P5: Advanced Performance Management

Section D: Strategic performance measurement Designed to give you knowledge and application of: D1. Performance hierarchy D2. Strategic performance measures in private sector D3. Divisional performance and transfer pricing issues D4. Strategic performance measures in not-for-profit organisations D5. Non-financial performance indicators D6. The role quality in management information & performance management system. D7. Performance measurement & strategic human resources management issues D8. Performance measurement & the reward systems D9. Other behavioural aspects of performance measurement

 Discuss the interaction of non-financial performance indicators with financial performance indicators. [2]  Discuss the implications of the growing emphasis on non-financial performance indicators. [3]  Discuss the significance of non-financial performance indicators in relation to employees. [2]  Identify and discuss the significance of non-financial performance indicators in relation to product / service quality e.g. customer satisfaction reports, repeat business ratings, customer loyalty, access and availability. [3]  Discuss the difficulties in interpreting data on qualitative issues. [2]  Discuss the significance of brand awareness and company profile and their potential impact on business performance. [3] D5: Non-financial performance indicators Learning Outcomes

Financial performance indicators (FPI) and non-financial performance indicators (NFPI) Discussed in paper F5 Both quantitative & qualitative NFPI can have a direct relationship with FPI. Example:  The more the staff employed by a company, the greater the salary expenses.  Higher revenue can be achieved by giving higher customer service. Sometimes FPI and NFPI can have an inverse relationship. Example: Increasing the quality of product increases the costs involved in producing that product but may not lead to increased sales. FPI are quantitative measures expressed in monetary terms NFPI can be quantitative or qualitative & are expressed in non-monetary terms Example: “Net profit” and “revenue” are quantitative and expressed in monetary terms Example: “Number of units produced” and “distance an airplane flies in a year” are quantitative but non-monetary

Implications of the growing emphasis on NFPI Impact of growing emphasis of NFPI Focus is shifted from short-term objectives to long-term objectives More importance to qualitative measures Detailed analysis of financial performance – helps answer “why?” Increase in competitiveness More time & money spent on recording, interpreting etc.

Significance of non-financial performance indicators in relation to employees  Employees are important in measuring non-financial performance indicators  Their performance is a key component of indicator, e.g. productivity, flexibility, waste NFPI have an important impact on the performance of the organisation considering following disadvantages of FPI FPI are:  Narrow since they do not consider impact of intangibles  generally short-term measures whereas NFPI can measure long term effort and results  too aggregated & may not support detailed analysis Qualitative aspects related to employees Measures SkillWastage, quality and speed of the providing service MoraleCustomer retention rate, repeat orders AttitudeAbsenteeism, customer survey BehaviourCustomer complaints, customer retention rate

Significance of non-financial performance indicators in relation to product / service quality Quality: meeting characteristics of product / service expected by customer Product quality: physical dimension such as appearance, length, width & performance dimensions such as speed, capacity etc. Service quality: has more dimensions to assess the quality of service as described by different research teams, below: Parasuraman, Berry and Zeithml (1991)stated the following service dimensions 1. Reliability:Ability to perform promised service 2. Appearance of physical facility: Personnel, equipment, communication materials 3. Responsiveness:Willingness to help customers promptly 4. Assurance:Knowledge, courtesy of employees 5. Empathy:Towards employees

Johnston, Fitzgerald, Silvestro, Voss (1990) specified the following dimensions: AccessComfortFriendliness Aesthetics / appearanceCommunicationReliability AvailabilityCompetenceResponsiveness Cleanliness / tidinessCourtesySecurity Product / service quality can be measured by a combination of the following performance measures Customer satisfaction report  customer satisfaction report is prepared from a customer survey that finds out how the customer perceives the organisaton Repeat business ratings  repeat customers reorder products / services from the organisation & help to attract new customers to the organisation Customer loyalty  loyal customers are repeat customers who offer good ratings for the company or encourage others to become customers of the company Access and availability  access refers to how easily organisation can be reached i.e. the distance  availability refers to the number of resources available

Brand awareness  measure of marketing effectiveness  measured by the likelihood of a customer recoginsing or recalling a name, image or mark associated with a particular brand  customer’s ability to recoginse existence & availability of a company’s product / service Significance of brand awareness, company profile and their potential impact on business performance Impact of brand awareness 1. Pricing:If the brand has good reputation in market, it can earn a large margin since the demand is less elastic to the price of the product. 2. Distribution channels: If a brand has a positive image in the market, it is easy to obtain distributors for the product 3. Sales promotion: Brand awareness has a direct impact on sales. Publicity by word-of-mouth can increase sales. Continued…

Company profile is a report with all the necessary information about the company such as the promoters of the company, financial performance and associations with other companies. A company profile includes the following information  Contact details  Company overview  Financial performance  Ratios  Products / services  Major shareholders  Major shareholdings  Infrastructure A company with good profile Is always preferred by customers Builds customer loyalty Is preferred by various stakeholders such as suppliers, investors, employees Acquiring company is interested in acquiree company’s profile Continued…

RECAP  Discuss the interaction of non-financial performance indicators with financial performance indicators. [2]  Discuss the implications of the growing emphasis on non-financial performance indicators. [3]  Discuss the significance of non-financial performance indicators in relation to employees. [2]  Identify and discuss the significance of non-financial performance indicators in relation to product / service quality e.g. customer satisfaction reports, repeat business ratings, customer loyalty, access and availability. [3]  Discuss the difficulties in interpreting data on qualitative issues. [2]  Discuss the significance of brand awareness and company profile and their potential impact on business performance. [3]