P5: Advanced Performance Management

Section E: Performance Evaluation and Corporate failure E1. Alternative views of performance measurement E2. Non-financial performance indicators E3. Predicting and preventing corporate failure Designed to give you knowledge and application of:

 Evaluate the ‘balanced scorecard’ approach as a way in which to improve the range and linkage between performance measures. [3]  Evaluate the ‘performance pyramid’ as a way in which to link strategy, operations and performance. [3]  Evaluate the work of Fitzgerald and Moon that considers performance measurement in business services using building blocks for dimensions, standards and rewards. [3]  Discuss and apply the performance prism. [2]  Discuss and evaluate the application of activity-based management. [3]  Evaluate and apply the value-based management approaches to performance management. [3] E1: Alternative views of performance measurement Learning Outcomes

Balanced scorecard approach (BSC) BSC involves:  defining the mission  outlining strategies to achieve the mission  understanding core customer requirement  defining internal business process  assessing organisational infrastructure needed to achieve the objectives Perspectives of BSC 1. Financial:  financial performance assesses organisaton’s strategy & its implementation 2. Customer:  most important stakeholders  customer’s perception affects purchase decisions 4. Internal business process:  deciding what the organisation should do to satisfy & retain its customers 3. Learning and growth:  focuses on resources & intangible assets needed to conduct internal business activities Discussed in Paper F5 & P1 BSC a performance measurement non financial performance measures financial performance measures short -term objectives long-term objectives Focuses on Considers

Customer perspective ObjectivesTargets MeasuresInitiatives Learning & growth ObjectivesTargets MeasuresInitiatives Financial ObjectivesTargets MeasuresInitiatives Internal business process ObjectivesTargets MeasuresInitiatives Format of balanced scorecard How do customers see us? What must we excel at? Vision & strategy How do we look to shareholders? How can we sustain our ability to change and improve?

Balanced scorecard forms a chain of cause and effect relationships in the perspectives. It can be explained with the help of the following example. Example Learning and growth: the availability of resources such as skill, competence, information & employee support makes it possible to implement good business processes. Internal business process: the support of employees and the availability of resources will result in the production of innovative goods. Customer: the production of innovative goods will attract customers and good business processes (such as good after-sales service) will satisfy these customers and therefore they may be retained by the organisation. Financial: the customer loyalty / satisfaction / retention will result in higher return on investment.

Performance pyramid (Lynch and Cross) Evaluate the ‘performance pyramid’ as a way in which to link strategy, operations and performance Basis for the rest of the pyramid which decides strategic direction of organisation 9 dimensions for performance evaluation which should support each other both vertically and horizontally Measures

Evaluate the work of Fitzgerald and Moon that considers performance measurement in business services using building blocks for dimensions, standards and rewards Dimensions Financial performance Competitiveness Quality of service Flexibility Resource utilisation Innovation Standards Ownership Achievable Equity Rewards Clarity Motivation Controllability Building blocks to measure performance in service industries (Fitzgerald & Moon 1996)

Different measures for dimensions are: DimensionMeasures 1. Financial performanceProfitability, cash flows 2. CompetitivenessRelative market share, customer retention rate, growth in sales 3. Quality of serviceNumber of complaints, customer feedback, customer retention / loyalty 4. FlexibilityDelivery time, promptness in responding to customer requests, employees’ ability to perform different kinds of work 5. Resource utilisationUtilisation rate, productivity, service rendered per labour-hour 6. InnovationNumber of new products / features of existing product, R & D expense performance (success / failure) First two dimensions indicates as outcome of actions taken previously i.e. results The other dimensions Competitive performance (success / failure) at present i.e. determinants indicates

Standards Performance standards are set to facilitate performance evaluation. The following should be considered while deciding the standards: Ownership  Standards should be owned by individuals  Standards should not be imposed on the individual,  Individual should be involved in the standard-setting process Achievable  Standards should be achievable If standards are not achievable,  the individuals may become demoralised  productivity / quality gets affected Equity  Standards should be fair to all the managers  Equity should be maintained for all areas of operation

Rewards Generally, rewards are linked to performance. The organisation should define how the achievement of standards will be rewarded i.e. the reward system Clarity  Targets & reward system should be clear  Individuals feel motivated if they receive rewards Motivation  Reward system should motivate individuals by rewarding successful achievements Controllability  Individuals should only be made responsible for the revenue & costs they can control Refer to Test Yourself 3

RECAP  Evaluate the ‘balanced scorecard’ approach as a way in which to improve the range and linkage between performance measures. [3]  Evaluate the ‘performance pyramid’ as a way in which to link strategy, operations and performance. [3]  Evaluate the work of Fitzgerald and Moon that considers performance measurement in business services using building blocks for dimensions, standards and rewards. [3]  Discuss and apply the performance prism. [2]  Discuss and evaluate the application of activity-based management. [3]  Evaluate and apply the value-based management approaches to performance management. [3]