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WEEK 12

WEEK 12. CONTEMPORARY APPROACHES TO MEASURING AND MANAGING PERFORMANCE. WHY MEASURE PERFORMANCE. Communication Comparison Problems Evaluation & rewards Future strategies.

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WEEK 12

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  1. WEEK 12 CONTEMPORARY APPROACHES TO MEASURING AND MANAGING PERFORMANCE AF201 Lecture - S2, 2008

  2. WHY MEASURE PERFORMANCE • Communication • Comparison • Problems • Evaluation & rewards • Future strategies AF201 Lecture - S2, 2008

  3. A Conventional accounting system assigns responsibility to organizational units and expresses performance measures in financial terms. CONVENTIONAL ACCOUNTING SYSTEMS It is the performance measurement system that was developed when most firms were operating in relatively stable environments. AF201 Lecture - S2, 2008

  4. CONVENTIONAL PERFORMANCE MEASURES • Not actionable • One perspective • Limited guidance • Dysfunctional AF201 Lecture - S2, 2008

  5. CONTEMPORARY PERFORMANCE MEASUREMENT SYSTEMS • Various measures • Strategic orientation • Benchmarks • Continuous improvement AF201 Lecture - S2, 2008

  6. ADVANTAGES • Value drivers • Actionable • Understandable AF201 Lecture - S2, 2008

  7. PROBLEMS • Too many • Ad-hoc • Trade-offs • No integrity • Financial outcomes AF201 Lecture - S2, 2008

  8. Strategy- Based Performance Measurement System A strategic-based performance measurement system(Balanced Scorecard) translates the mission and strategy of an organization into operational objectives and measures for four different perspectives: The financial perspective The customer perspective The process perspective The infrastructure (learning and growth) perspective AF201 Lecture - S2, 2008

  9. Elements of a Strategy-Based Performance Measurement System AF201 Lecture - S2, 2008

  10. Gain- Sharing Process Measures Financial Measures Customer Measures Infrastructure Measures Link to Strategy Customer Financial Process Infrastructure Communica-tion Strategy Balanced Measures Performance Measures Are Established Alignment of Objectives Performance Is Measured Promotions Individuals Are Rewarded Based on Multidimensional Performance Bonuses Salary Increases Responsibility Is Defined AF201 Lecture - S2, 2008

  11. Strategy, according to Robert Kaplan and David Norton, is defined as “. . . choosing the market and customer segments the business unit intends to serve, identifying thecritical internal and business processes that the unit must excel at to deliver the value propositions to customers in the targeted market segments, and selecting the individual and organizational capabilities required for the internal, customer, and financial objectives.” AF201 Lecture - S2, 2008

  12. Financial Infrastructure Customer Process Objectives Strategy-Translation Process Measures Targets Initiatives Vision and Strategy AF201 Lecture - S2, 2008

  13. FINANCIAL PERSPECTIVE • What the shareholder thinks? • financial outcomes • range of measures AF201 Lecture - S2, 2008

  14. CUSTOMER PERSPECTIVE • How does the customer see us? • Outcome (lag) measures • Lead indicators AF201 Lecture - S2, 2008

  15. INTERNAL BUSINESS PROCESSES • What must we excel at? • Specific processes • Core competencies • Productivity and service • Product design and development • Competitive advantage AF201 Lecture - S2, 2008

  16. LEARNING AND GROWTH • How can we improve? • Growth and improvement • Technology leadership • IT capabilities • Employee capabilities • Employee satisfaction & training • Time-to-market AF201 Lecture - S2, 2008

  17. Summary of Objectives and Measures:Financial Perspective ObjectivesMeasures/Indicators Revenue Growth: Increase the No. of new Percentage of revenue products from new products Create new applications Percentage of repeat customers Develop new customers and Percentage of revenue markets from new sources Adopt a new pricing strategy Product and customer profitability AF201 Lecture - S2, 2008

  18. Objectives Measures Cost Reduction: Reduce unit product cost Unit product cost Reduce unit customer cost Unit customer cost Asset Utilization: Improve asset utilization Return on investment Economic value added AF201 Lecture - S2, 2008

  19. Summary of Objectives and Measures:Customer Perspective Objectives Measures/Indicators Core: Increase market share Market share (percentage of market) Increase customer retention Percentage of repeat customers Increase customer acquisition Number of new customers Increase customer satisfaction Ratings from customer surveys AF201 Lecture - S2, 2008

  20. Objectives Measures/Indicators Performance Value: Decrease price Price Improve product quality Percentage of returns Increase delivery reliability On-time delivery % Aging schedule Improve product image and Ratings from customer reputation surveys AF201 Lecture - S2, 2008

  21. Summary of Objectives and Measures:Process Perspective Objectives Measures/Indicators Innovation: Increase the number of new Number of new products products vs. planned Decrease new product Time to market (from start development time to finish) Break even time AF201 Lecture - S2, 2008

  22. Objectives Measures/Indicators Operations: Increase product quality Quality costs Percentage of defective units Increase process efficiency Unit cost trends Output/input(s) Decrease process time Production lead (cycle) time AF201 Lecture - S2, 2008

  23. Summary of Objectives and Measures:Learning and Growth Perspective Objectives Measures/Indicators Increase employee Employee satisfaction capabilities ratings Employee turnover % Employee productivity (revenue/employee) Hours of training AF201 Lecture - S2, 2008

  24. Objectives Measures/Indicators Increase motivation and Suggestions per employee alignment Suggestions implemented per employee Increase information systems Percentage of processes capabilities with real-time feedback capabilities AF201 Lecture - S2, 2008

  25. FOUR PERSPECTIVES • FINANCIAL PERSPECTIVE • CUSTOMER PERSPECTIVE • INTERNAL BUSINESS PROCESSES • LEARNING AND GROWTH AF201 Lecture - S2, 2008

  26. Increase Sales Increase Profits Increase Customer Satisfaction Increase Market Share Reduce Defective Units Redesign Products Quality Training Infra-structure Financial Customer Process Testable Strategy Illustrated AF201 Lecture - S2, 2008

  27. MEASURES/INDICATORS • Lag indicators • Monitor progress • Indirect • Summary outcome measures • market share, customer satisfaction • Lead indicators • Drivers • Processes and activities AF201 Lecture - S2, 2008

  28. LINKING NON-FINANCIAL MEASURES TO FINANCIAL PERFORMANCE • Why don’t they work sometimes? • Wrong critical success factors • Insufficient resources • Poor design AF201 Lecture - S2, 2008

  29. LINKING NON-FINANCIAL MEASURES TO FINANCIAL PERFORMANCE • Du Pont chart AF201 Lecture - S2, 2008

  30. Financial measures KPIs (Lag Indicators) KPDs (Lead Indicators) No. of customers Average selling price Rev from top customers No. of customer calls No of promotions Product Quality On-time delivery Rev Profit Labour efficiency Quality of ore Power usage Absenteeism Cycle time Lost-time injuries Labour costs per tonne % ore recovered Electricity per tonne Production costs as % of total cost Costs ROI Inventory mgt policy Debtor mgt policy % assets idle Capacity utilisation Inventory T/over Debtor collection days Fixed asset utilisation Assets AF201 Lecture - S2, 2008

  31. Benchmarking uses best practices as the standard for evaluating activity performance. AF201 Lecture - S2, 2008

  32. BENCHMARKING • What is it? • External comparison AF201 Lecture - S2, 2008

  33. STEPS IN THE BENCHMARKING PROCESS • What? • Partners? • Data ? • Goals? • Plans? AF201 Lecture - S2, 2008

  34. FORMS OF BENCHMARKING • Internal • External • Public info • Industry Assn. • Stockbrokers • Consulting firms AF201 Lecture - S2, 2008

  35. INADEQUATE PERFORMANCE MEASUREMENT SYSTEMS • Performance profit  • Customers reaction • No one cares AF201 Lecture - S2, 2008

  36. INADEQUATE PERFORMANCE MEASUREMENT SYSTEMS • Too much talk • Change • strategy - yes • measures - no AF201 Lecture - S2, 2008

  37. A GOOD SCORECARD • Cause-and-effect • Communicate • What to emphasize? • Fewer is better • Trade-offs • Link to rewards AF201 Lecture - S2, 2008

  38. PITFALLS • Evolution • Seeking too much improvement • Subjective measures • Remember cost/benefits • Evaluate managers as well as units • Too many measures AF201 Lecture - S2, 2008

  39. EFFECTIVE PERFORMANCE MEASUREMENT SYSTEMS • Link to strategy and goals • Simple • Control • Positive vs Negative • Timely AF201 Lecture - S2, 2008

  40. EFFECTIVE PERFORMANCE MEASUREMENT SYSTEMS • Benchmarking • Involvement • Not too many • Link to rewards AF201 Lecture - S2, 2008

  41. DESIGNING MEASURES FOR CONTINUOUS IMPROVEMENT • Continuous improvement • Relevant targets • Clear measures • Challenges AF201 Lecture - S2, 2008

  42. BEHAVIOURAL IMPLICATIONS • Resistance • Fairness of measures • Punishment • Success • Widespread support • Not an ‘add on’ • Rewards AF201 Lecture - S2, 2008

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