Niluh Putu Ayu P.W.P.

(1101002005)
Q:The objective of Performance Measurement Systems is to help implement strategy. Please describe the four general steps which involves in implementation of a Performance Measurement Systems; and what the difficulties in implementing Performance Measurement Systems? A: 1. Implementation of a Performance Measurement System involves four general steps; a. Define strategy In this phase, its important that the organizations goals are explicit and the target have been developed. Company can uses scorecard to link strategy and operational action. For a single industry firm, scorecard should be developed at the corporate level and then cascaded down to functional levels and below. Foe multibusiness firm, scorecard should be developed at the business unit level. b. Define measures of strategy Goal of this step is to support the articulated strategy. Organization must focus on a few critical measures at this point or management will overloaded with measures. It is also important that the individual measures be linked with each other in a cause-effect manner. c. Integrate measures into the management system The scorecard must be integrated with the organizations formal and informal structures, culture, and human resource practices. For instance, the effectiveness of the scorecard will be compromised if managers compensation is based only on financial performance. d. Review measures and results frequently Once the scorecard is up and running, it must be consistently and continually reviewed by senior management. The organization should look for the following: How is the organization doing according to the outcome measures? How is the organization doing according to the driver measures? How has the organizations strategy changed since the last review? How have the scorecard measures changed? The most important aspects of these reviews are as follows: They tell management whether the strategy is being implemented correctly and how successfully it is working. They show that management is serious about the importance of these measures. They keep measures aligned to ever-changing strategies. They improve measurement. This review sessions complete the four steps and provide the impetus to start the cycle again.

Niluh Putu Ayu P.W.P. (1101002005)

2. Difficulties in implementing Performance Measurement Systems: a. Poor correlation between nonfinancial measures and results There is no guarantee that future profitability will follow target achievements in any nonfinancial area. shareholders This is serious problem because there is an inherent assumption that future profitability does follow from achieving individual measures. Identifying the cause-effect relationships among the different measures is easier said than done. b. Fixation on financial results Not only are most senior managers well trained and adept with financial measures, they also keenly feel pressure regarding the financial performance of their companies. Shareholders are vocal and BOD frequently apply pressure on the shareholders behalf. This pressure may overwhelm the long term, uncertain payback of the nonfinancial measures. c. Measures are not updated Many companies dont have a formal mechanism for updating the measures to align with changes in strategy. As a result, the companies continue to use measures based on yesterdays strategy. Additionally, measures often build up inertia, particularly as people get comfortable using them. d. Measurement overload There are many (usually more than 1 and less than 50) critical measures that one manager can track at one time without losing focus. If the number is too few, manager is ignoring measures that are critical to monitoring strategy execution. If there are too many measures, manager may risk losing focus in trying to do too many things at once. e. Difficulty in establishing trade-offs Some companies combine financial and nonfinancial measures into a single report and give weight to the individual measures, But most scorecards do not assign explicit weight across measures. Without such weights, it becomes difficult to establish trade-offs between financial and nonfinancial measures.