems,
diagnostic
control
systems
and
interactive
control
systems.
The
power
of
these
levers
in
implementing
strategy
does
not
lie
in
how
each
is
used
alone,
but
rather
in
how
they
complement
each
other
when
used
together.
Strategy
can
be
described
as
a
plan,
a
pattern
of
actions,
a
product-market
position,
or
a
unique
perspective.
Intended
strategies
are
the
plans
that
managers
attempt
to
implement
in
a
specific
product
market
based
on
analysis
of
competitive
dynamics
and
current
capabilities.
Emergent
strategies
by
contrast
are
strategies
that
emerge
spontaneously
in
the
organization
as
employees
respond
to
unpredictable
threats
and
opportunities
through
experimentation
and
trial
and
error.
Realized
strategies
are
the
outcome
of
both
streams.
Diagnostic
control
systems
are
the
essential
management
tools
for
transforming
intended
strategies
into
realized
strategies:
they
focus
attention
on
goal
achievement
for
the
business
and
for
each
individual
within
the
business.
They
relate
to
strategy
as
a
plan
and
allow
managers
to
measure
outcomes
and
compare
results
with
pre-set
profit
plans
and
performance
goals.
Interactive
control
systems
give
managers
tools
to
influence
the
experimentation
and
opportunity-seeking
that
may
result
in
emergent
strategies.
These
systems
relate
to
strategy
as
patterns
of
action.
The
belief
systems
of
the
organization
help
to
inspire
both
intended
and
emergent
strategies.
These
systems
relate
to
strategy
as
a
pattern
of
actions
and
create
direction
and
momentum
to
fuse
intended
and
emergent
strategies
together
and
provide
guidance
and
inspiration
for
individual
opportunity-seeking.
Boundary
systems
ensure
that
realized
strategies
fall
within
the
acceptable
domain
of
activity.
Boundary
systems
control
strategy
as
position,
ensuring
that
business
activities
occur
in
defined
product
markets
and
at
acceptable
levels
of
risk.
Strategic
control
is
not
achieved
through
new
and
unique
performance
measurement
and
control
systems
but
through
belief
systems,
boundary
systems,
diagnostic
control
systems
and
interactive
control
systems
working
together
to
control
both
implementation
of
intend
strategies
and
the
formation
of
emergent
strategies.
The
levers
of
control
must
be
phased
in
over
the
life
cycle
of
the
firm
to
effectively
balance
profit,
growth
and
control.
1. Stage
1:
start-up:
an
intimate
sense
of
purpose
pervades
the
business:
commitment
is
achieved
by
sense
of
enthusiasm
about
the
new
product
or
service.
There
is
little
need
for
formal
control
systems
2. Stage
2:
rapid
growth:
Senior
managers
must
decentralize
decision
making
by
creating
decentralized
accountability
structures,
such
as
market
based
profit
centres.
Several
additional
controls
are
now
needed.
Managers
must
create
and
communicate
their
core
values
using
formal
belief
systems.
Second,
managers
must
clarify
and
communicate
strategic
boundaries.
Third,
accounting
measures
must
focus
not
only
on
profitability
but
also
on
the
assets
used
to
generate
those
profits.
3. Stage
3:
maturity:
Senior
managers
must
now
learn
how
to
rely
on
the
opportunity-
seeking
behaviour
of
subordinates
for
innovation
and
new
strategic
initiatives.
Managers
should
make
one
or
more
control
system
interactive.
The
levers
of
control
can
be
used
to:
1. Drive
strategic
turnaround
2. Drive
strategic
renewal