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Chapter 20 CONTROLLING FOR ORGANIZATIONAL PERFORMANCE © Prentice Hall, 200220-1
Learning Objectives You should learn to: –Define organizational performance –Explain why measuring organizational performance is important –Describe the different organizational performance measures –Identify financial control tools used to monitor and measure organizational performance –Explain how a management information system can be used as a tool for monitoring and measuring organizational performance © Prentice Hall, 200220-2
Learning Objectives (cont.) You should learn to: –Describe the balanced scorecard approach to monitoring and measuring organizational performance –Tell how benchmarking of best practices can be used for monitoring and measuring organizational performance –Discuss the manager’s role in helping organizations achieve a high level of performance © Prentice Hall, 200220-3
Organizational Performance What is Organizational Performance? –performance - the end result of an activity –organizational performance - accumulated end results of all the organization’s work processes and activities Why is Measuring Organizational Performance Important? –managers need to understand the factors that contribute to high organizational performance – Better Asset Management asset management - process of acquiring, managing, renewing, and disposing of assets –design business models to take advantage of assets © Prentice Hall, 200220-4
Organizational Performance (cont.) Why is Measuring Organizational Performance Important? (cont.) –Increased Ability to Provide Customer Value - must monitor value obtained by customers customers will seek other sources of supply if value is not obtained –Impact on Organizational Reputation - strong reputation leads to greater consumer trust and ability to command premium pricing –Improved Measures of Organizational Knowledge organizational knowledge - knowledge created by collaborative information sharing and social interaction leading to appropriate action © Prentice Hall, 200220-5
Why Is Measuring Organizational Performance Important? Increased Ability To Provide Customer Value Better Asset Management Impact on Organizational Reputation Improved Measures of Organizational Knowledge Why Measure Organizational Performance? © Prentice Hall, 200220-6
Organizational Performance (cont.) Measures of Organizational Performance –Organizational Productivity productivity - overall output of goods or services produced divided by the inputs needed to generate that output –output measured by sales revenue –input measured by the costs of acquiring and transforming the organizational resources into outputs organizational productivity - a measure of how efficiently employees do their work © Prentice Hall, 200220-7
Organizational Performance (cont.) Measures of Organizational Performance (cont.) –Organizational Effectiveness - measure of how appropriate organizational goals are and how well an organization is achieving those goals there are different models of effectiveness –Industry Rankings - numerous industry and company rankings rankings determined by specific performance measures examples include Fortune, Business Week, Forbes, and Industry Week © Prentice Hall, 200220-8
Types Of Performance Control Tools Information Controls Financial Controls Balanced Scorecard Approach Benchmarking Best Practices Approach Performance Control Tools © Prentice Hall, 200220-9
Tools For Monitoring Performance Financial Controls –Traditional Financial Control Measures taken from organization’s main financial statements a number of financial ratios used in organizations –liquidity ratios - organization’s ability to meet its current debt obligations –leverage ratios - use of debt to finance assets and ability to meet interest payments –activity ratios - efficiency of use of firm’s assets –profitability ratios - effectiveness with which assets used to generate profits © Prentice Hall, 200220-10
Popular Financial Ratios © Prentice Hall, 200220-11
Tools For Monitoring Performance (cont.) Financial Controls (cont.) –Traditional Financial Controls Measures (cont.) budgets provide quantitative standards against which to measure and compare resource consumption –Other Financial Control Measures - increasing popularity Economic Value Added (EVA) - economic value created with the firm’s assets less any capital investments made by the firm in its assets Market Value Added (MVA) - stock market’s estimate of the value of the firm’s past and expected capital investment projects © Prentice Hall, 200220-12
Information Controls –Management Information Systems - used to provide management with needed information on a regular basis provides information, not merely data –data - raw, unanalyzed facts –information - analyzed and processed data organizes data in a meaningful way can access the information in a reasonable amount of time Tools For Monitoring Performance (cont.) © Prentice Hall, 200220-13
Information Controls (cont.) –How Are Information Systems Used in Controlling? managers need information about: –what is happening –what are performance standards –acceptable ranges of variation –appropriate courses of action Tools For Monitoring Performance (cont.) © Prentice Hall, 200220-14
Balanced Scorecard Approach –performance measurement tool that examines four areas financial customer internal processes people/innovation/growth assets –determine whether goals in each area are being met –focus is still on areas that drive the organization’s success scorecards reflect organizational strategies Tools For Monitoring Performance (cont.) © Prentice Hall, 200220-15
Benchmarking of Best Practices –benchmarking - search for the best practices among other organizations that lead to their superior performance means learning from others –used to identify performance gaps and potential areas of improvement –look for internal best practices that can be shared best practices frequently already exist within an organization but usually go unidentified and unused Tools For Monitoring Performance (cont.) © Prentice Hall, 200220-16
Steps To Successfully Implementing An Internal Benchmarking Best Practices Program Connect best practices to strategies and goals Identify best practices throughout the organization Develop best practices reward and recognition systems Communicate best practices throughout the organization Create best practices knowledge sharing system Nurture best practices on an ongoing basis © Prentice Hall, 200220-17
Manager’s Role In Achieving High Performance Help Members Make Right Choices During Change –provide direction by answering employees’ questions –define what change means for employees –describe how performance will be evaluated –describe tools and support that will be provided Design Performance Management Systems –identify appropriate performance measures –addresses common performance measurement problems –what gets measured gets done –address common problems that plague performance measurement © Prentice Hall, 200220-18
Common Performance Measuring And Reporting Problems Conflicting reports Failure to customize No links between performance data and goals Unrelated sources of data Common Problems Overly complex measures Confusing charts and graphs Too much detail © Prentice Hall, 200220-19
Manager’s Role In High Performance (cont.) Move From Ideas To Action –develop great ideas –think of these ideas as things that can actually be done –map out the entire implementation process from conception to delivery © Prentice Hall, 200220-20
Manager’s Role In Achieving High Performance Help employees move from ideas to action Achieving High Levels of Performance Help organizational members make right choices during change Design an appropriate performance management system © Prentice Hall, 200220-21
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