McGraw-Hill/IrwinCopyright ©2008 The McGraw-Hill Companies, Inc. All rights reserved. Nonfinancial and Multiple Measures of Performance Chapter 18

McGraw-Hill/IrwinCopyright ©2008 The McGraw-Hill Companies, Inc. All rights reserved. Learning Objectives: 1. Explain why companies use nonfinancial performance measures. 2. Recognize the reasons why performance measures differ across levels of the organization. 3.Understand when the use of a single measure or multiple measures of performance is appropriate. 4. Understand how the balanced scorecard helps organizations recognize and deal with their opposing responsibilities. 5.Understand how to apply the methods involved in an effective performance measurement system. 6.Identify examples of nonfinancial performance measures and discuss the potential for improved performance resulting from improved activity management. 7.Explain why employee involvement is important in an effective performance measurement system.

McGraw-Hill/IrwinCopyright ©2008 The McGraw-Hill Companies, Inc. All rights reserved. Beyond the Accounting Numbers LO1 Explain why companies use nonfinancial performance measures. Often not useful in identifying the cause of operational problems Commonly reported only on a monthly, quarterly, or annual basis

McGraw-Hill/IrwinCopyright ©2008 The McGraw-Hill Companies, Inc. All rights reserved. Nonfinancial Measures Nonfinancial measures direct employees’ attention to those things they control. The case of the airline flight attendant OR Company profits? Customer satisfaction?

McGraw-Hill/IrwinCopyright ©2008 The McGraw-Hill Companies, Inc. All rights reserved. Organization Environment and Business Strategy Organization’s purpose Mission Description of an organization’s values, definition of its responsibilities to stakeholders, and identification of its major strategies Mission statementBusiness level strategy Organization’s plan to compete in each of its businesses

McGraw-Hill/IrwinCopyright ©2008 The McGraw-Hill Companies, Inc. All rights reserved. Responsibilities According to Level of Organization LO2Recognize the reasons why performance measures differ across levels of the organization. Groups or individuals, such as employees, suppliers, customers, shareholders, and the community, who have a stake in what the organization does. Stakeholders Description of how different levels and employees in the organization must perform for the organization to achieve its goals. Business model

McGraw-Hill/IrwinCopyright ©2008 The McGraw-Hill Companies, Inc. All rights reserved. Business Model Branch Leadership Satisfy Employees Excellent Advisors Efficient Operations Build Knowledge Act Ethically Satisfy Customers Build Revenues Control Cost Return Profits JYC Investments Business Model

McGraw-Hill/IrwinCopyright ©2008 The McGraw-Hill Companies, Inc. All rights reserved. Multiple Measures or a Single Measure LO3Understand when the use of a single measure or multiple measures of performance is appropriate. Single measure Multiple measures Profit Employee satisfaction Employee learning Branch costs Customer satisfaction Regulatory violations Branch profitability

McGraw-Hill/IrwinCopyright ©2008 The McGraw-Hill Companies, Inc. All rights reserved. Balanced Scorecard LO4Understand how the balanced scorecard helps organizations recognize and deal with their opposing responsibilities. Set of performance targets and results that show how well an organization has performed in meeting its objectives relating to its stakeholders. ObjectivesMeasuresTargetsInitiatives

McGraw-Hill/IrwinCopyright ©2008 The McGraw-Hill Companies, Inc. All rights reserved. Continuous Improvement and Benchmarking LO5Understand how to apply methods involved in an effective performance measurement system. Continuous reevaluation and improvement of the efficiency of the organization’s activities. Continuous improvement Continuous process of measuring a company’s own products, services, and activities against competitors’ performance. Benchmarking

McGraw-Hill/IrwinCopyright ©2008 The McGraw-Hill Companies, Inc. All rights reserved. Nonfinancial Measures LO6Identify examples of nonfinancial measures and discuss the potential for improved performance resulting from improved activity management. Customer satisfaction measures Keep customers returning Quality control Increase customer satisfaction Delivery performance Deliver goods and services when promised

McGraw-Hill/IrwinCopyright ©2008 The McGraw-Hill Companies, Inc. All rights reserved. Nonfinancial Measures, Continued... Functional performance measures keep processes efficient and effective. Time involved in processing, moving, storing, and inspecting products and materials. Manufacturing cycle time Measure of the efficiency of the total manufacturing cycle; equals processing time divided by the manufacturing cycle time. Manufacturing cycle efficiency

McGraw-Hill/IrwinCopyright ©2008 The McGraw-Hill Companies, Inc. All rights reserved. Employee Involvement LO7Explain why employee involvement is important in an effective performance measurement system. Many managers believe that when workers take on real decision-making authority, their commitment to the organization and its objectives increases. When decision-making responsibility lies with workers closer to the customer, workers are more responsive to customer concerns and can make informed decisions. Giving decision-making responsibility to workers uses their skills and knowledge and motivates them to further develop those skills and knowledge in an effort to improve the organization’s performance.

McGraw-Hill/IrwinCopyright ©2008 The McGraw-Hill Companies, Inc. All rights reserved. Employee Involvement, Continued... Promote goal congruence Convey the organization’s objectives and critical success factors Be applied consistently and accurately

McGraw-Hill/IrwinCopyright ©2008 The McGraw-Hill Companies, Inc. All rights reserved. Chapter 18: END!!