The Performance Pyramid

As part of performance management it is generally agreed

that a system should include financial performance
indicators and non-financial ones. The performance
pyramid is an attempt to incorporate both.

What is the performance pyramid?

 The performance pyramid, developed by Lynch and
Cross, includes a hierarchy of financial and non-
financial performance measures.
 The diagram below shows actions to assist in the
achievement of corporate vision may be cascaded
down through a number of levels, i.e. it shows the link
between strategy and day to day operations.
Level 1:
At the top of the organization is the corporate vision
or mission through which the organization describes how it
will achieve long-term success and competitive
advantage.

Level 2:
This focuses on the achievement of an
organization’s CSFs in terms of market-related measures
and financial measures. The marketing and financial
success of a proposal is the initial focus for the
achievement of corporate vision.

Level 3:
The marketing and financial strategies set at level 2 must
be linked to the achievement of customer satisfaction,
increased flexibility and high productivity at the next level.
These are the guiding forces that drive the strategic
objectives of the organization.

Level 4:
The status of the level 3 driving forces can be monitored
using the lower level departmental indicators of quality,
delivery, cycle time and waste.
The left hand side of the pyramid contains measures
which have an external focus and which are predominantly
non-financial. Those on the right are focused on the
internal efficiency of the organization and are
predominantly financial.
The one drawback of the performance pyramid is that it
does tend to concentrate on two groups of stakeholders,
i.e. shareholders and customers. It is necessary to ensure
that measures are included which relate to other
stakeholders as well.

STRONG POINTS
• Attempt to integrate corporate objectives with operational
performance indicators

• manage PM strategically

WEAK POINTS
• does not provide any mechanism to identify key performance
indicators

• fails to specify the form of the measures

• does not explicitly integrate the concept of continuous

improvement

 They should measure the effectiveness of the business and its

processes in meeting the organization’s objectives in order to
link to the overall strategy.
 They should measure the efficiency of resource utilization
within the organization

 They should contain internal and external measures of

performance

 They should comprise a mix of financial and non-financial

(quantitative and qualitative) methods

 They will require to make clear the different dimensions of

performance so that judgments on trade-offs between them are
explicit (e.g. quality and cost);

 They will link to the targets set for employee motivation;

 They should cover both the short-term (Profit) and long-term
(Customer impression) performance of the organization

 They should be flexible in order to respond to changes in the

business environment.
(FROM KAPLAN)
ARTICLE 1:

“This article considers the 'performance pyramid' of Lynch and

Cross (1991)1. The model represents an acknowledgement by
the writers that traditional performance measurement systems
were falling short of meeting the needs of managers in a much
changed business environment.
Lynch and Cross suggest a number of measures that go far
beyond traditional financial measures such as profitability, cash
flow and return on capital employed. The measures that they
propose relate to business operating systems, and they address
the driving forces that guide the strategic objectives of the
organization. Lynch and Cross propose that customer
satisfaction, flexibility and productivity are the driving forces
upon which company objectives are based. They suggest that
the status of these driving forces can be monitored by various
indicators which can be derived from lower level
(departmental) measures of waste, delivery, quality and cycle
time. The performance pyramid derives from the idea that an
organization operates at different levels each of which has a
different focus. However, it is vital that these different levels
support each other. Thus the pyramid links the business
strategy with day-to-day operations.

In proposing the use of the performance pyramid Lynch and

Cross suggest measuring performance across nine dimensions.
These are mapped onto the organization - from corporate
vision to individual objectives.

Within the pyramid the corporate vision is articulated by those

responsible for the strategic direction of the organization. The
pyramid views a range of objectives for both external
effectiveness and internal efficiency. These objectives can be
achieved through measures at various levels as shown in the
pyramid. These measures are seen to interact with each other
both horizontally at each level, and vertically across the levels
in the pyramid.

George Brown (1998)2 explains what Lynch and Cross refer to

as 'getting it done in the middle' focuses on business operating
systems where each system is geared to achieve specific
objectives, and will cross departmental/functional boundaries,
with one department possibly serving more than one operating
system. For example, an operating system may have new
product introduction as its objective, and is likely to involve a
number of departments from design and development to
marketing. At this level, performance focus will be on three
needs. First, there will be a focus on the need to ensure
customer satisfaction. Second, there will be a focus on the need
for flexibility in order to accommodate changes in methods and
customer requirements. Third, there will be a focus on the need
to achieve productivity which necessitates looking for the most
cost effective and timely means of achieving customer
satisfaction and flexibility.

At the bottom level of the pyramid is what Lynch and Cross

refer to as 'measuring in the trenches'. Here the objective is to
enhance quality and delivery performance and reduce cycle
time and waste. At this level a number of non-financial
indicators will be used in order to measure the operations. The
four levels of the pyramid are seen to fit into each other in the
achievement of objectives. For example, reductions in cycle
time and/or waste will increase productivity and hence
profitability and cash flow
The strength of the performance pyramid model lies in the fact
that it ties together the hierarchical view of business
performance measurement with the business process review. It
also makes explicit the difference between measures that are
of interest to external parties - such as customer satisfaction,
quality and delivery - and measures that are of interest within
the business such as productivity, cycle time and waste.

Lynch and Cross concluded that it was essential that the

performance measurement systems adopted by an
organization should fulfil the following functions:

The measures chosen should link operations to strategic goals.

It is vital that departments are aware of the extent to which
they are contributing - separately and together - in achieving
strategic aims.

The measures chosen must make use of both financial and non-
financial information in such a manner that is of value to
departmental managers. In addition, the availability of the
correct information as and when required is necessary to
support decision-making at all levels within an organization.

The real value of the system lies in its ability to focus all
business activities on the requirements of its customers.

These conclusions helped to shape the performance pyramid

which can be regarded as a modelling tool that assists in the
design of new performance measurement systems, or
alternatively the re-engineering of such systems that are
already in operation.”

(BY SHANE JHONSON)

ARITCLE 2:
Performance Pyramid come from the idea that organization
operate at the different level, each of which has different
concern which should nevertheless in achieving business
objectives. This concept also believe that the business strategy
link to day to day operations.

Performance Pyramid believe that the traditional performance

management focus mainly on financial performance which is
not tied the organization operation to its business strategy.

Instate of focus only for financial performance

indicators, Performance Pyramid have consider two main
objective, say, internal effect and external effect.

At the top level, corporate level, the organizations objective

have been develop which is the financial objective and market
objective is set. For example, the corporate objective of the
organization related to market is to be the market leader in
term of market share, and the corporate objective of the
organization relate to financial indicator is to increase share
price 5% every years. The organization may have many other
corporate objectives related to finance and market.
Performance Pyramid philosophy believes that this corporate
objective could be meeting only if they are supported from
operation or unit business objectives.
At the business operation system or unit level, there are three
indicators that could help the organization to meet its
corporate objectives.
The first one is the customer satisfactions. Customer
satisfaction at the business unit level should be identified, set,
and measure in order to ensure that the organization meet its
corporate objective related to market objective. So, the
organization should strictly measure its customer’s level
properly.
The second factors of the Performance pyramid at the business
unit level is flexibilities is simply mean how flexible the
company’s product or service as well as its operation, and
finance are able to respond to the change in the markets. The
business process and operating system should be considered
strictly whether it could be respond or not. Say, if the
technology change, could the business operating system could
respond to it or not?
Productivity refers to the management of resource such as
labor, material, skill, time, and others. The company should has
enough labor, material, as well as many others kind of resource
to ensure that it could respond to the market change, customer
demand or demand in the market. Performance pyramid
believe this factor could help the organization to help it
corporate objectives.
Department and work centers:
Performance Pyramid believe that the above three business
unit’s objectives: Customers satisfaction, Flexibilities, and
Productivities could be met unless there are the support from
department and work level.
There are five criteria at the departmental level could help the
business unit level to meeting its objective. They are included:
quality, delivery, process time, and waste.
Quality of product and consistency of standard of service is
very should be properly identified and measure. In every
business, the qualities of produce that it provide to its
customer, and consistency of standard of service that company
provided could attract the customers to provide the trust and
authorship on its.

Bother product and service, delivery is the critical that could

help business success. Therefore, the measurement should be
identified and set.
Process time is also the very importance part. The length of
process to produce the produce or to provide the service is very
importance point. Performance pyramid believe that if the
company reduce the time to produce the product, then the
productivities is increased and hence lead to increase the
financial of the company.
Waste of time in doing non value adds activities are also the
main factors behind the concept of Performance pyramid. The
company should consider if there any activities that the
company currently performs which are not added the value to
the company.