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Performance Measurement

Paramjit Sharma
Performance Evaluation
is the process by which managers at all levels gain information
about the performance of tasks within the firm and judge that
performance against pre-established criteria as set out in
budgets, plans and goals

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levels of performance evaluation

Top
Level

Middle
Level

Operating level
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Management Control & Operational Control

Management Control
refers to the evaluation by upper level Managers of the
performance of mid level managers

Operational Control
Means the evaluation the evaluation of operating level
Employees by mid level managers

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Objectives of Management Control

Strategic CEO
Business
Unit
Mkt Oper Fin
manager Manager Manager
MC

Region Region Plant Plant


A B A B

Employee OC
Employee Employee Employee
1
2 3 4

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Strategic Business Unit

SBU
consist of well defined set of controllable operating
Activities over which the SBU manager is responsible

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Management Control-
objectives

1 Motivate managers to achieve


Goals set by top management

2 Provide incentives for managers to


make decisions consistent with goals

3 Determine Rewards in conformity with


the efforts and effectiveness

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Effort Reward and Goal Congruence
Accounting

Prepare
External Performance Top
Factors Report Management
Pays Managers
uncertainty On the basis of
Performance
Outcome of Manager’s Report
Decision & effort

Risk Decision Receives


Effort
Aversion Making Pay

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Design of Management Control Systems for Evaluation

WHO

WHAT

WHEN

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Design of Management Control Systems for Evaluation

WHO

Who are interested in reports

Owners, directors or shareholders

Creditors

Community or Government

Employees

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Design of Management Control Systems for Evaluation

Assess effort & effectiveness

Performance

Intra Manager's comparison WHAT


Past Performance

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Strategic Performance Evaluation

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Design of Management Control Systems for Evaluation

WHEN

Stages of PLC Perf Measure


On the basis of input/output

Before/after the decision Early Revenue, Mkt Penetration

Evaluation to PLC Growth Profitability, Assets Mgt

Mature Profitability, Strategy

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systems for management control

Informal Systems Formal Systems


Hiring Practices

Promotion
Aspiration level
individual Procedures
Personal drives
Strategic Perf
Measurement

Peer Norms
Keiretsu
Teams Organization Shared responsibility
Culture

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Strategic Performance Measurement

Strategic Performance Management

Is a system used by top management to evaluate


SBU managers

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Types of Strategic Business Units

Cost
SBUs

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Types of Strategic Business Units

Revenue
SBUs

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Types of Strategic Business Units

Profit
SBUs

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Types of Strategic Business Units

Investment
SBUs

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Types of Strategic Business Units

Cost Revenue
SBUs SBUs

Profit Investment
SBUs SBUs

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Types of Strategic Business Units

Cost Shifting
Cost
SBUs

Excessive Short
Budget Slack
Term Focus

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Implementing Cost SBUs in Departments

Cost
SBUs

Production and
Support Departments

Discretionary Engineered
Cost Method Cost Method

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Implementing Cost SBUs in Departments

Cost
SBUs

Administration
Department

Discretionary Engineered
Cost Method Cost Method

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Implementing Cost SBUs in Departments

Cost
SBUs

Discretionary Engineered
Cost Method Cost Method

Considers costs
Considers costs To be variable and
Largely Therefore
Uncontrollable and Engineered or
Applies discretion Controllable; it is
At the planning An output
Stage; it is an Oriented
Input oriented approach
approach

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Implementing Cost SBUs in Departments

Cost
SBUs

Discretionary Engineered
Cost Approach Cost Method

Costs are mainly fixed, Costs are mainly variable &


Uncontrollable Controllable

Firms use an input-oriented Firms use an output-oriented


Planning focus Evaluation focus

Operations are ill-defined Operations are well defined

Focus is on planning Focus is on evaluation

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Outsourcing Cost SBU’s

Out sourcing means decision to


Have a service or product currently
Provided by support department
Supplied by an outside firm in the future

Outsourcing is an option increasingly used


by many firms for their IT, Printing &
Duplicating and other service needs

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Types of Strategic Business Units

Revenue
SBUs

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Revenue Drivers

Revenue drivers

are the factors that affect sales,


Volume ,such as price changes,
Promotions, discounts, customer Service
Changes in products features, delivery
dates and other value added factors

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Revenue Drivers

Marketing Department

Revenue Cost
SBU SBU

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Revenue Drivers

Marketing Department

Sales and Sales


Persons Sales mix,
Revenue Effects of change in
SBU Price, Quantity

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Revenue Drivers

Marketing Department

Mktg Dept can be a


cost
SBU. Advertising & Cost
Promotion can be
Major cost in selling
SBU

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Revenue Drivers

Marketing Department

Order-getting
Costs
Cost
SBU
Order-Filling
Costs

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Revenue Drivers

Marketing Department

Order-getting
Costs

Cost
SBU
Samples, demos,
Advertising
Commission,
travel

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Revenue Drivers

Marketing Department

Freight, packing
Warehousing,
Shipping
Collection etc
Cost
SBU

Order-Filling
Costs

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Profit Strategic Business Units

Three strategic Reasons to choose profit SBU’s

1 P SBU’s provide desired coordination among


Marketing, Production and other support functions

2 P SBU,s motivate managers to get better price outside

3 P SBU’s motivate managers to think new ways to


make profit from their products & services

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Contribution income Statement

The contribution income statement is based


on the contribution margin developed for each
profit SBU and for each relevant group of profit
SBU’s

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Strategic Performance Measurement and the Balance Scorecard

The Sacred Obligation of Senior Leadership

Vision; What will it be?

Goals; What four or five things must we do to get there?

Alignment: Translate the work of each person into an alignment with the Goals?

Paramjit Sharma
Strategic Performance Measurement and the Balance Scorecard
(Strategy Map}

Financial
Goals,
Earnings, Sales, Growth

Customer
Goals
Satisfaction, better staff response to customers Needs

Operations
Goals
Staff apply their Competencies & strategic awareness

Learning & Innovations


Goals
Staff competencies, Strategy awareness

Paramjit Sharma