PERFORMANCE MEASUREMENT

KELOMPOK 8:RICCANA ROSITARISMADIANTORIZAL WIJATMOKO

Limitation of Financial MeasuresFinancial data reflect past performance and dont represent the current and future states of the company. Financial measures do not cover intangible assets. Managers may sacrifice long-term benefit to obtain short-term profits.

Balanced ScorecardBalanced scorecards are performance measurement systems or business models that tie together knowledge of strategy, processes, activities, and operational and strategic performance measures.An incentive system communicates strategy, motivates employees, and reinforces achievement of organizational goals.

Using Leading and Lagging Indicators in Balanced ScorecardsLeading indicators are measures that identify future nonfinancial and financial outcomes to guide management decision making.Organizational learning and growth

Using Leading and Lagging Indicators in Balanced ScorecardsLeadLeadLeadOrganizational learning and growth Business and production process efficiency Customer value Financial performance Lagging indicators are measures of the final outcomes of earlier management plans and their execution.

Communicating Strategy to EmployeesMany employees do not understand the impacts of their activities on customer value and profitability because their jobs are narrowly defined or they do not interact directly with customers. Communicating leading indicators in a balanced scorecard can make the effects of employees actions more visible.

Motivating Employees and Evaluating PerformanceVisible leading indicators can contribute to employees improved motivation and commitment. At a commercial bank the following sequence may be effective.Increased employee training

A Balanced Scorecards Strategic Performance MeasuresVisionand StrategyBusiness and production process performance At what business practices must we excel?Customer performance How should we appear to our customersFinancial performance How should we appear to our shareholders?Learning and growth performance How should we sustain our ability to change and improve?

Implementation of a Balanced ScorecardOrganizational learning and growthEmployee training and education.Employee satisfaction.Organizational learning and growth1. Employee training 2. Employee satisfaction 3. Employee turnover 4. Innovativeness 5. Opportunities for improvement

Business and Production Process EfficiencyOrganizational learning and growth

Customer ValueOrganizational learning and growth

Financial PerformanceOrganizational learning and growthFinancial measures of performance tend to be the most objective measures because most organizations have dedicated significant resources to ensure the validity of their financial performance measures.

Benefits and Costs of a Balanced ScorecardBenefits of a balanced scorecardEncourages all employees to consider the impacts of their decisions on profitabilityAppears to work in various types of organizationsCosts of a balanced scorecardChoosing and validating measuresTraining and interpretation activitiesManaging many measures at once

Benefits and Costs of a Balanced ScorecardBenefits of a balanced scorecardEncourages all employees to consider the impacts of their decisions on profitabilityAppears to work in various types of organizationsCosts of a balanced scorecardChoosing and validating measuresTraining and interpretation activitiesManaging many measures at once

Implementing a Performance Measurement System

Implementing of a performance measurement system involves 4general steps:Define StrategyThe scorecard builds a link beetween strategy and operational action. The process of defining a scorecard begin by defining the organizations strategy.Define Measures of StrategyThe organization must focus on a few critical measures at this point or management will be overload with measures.

Integrate Measures into the Management SystemThe scorecard must be integrated with the organizations formal and informal structures, culture, and human resource practise. Review Measures and Results FrequentlyThe organization should look for the following: How the organization doing according to the outcome measures?How the organization doing according to the driver measures?How has the organizations strategy changed since the last review?How have the scorecard measures changed?

The most impotant aspecs of these reviews are as follows:They tell management whether the strategy is being implemented correctly and how successfully it is working.They show that management is serious about the importance of these measures.They keep measures aligned to over-changing strategies.They improve measurement.

Difficulties in Implementing Performance Measurement SystemsPoor Correlation between Nonfinancial Measures and ResultsThis is a problem when we try to develop proxy measures for future performance. While it does not mean that systems with several measures should be abandoned, it is important for companies to understand that the links between nonfinancial measures and financial performance are not well understood.Fixation on Financial ResultsShareholders are vocal, and BOD frequently apply pressure on the shareholders behalf. The pressure may overwhelm the long-term, uncertain payback of the nonfinancial measures

Measures Are Not UpdatedMany companies do not have a formal mechanism for updating the measures to align with changes in strategy. As a result, the companies continue to use measures based on yesterdays strategy.Measurement Overload If the number of critical measures can track at one time without losing focus is too few, the manager is ignoring measures that are critical to monitoring strategy execution. Difficulty in Establishing Trade-OffsSome companies combine financial and nonfinancial measures into a single report and give weights to the individual measures. But most scorecards do not assign explicit weights across measures.

Interactive ControlControl System as a Strategy Implementation Tool

Chosen StrategyCritical Success FactorsDesign and Operation of Management Control System

Interactive Control

Todays Management Control SystemTomorrows Strategy

Control System as a Strategy Formation Tool

Strategic UncertaintiesUse of Subset of Management Control Information InteractivelyNew Strategies

Case Study ENAGER INDUSTRIES, Inc.

Each division is an independent company. Prior to 1992 : Profit center Post 1992 : Investment center Corporate income = summation ( each division's income)Corporate assets = summation ( each division's assets)Investment proposals with return > 15% were only approved.

1. Why was McNeil's new product? should it have been? explainThe proposal was rejected because it did not satisfy the required criteria Of having a return of atleast 15%

* return = net income / total asset base

PARTICULARSPRODUCT APRODUCT BPRODUCT C

No. of units sold1,00,00075,00060,000S.P. per unit$18$21$24Total sales($)18,00,00015,75,00014,40,000Variable cost per unit$9$9$9Total variable cost9,00,0006,75,0005,40,000Total fixed cost5,10,0005,10,0005,10,000Cost of goods sold($)14,10,00011,85,00010,50,000Net income3,90,0003,90,0003,90,000Total asset base($)30,00,00030,00,00030,00,000Return from proposal*13%13%13%

2. What inferences do you draw from the cash flow statements of 1993? was it useful?

INFERENCES:1. The professional services division exceeded the 12% gross return target but the other two divisions failed to do so.2. Consumer division could have underemployed the assets in order to boost the gross ROA.3.Cost of goods sold and the other expenses of industrial division in comparison to consumers division could be high due to which its EBIT has fallen down.These inferences help us in performing a root cause analysis of the performance of each division.

DIVISIONSALESEBITW/CFIXEDALLOCTOTALGROSS ROA

Consumer74.310.860.834.64.6100.010.8Industrial74.27.244.454.64.6103.66.9Professional service74.23.3180.04.622.614.6Total21.3123.289.213.8226.29.4

3. What inferences are drawn from the comparative balance sheets and income statements for 1992-1993?

Formula:

ROA : (Net income) / (Total asset base) Gross ROA: (EBIT) / (Total asset base) ROS: (Net income) / (Total sales) ROE: (Net income) / (Total Equity)

19921993InferenceROA5.67%5.37%More assets employed in 93 to boost salesGross ROA9.49%9.43%More assets employed in 93 to boost salesROS5.13%5.45%More income earned in 93 due to boost in salesROE4.69%4.74%ROE has improved which is of great importance for the stakeholders.

4. Evaluate the manner in which Randall and Hubbard have implemented their investment centre concept.

What pitfalls did they apparently not anticipate?

There are some things that I think is the reason, why a policy to use as a measure of the performance division ROA is less precise.

First,Hubbard and Randall set ROA same rates of 15% to assess the performance of each division. In fact, activity and industrial needs of each division is different. Of course, Professional Service benefited from this system, given the division does not require equipment such as machines like the other manufacturing divisions.

Second,Enager should not use the value of net assets stated in the balance sheet as a reference to calculate ROA, because it is detrimental to divisions that use the new assets, such as the Industrial Product Division. New assets have a net asset value, as for calculating ROA, higher, whereas the use of these assets may be relatively the same each year.

WORKCOST($)INPUTOUTPUTPROFIT($)A shift from profit centre concept to investment centre concept because: Comparing absolute differences in profit is not meaningful. Difficult to compare profit performance unless assets employed is taken into account. Business unit managers have 2 performance objectives:To generate profits from resources used.To invest in additional resources only if it produces an adequate return.

INPUTS ARE RELATED TO OUTPUTSPROFIT CENTRECAPITALEMPLOYEDINPUTCOST($)OUTPUTPROFIT($)INVESTMENT CENTREPROFITS ARE RELATED TO CAPITAL EMPLOYED

Hubbard and Randall used ROI to measure the assets employed.

The Pitfalls

ROI provides different incentives for investments across business units.Decisions that increase a centres ROI may decrease its overall profits.

5. What should Randall do about his investment centre concept?

Randall need to evaluate the effectiveness of the establishment of the three divisions as an investment center. Our group believes that it may be more appropriate Professional Service to be positioned as a revenue center. In addition, it may be better for enager to measure the performance of each division, based on the Balanced Scorecard each division. Balanced Scorecard that contains the strategic objectives of the company and derivative long-term plans in the short-term plan will allow each division to create a sustainable profit and focused on its strategic plan.

6. Design a balanced scorecard for : 1. Consumer Products Division 2. Industrial Products Division 3. Professional Service Division

Balanced Scorecarddivisi Consumer Product

PerspektifSasaran StrategikUkuran HasilUkuran Pemacu KinerjaTargetKeuangan-Sustainable Outstanding Financial ReturnsEconomic Value AddedPangsa PasarCost Effectiveness ProcessPangsa pangsar meningkat 10% dalam 3 tahun.-Bertumbuhnya PendapatanTingkat pertumbuhan pendapatanPenjualan meningkat $3,000,000 per tahun-Berkurangnya BiayaTingkat pengurangan biayaBiaya operasi berkurang 20% dalam 3 tahun.PelangganMeningkatkan Kualitas ProdukMeningkatnya jumlah konsumen baruKesetiaan KonsumenJumlah pelanggan yang menjadi pelanggan setiaJumlah pelanggan meningkat 1500 per tahun.ProsesTerintegrasinya proses manufaktur produk dan pemasaranWaktu dan biaya produksi yang berkurang atau kapasitas produksi meningkatPengurangan dan penghapusan aktivitas yang non value addedKapasitas produksi meningkat 25% dalam 3 tahun.

Balanced ScorecardDivisi Industrial Product

PerspektifSasaran StrategikUkuran HasilUkuran Pemacu KinerjaTargetKeuangan-Sustainable Outstanding Financial ReturnsEconomic Value AddedPangsa PasarCost Effectiveness ProcessPangsa pangsar meningkat 10% dalam 2 tahun.-Bertumbuhnya PendapatanTingkat pertumbuhan pendapatanPenjualan meningkat $3,500,000 per tahun-Berkurangnya BiayaTingkat pengurangan biayaBiaya operasi berkurang 30% dalam 3 tahun.PelangganMeningkatkan Kualitas ProdukMeningkatnya jumlah konsumen baruKesetiaan KonsumenJumlah pelanggan yang menjadi pelanggan setiaJumlah pelanggan meningkat 100 dalam 3 tahunProsesTerintegrasinya proses manufaktur produk dan pemasaranWaktu dan biaya produksi yang berkurang atau kapasitas produksi meningkatPengurangan dan penghapusan aktivitas yang non value addedKapasitas produksi meningkat 25% dalam 3 tahun.

Balanced ScorecardDivisi Industrial Product

PerspektifSasaran StrategikUkuran HasilUkuran Pemacu KinerjaTargetKeuangan-Sustainable Outstanding Financial ReturnsEconomic Value AddedPangsa PasarCost Effectiveness ProcessPangsa pangsar meningkat 10% dalam 2 tahun.-Bertumbuhnya PendapatanTingkat pertumbuhan pendapatanPenjualan meningkat $3,500,000 per tahun-Berkurangnya BiayaTingkat pengurangan biayaBiaya operasi berkurang 30% dalam 3 tahun.PelangganMeningkatkan Kualitas ProdukMeningkatnya jumlah konsumen baruKesetiaan KonsumenJumlah pelanggan yang menjadi pelanggan setiaJumlah pelanggan meningkat 100 dalam 3 tahunProsesTerintegrasinya proses manufaktur produk dan pemasaranWaktu dan biaya produksi yang berkurang atau kapasitas produksi meningkatPengurangan dan penghapusan aktivitas yang non value addedKapasitas produksi meningkat 25% dalam 3 tahun.

Balanced Scorecard has been prepared a long-term plan that can be followed by the preparation of the annual target until the budget of each division. It could be the company to revise the strategic plan when it is necessary.

For example, when the economy and the industry allows the target can not be achieved, or even when the target turned out to be too easily achieved. The important thing is, that each division compete not with other divisions in enager, but with other companies in the same industry.

Competition company is in competition to win the consumer's choice.

7. What advice do you have for Randall and Hubbard?

Randall and Hubbard must use EVA for measuring and controlling the assets employed.EVA = Capital employed * (ROI Cost of Capital)Advantages of EVA: All business units have same profit objective for comparable investments. Different interest rates may be used for different types of assets. It has a stronger positive correlation with changes in companys market value.

Sacrifice : mengorbankan20-*20-*20-*20-*20-*20-*20-*20-*20-*20-*20-*20-*20-*20-*To attain the above 2 objectives, a shift was required.*