Term
| Performance Measurement Systems |
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Definition
- goal is to implement strategy
- senior management selects measures that best represent the company's strategy
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Term
| Limtations on Performance Measurement Systems |
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Definition
- encourage short-term actions that aren't in company's long-term interests (more pressure to meet current profit = business unit manager takes short-term actions that may be wrong in long-run)
- business unit managers may not undertake useful long-term actions to obtain short-term profits "errors of omission"
- using short-term profits as sole objective can distort communcation between business manager and senior management
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Term
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Definition
- single measures can't control a complex system
- too many critical measures make the system uncontrollably complex.
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Term
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Definition
| example of a performance measurement system |
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Term
| Business units are assigned goals and measured from four perspectives |
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Definition
- financial (profit margins, return on assets, cash flow)
- customer (market share, customer satisfaction index)
- internal business processes (internal operations) (employee retention, cycle time reduction)
- innovation and learning (learning and growth) (percentage of sales from new products)
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Term
| Objectives of Balanced Scorecard |
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Definition
- operationalizes strategy
- fosters balance among different strategic measures in an effort to achieve goal congruence, encouraging employees to act in the organization's best interest.
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Term
| Performance measurement system attempts to address the needs of different stakeholders of the organization by creating a blend of strategic measures (3) |
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Definition
- outcome (leading and lagging) and driver measures
- financial and nonfinancial measures
- internal and external measures
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Term
| Outcome and Driver Measures: |
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Definition
- result of strategy (increased revenue) measures are "lagging indicators"; tell management what has hapened are "leading indicators"; show progress of key areas in implementing a strategy.
- only indicate final result, but driver measures can be used at a lower level and indicate incremental changes that will ultimately affect the outcome.
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Term
| Financial and nonfinancial measures |
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Definition
- organizaitons have sophisticated systems to measure financial performance
- industries are being driven by changes in nonfinancial measures: quality, customer satisfaction
- many organizations have failed to incoroprate them into executive level performance.
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Term
| internal and external measures |
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Definition
- companies must strike a blanace between external measures (customer satisfaction) and internal business processes (manufacturer yields)
- too often companies sacrifice internal development for external results or ignore external results altogether.
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Term
| Measurements drive change |
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Definition
- most important aspect is ability to measure outcomes and drivers in a way that causes the organization to act in accordance with strategy
- achieve goal congruence by linking overall financial and strategic objectives with lower-level objectives that can be observed and affected at different organizational levels.
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Term
| Nonfinancial key success factors (customer focused) (7) |
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Definition
- bookings
- backorders
- market share
- key account orders
- customer satisfaction
- customer retention
- customer loyalty
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Term
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Definition
| some aspect of sales volume is a key variable |
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Term
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Definition
| indication of imbalance between sales and production; suggests customer satisfaction |
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Term
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Definition
| unless market share is watched closely, deterioration in the unit's competitive positiong can b e obscured by reported increases in sales voluem that results from overall industry growth |
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Definition
| orders received from certain accounts may indicate early the entire marketing strategy's success. |
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Definition
| measured by customer surveys "mystery shoppers" and number of complaint letters. |
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Definition
| measured by lengths of customer relationships |
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Definition
| measured in terms of repeat purchases, customer referrals, sales to customers as a percentage of customer's total requirements for the same product or service. |
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Term
| Key variables related to internal business processes (5): |
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Definition
- capacity utiliziation
- on-time delivery
- inventory turnover
- quality
- cycle time
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Term
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Definition
| important in businesses where fixed costs are high (paper, steel, aluminum) in professional organization, percentage of total available professional hours that is billed to clients "sold time" is a measure of fixed resource utilization |
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Definition
| indicators are number of defective units delivered, number and frequency of late deliveries, number of parts in a product, percentage of common v. unique parts, percentage yields, first-pass yields, scrap, rework, machine breakdowns, etc. |
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Term
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Definition
- Process Time + stroage time + movement time + inspection time
- only first element adds value to product, so companies try to eliminate rest or reduce them.
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Term
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Definition
- focuses on time in addition to cost.
- reducing cycle time can lead to reduction in cost; process time / cycle time (goal is to equal 1)
- falls under internal operations pespective of balanced scorecard.
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Term
| Implementing a Performance Measurement System (4) |
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Definition
- define strategy
- define measure of strategy
- integrate measures into management systems
- review measures and results frequenty
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Term
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Definition
- scorecard builds link between strategy and oeprational action
- process of defining a scorecard begins by defining the organizations strategy
- single industry: scorecard should be devleloped at coroprate level and cascaded down to functional levels
- multi-business: scorecard should be developed at business unit level
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Term
| Define measures of strategy |
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Definition
- develop measures to support articulated strategy
- must focus on critical measures or management will be overloaded with measures
- important that the individual measures be linked with each other in a cause-effect manner
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Term
| Integrate Measures into Management System |
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Definition
- How is organization doing according to outcome measures?
- How is the organization doing according to driver measures?
- How is the organization's strategy changed since last review?
- How is the scorecard measures changed?
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Term
| Review measures and Results frequently |
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Definition
- tell management whether strategy is being implemented correctly and how successfully it's working
- show management is serious about importance of measures
- keep measures aligned to ever-changing strategies
- improve measurements
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Term
| Difficulties in Implementing Performance Measurement Systems |
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Definition
- poor correlation between Nonfinancial Measures and Results
- fixation on financial results
- measures are not updated
- measurement overload
- difficulty in establishing trade-offs
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Term
| Poor Correlation between nonfinancial measures and results |
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Definition
- no garuntee that future profitability will follow target achievements in any nonfinancial area
- problem: assumption tht future profitability follows from achieving individual measures
- identifying cause-effect relationships among different measures is easier said than done
- problme with developing proxy measures for future performance.
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Term
| fixation on financial results |
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Definition
- managers feel pressure regarding financial performance of their companies
- poorly designed incentive programs create additional pressure and are usually biased twoards financial results
- ex. sell Nordstrom clothes to Bulding 19 in order to sell amount needed to make sales target.
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Term
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Definition
- many companies don't have a formal mechanism for updating the meausres to align with changes in strategy
- companies continue to use measures based on yesterday's strategy
- additionally measures build up inertia, as poeple get comfortable using them.
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Term
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Definition
- if critical measures are too few, manager is ignoring measure 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
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Term
| Difficulty in Estalblishing Trade-Offs |
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Definition
- some companies combine financial and nonfinancial measures into a single report and give weights to individual measures
- most scorecards don't assign explicit weights among meausres
- without weights it's difficult to establish tradepoffs between financial and nonfinancial measures.
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Term
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Definition
- Lingle and Schiemann study give insight to waht companies are measuring, perceived quality and what measures are linked to compensation.
- types of measures
- quality of measures
- relationship of measures to compensation
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Term
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Definition
- 76% of responding companies included financial, operating and customer satisfaction in regular management reviews, but only 33% indicated that they included innovation and change measures into regular management reviews.
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Term
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Definition
- financial performance measures were the only measures that were considered to be high quality, current and tied to compensation
- most reporting companies had operating and customer satisfaction measures and over 79% of companies considered this information to be highly valuable
- unfortunately there was a difference between perceived value and qulity of information they produced.
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Term
| Relationship of Measures to Compensation |
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Definition
- most management systems link financial measures to compensation
- about 1/3 of companies surveyed used customer satisfaction and less than 1/4 used innovation and change measures to drive compensation decisions
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Term
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Definition
| Some aspect of management that detects threats and opportunities |
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Term
| Main objective of interactive control |
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Definition
| facilitate creation of a learning organization |
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Term
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Definition
| fundamental environmental shifts that could potentially disrupt the rules by which an organization is playing today |
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Term
| Fundamental difference between critical success factors and strategic uncertainties |
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Definition
- critical success factors are derived from chosen strategies and they support implementation of strategies for current products and markets
- strategic uncertainties are the basis for firm to search fo new strategies, they help in developing new businesses and result in questions not answers: what has changed? why? what new business models can we develop?
- interactive controls alert management to strategic uncertainties, either troubles or opportunities
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Term
| Interactive control has following characteristics |
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Definition
- subset of management control information that has a bearing on strategic uncertainties facing the business bcomes focal point
- senior executives take information seriously
- managers at all levels of org focus attention on info produced by the system
- superiors, subordinates, and peers meet face to face to interpret and discuss implications of information for future strategic initiatives
- face-to-face meetings take form of debate and challenge underlying data, assumptions and apprpriate actions
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Term
| Strategic uncertainties relate |
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Definition
| to fundamental nonlinear shifts in the environment that can create new business models. |
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Term
| Subsystem should satisfy following conditions before it can be used interactively |
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Definition
- data contained in the subsystem should be unambiguous and simple to understand and interpret
- subsystem must cocntain data on strategic uncertainties
- data in subsystem should help firm develop new strategies.
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