Chapter 11 Performance Measurement

Management Control Systems

Presented By: Shweta Khamar (31)

Flow of Presentation
What are performance measurement systems? Limitations of financial control systems The Balanced Scorecard Implementing a performance measurement system Difficulties in implementing PMS Interactive Control

Performance measurement systems

Objective To implement strategy

A performance measurement system is a mechanism that improves the likelihood the organization will implement its strategy successfully Strategy defines the critical success factors, if those factors are measured and rewarded, people are motivated to achieve them

What counts , gets measured

What gets rewarded, really counts

STRATEGY

What gets measured, gets done

What gets done, gets rewarded

Limitations of Financial control systems

Relying solely on financial measures is inadequate and in fact, be dysfunctional for several reasons It encourages short term actions that are not in the companys long term interest

Errors of commission Eg Baush & lomb credit terms

Errors of omission R & D investments

Manipulation of data manipulate budget data

Falsifying data Baush & lomb shipped products not asked

Balanced scorecard
It is a performance measurement system In creating balanced scorecard, executives must chose a mix of measurement that

1. Accurately reflect the critical success factors

2. Show the relationship among the individual measures in a cause-and-effect manner 3. Provide a broad based view of current status of the company

Other considerations
Outcome & Driver measures

outcome indicate result of strategy (eg. Increased revenue)

Lagging indicators - tell what has happened Indicate only the final result Driver measures Leading indicators they show the progress of key areas in implementing a strategy Eg Cycle time Indicate incremental changes that ultimately affect outcomes

Financial & Non-financial measures

Organizations have developed many sophisticated systems to measure financial performance But industries are being driven by Non-financial measures as well, such as customer satisfaction, quality, innovation Non-financial measures eventually affect the financial performance of the organization

Eg. In 1970s , IBM, US steel, Xerox dominated the market financially, but attacked by competitors who achieved quality, customer satisfaction

External & Internal measures

Companies too often sacrifice internal development for external results or ignore external results altogether, mistakenly believing internal measures are sufficient Companies must strike the balance between external measure such as customer satisfaction, and measures of internal business process, such as manufacturing productivity

All the measures are interlinked i.e. nonfinancial measures (product quality) drive financial measures (increased revenue)

Key success factors

Customer focused key variables
Bookings Backorders Market share Key account orders Customer satisfaction Customer retention Customer loyalty

Key variables related to internal business processes Capacity utilization On-time delivery Inventory turnover Quality Cycle time = process time + storage time + movement time + inspection time Just-in-time ideal ratio =1

Implementing performance measurement system

Steps
Define strategy (single industry multiple business functional levels) Define measures of strategy (focus on few critical measures cause & effect) Integrate measures into the management system (integrate with formal/informal culture, structure) Review measures and results frequently

Difficulties in implementing PMS

Poor correlation between nonfinancial measures and results (cause effect) Fixation of financial results Measures are not updated (as strategies change) Measurement overload (losing focus) Difficulty in establishing trade off (assign weights)

Interactive control
Todays management control system

Tomorrows strategy

 The primary role of management control is to help execute chosen strategies In industries that are subject to rapid environmental changes, management control information can provide basis for taking new strategies The main objective of interactive control is to facilitate the creation of a learning organization In changing and dynamic environment, creating a learning organization is essential to corporate survival Learning organization refers to the ability of organizations employees to learn to cope with environmental changes

An effective learning organization is one where employees at all levels continuously

scan the environment Identify potential problems Identify potential opportunities Exchange information candidly & rapidly Experiment with alternate business

In order to successfully adapt to emerging environment

Critical success factors & strategic uncertainties

Critical success factors are derived from chosen strategies They support the implementation of strategies for current products & markets Strategic uncertainties are fundamental environmental shifts that could potentially disrupt the rules by which organization is playing today They are the basis for developing new strategies They are the questions such as what has changed? why has it changed?

 Interactive controls are not a separate system but an integral part of the management control system

Interactive controls alert management to strategic uncertainties, either troubles or opportunities

They become the basis for manager to adapt to a rapidly changing environment by thinking about new strategies