performance measurement chp11
TRANSCRIPT
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PERFORMANCE MEASURES - Chapter 11
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"We want to change the competitive landscape by being not just better than our competitors, but by taking quality to a whole new level.” – Jack Welch
Performance measures should aim at the long-term and should be forward-thinking initiative designed to fundamentally change the way corporations do business. It is not a post-mortem of what happened but a step towards how we do better in the future.
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Why measure performance?
Objectives for for-profit organizations:– Measure changes to stakeholders wealth; put in
simple terms, the value of a firm.– Reward an employee for contributing to increase in
firm value
Issue: How would a firm measure an individual’s contribution to value creation and what purposedoes it serve?
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The value concept(Results control)
• The performance measurement concept indicates that employees can increase the value of the firm by– Increasing the size of a firm’s future cash flows,– By accelerating the receipt of those cash flows, or– By making them more certain or less risky.
If you are a CEO or CFO, how would you increase the cash flows?
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Measure the right things
• An ideal performance management system is one that energizes the people in an organization to focus effort on
• Improving things that really matter – • One that gives people the information and
freedom that they need to realize• Their potential within their own roles and that
aligns their contribution with the success of the enterprise.
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Then, why do performance measures fail?
• Root cause: complexity - details, details, details
• Staff who collect data get frustrated.• Follow: What has to be done" (WHTBD).
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Measure What Matters
• Easy to say but difficult to do.• Find out what is valued both by customers and
stakeholders• Examples: process: new product• development, measure: time to market.• process: customer service, measure: customer
retention.process: treasury management, measure: cost of service vs. value created.
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Keep it simple
• Performance Measures must be • • simple to operate
• simple to understand• • simple to action• Ex: If a sales person spends too much
time on call reporting, they have less time for making calls.
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Let us now examine how real world firms measure performance and we will, later, find out whether these measures conform to the concepts we just discussed.
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Most organization measure performance using accounting measures – Net profits, gross margin, ROA, ROE, etc.
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Why do organizations choose accounting data as measures of performance?
• Accounting profits and returns can be measured on a timely basis relatively precisely and objectively.
• Because they are timely, precise, and objective, employees would react positively.
• The short term measures keep employees on check.
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Why accounting measures of performanceare not adequate?
• Accounting measures are lagged indicators.
• Dependent on the choice of measurement method.
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Accounting can create management myopia
• Accounting is short term earnings or returns.
• Why focusing on the short term is inappropriate?
• Why would this short-term focus affect long-term relationships?
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The Changing Business Environment
Are historical accounting measures adequate for today’s business environment that transcend global boundaries?
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Performance Measurements for the new era
• In the global, technology-driven, decentralized environment, measuring
• Financial performance, while important, is not adequate.
• Even if less than precise, other measures of performance are required.
• These measures should be capable of measuring multiple attributes of an organization.
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We need a balanced set of Performance Measures –
We need both lead and lag indicators
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Lead indicators as value drivers
• Many non-financial indicators can serve as lead indicators in certain settings.
• Common examples are:– Market share, backlog (book-to-bill ratio), new
product introductions, new product development lead times, product quality, customer satisfaction, employee morale, personnel development, inventory turnover, bad debt ratio, or safety
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Lag Indicators
• In contrast to lead indicators, lag indicators are measures that point to earlier plans and their execution.
• Financial performances are lag indicators.• Many times, financial performances are too
late to affect future products and services.• Therefore, we need multiple measures that
include both financial and non-financial measures.
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Comprehensive Performance Measures must address
1. Financial performance2. Customer satisfaction3. Internal business process developments
and 4. Allow an organization to learn and
grow.
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Financial Performance can be measured by
•ROA ROE, EPS etc. These measure are essential to summarize the economic consequences of strategy.
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Customer-related measures
• Managers must identify the customer and market segments in which the business desires to compete.
• Develop measures to track the business unit’s ability to create satisfied and loyal customers.
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Customer-based measures
Customer Satisfaction
Customer Retention
Customer Loyalty Product and Service Attributes
Image and Reputation
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Internal Business Process Measures
Identify the critical internal processes for which the organization must excel in implementing its strategy.• IBP dimension enable the business unit to
– deliver the value propositions that will attract and retain customers in targeted market segments, and
– satisfy shareholder expectations regarding financial returns.
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Internal Business Process Measures
Innovation processes
Operation Processes
Quality Measures Cycle Time Measures
Cost Measures
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Learning and Growth measures
• Learning and growth identifies the infrastructure an organization must build to create long-term growth and improvement.• Growth comes from: people, systems
and organizational procedures.
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A performance concept that combines everything that we discusses so far is
Six Sigma
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The Six Sigma
• Is “a business process that enables companies to increase profits dramatically by streamlining operations, improving quality, and eliminating defects or mistakes in everything a company does. “
• The objective is change the process so that defects are never produced in the first place.
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The objectives of Six Sigma
• To ‘satisfy the customer’ by changing internal performance and processes.
• To enable better performance by better design
• To improve the ‘quality’ of supplies and other operational processes.
• Manage the costs
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Six Sigma points out
• You don't know what you don't know You can't do what you don't know
• You don't know until you measure • You don't measure what you don't value • You don't value what you don't measure
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Difference between TQM and Six Sigma
• TQM focuses on improvement in individual operations with unrelated processes; takes many years before all operations within a given process are improved.
• Six Sigma focuses on making improvements in all operations within a process, producing results more rapidly and effectively.