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Concepts on Performance Management
What is Performance Management?
A key aspect of management accounting
determining an organisation's structure
e.g. should they adopt a functional struture or a divisional one and what level of decentralisation would be appropriate?
assigning responsibility
is the manager of a division responsible for costs, revenues and investment or just cost control?
setting up a system of performance measures and targets
reviewing performance and acting accordingly
What are some ways to measure Performance?
Critical Success Factors (CSF)
What are CSFs?
vital areas 'where things must go right' for the business in order for them to achieve their strategic objectives.
The achievement of CSFs should allow the organisation to cope better than rivals with any changes in the competitive environment.
The organisation will need to have in place the core competencies that are required to achieve the CSFs, i.e. something that they are able to do that is difficult for competitors to follow.
There are five prime sources of CSFs:
(1) The structure of the industry
CSFs will be determined by the characteristics of the industry itself, e.g.in the car industry 'efficient dealer network organisation' will be important where as in the food processing industry 'new product development' will be important.
(2) Competitive strategy, industry position and geographic location
Competitive strategies such as differentiation or cost leadership will impact CSFs.
Industry position, e.g. a small company's CSFs may be driven by a major competitor's strategy.
Geographical location will impact factors such as distribution costs and hence CSFs.
(3) Environmental factors
factors such as increasing fuel costs can have an impact on the choice of CSFs.
(4) Temporary factors
temporary internal factors may drive CSFs, e.g. a supermarket may have been forced to recall certain products due to contamination fears and may therefore generate a short term CSF of ensuring that such contamination does not happen again in the future.
(5) Functional managerial position
the function will affect the CSFs, e.g. production managers will be concerned with product quality and cost control.
Key Performance Indicators (KPI)
What are KPIs?
Part of the Strategic Planning Process
Strategic Analysis
Internal analysis to identify resources and core competencies
External analysis to identify CFS in markets
Strategic Choice
Select strategies where firm can acquire core competencies to meet CSFs
Strategic Implementation
Formulation of detailed plans and budgets
Target setting for KPIs for each CSF
Monitoring and Control
Hierarchy of Objectives
Mission Statement
Strategic Objectives
Tactical Objecties
Operational Targets
Choice of Targets
Behavioural Aspects
Relevant to the organisation's overall objective
e.g. if the organisation has an objective of 100% quality then an individual production worker maybe set a target to produce products with zero defects. (It is worth noting that quality initiatives are often undermined by targets that focus on short term profits).
Achievable
employees may be unmotivated if they consider targets are very difficult or impossible to achieve, e.g. zero defects may be seen as impossible. However, it is worth noting that the same may be true if targets are too easy to achieve.
Controllable
the individual will be unmotivated if they feel they can't control the target set, e.g. a production worker may not be responsible for defects if poor quality materials are purchased.
Prioritised
employees will be overwhelmed and hence unmotivated if they are set a large number of targets.
Financial and non-financial indicators
What are some Impacts of a Badly Designed Performance Management System?
Wrong Signals and dysfunctional behaviour
Berry, Broadbent and Otley identified the following problem areas:
Misrepresentation
'creative' reporting to suggest that a result is acceptable.
Gaming
deliberate distortion of a measure to secure some strategic advantage.
Misinterpretation
failure to recognise the complexity of the environment in which the organisation operates.
Short-termism
leading to the neglect of longer-term objectives.
Measure fixation
measures and behaviour in order to achieve specific performance indicators which may not be effective.
Tunnel vision
undue focus on stated performance measures to the detriment of other areas.
Sub-optimisation
focus on some objectives so that others are not achieved.
Ossification
an unwillingness to change the performance measure scheme once it has been set up.
What is the Optimum System for Performance measurement and control in today's dynamic business environment?
Financial performance indicators (FPIs)
t is still important to monitor financial performance, e.g. using ROCE, EBITDA, EVA.
Non-financial performance indicators (NFPIs)
these measures will reflect the long-term viability and health of the organisation
What are some Models for evaluating financial and non-financial performance?
4 Key Tools
Kaplan and Norton's balanced scorecard
The performance pyramid
Fitzgerald and Moon's building block model
The performance prism
Benefits of Using these Models
financial and non-financial performance measures are included
they are linked in to corporate strategy
include external as well as internal measures
include all important factors regardless of how easy they are to measure
show clearly the tradeoffs between different dimensions of performance
show how measures will motivate managers and employees.