Chapter 6 Measuring Indicators © David O’Sullivan

Reflections Define a stakeholder for a particular organization. Explain the terms transactional and contextual requirements. Define strategic thrust. List up to five strategic thrusts suitable for an organization such as a hospital. Explain why strategic plans should be concise. Discuss how to evaluate strategic objectives. Name four common or emergent objectives currently discussed in strategy literature.

Activities [Discussion of selected student ‘Activities’ from previous chapter]

Learning Targets Describe the difference between financial and nonfinancial indicators Understand the importance of indicators for motivating employees Explain the balanced scorecard technique List a number of current or emergent indicators used in many organizations Create a simple form for capturing the critical data for an indicator Indicate the key data points in a performance chart Innovation is a process of management in most oganisations Changes to products, processes, services, organisations, … Changes can be incremental or radical - large or small. Innovation is often confused with ‘Invent or Invention’ which is defined as creating something that has never existed before

Why Measure? Corporate accounting scandals Overdependence on financial measures which few understand Inability for organisations to implement strategy

Performance Indicators Performance indicators are a measurable way of defining and monitoring goals Financial and non-financial metrics

Performance Indicators Indicators that show progress towards organisational goals Key questions: What has happened ? Why has it happened ? Is it going to continue ? What are we going to do about it ?

Weakness of sole financial focus Inconsistency with today’s business realities Reliance on historical data (“driving by rearview mirror”) Tendency to reinforce functional silos Sacrifice of long-term thinking Lack of relevance to many levels of the organization Lack of connection to strategic objectives

Defining Indicators Indicators show progress toward defined performance targets and motivate people to achieve goals Key questions addressed include: What has happened in the organization? Why has it happened? Is the trend going to continue? What impact have efforts had on the trend?

Macro Measures Cost Quality Time (Flexibility) (Environment) (Culture)

Indicator Attributes Related directly to strategic objectives Repeatable over time, allowing comparisons Fosters improvement rather than monitoring Reliable and verifiable Mix of financial and nonfinancial metrics Maximum number of measures Simple and easy to use Provide fast feedback Linked hierarchically

Indicator Examples Operations Sales and Marketing People Productivity (hours/unit) Throughput (units per day) Utilization (output/capacity) Sales and Marketing Sales per region Sales per model Marketing costs People Labor turnover Overtime Absenteeism Research and Development R&D expenditure Failure rates Additional revenue created Environment Emissions Scrap and wastage Accidents

Macro Indicators Operations Sales and Marketing People Research and Development Environment

Indicators > Operations Productivity (hours/unit) Throughput (units per day) Utilisation (output/capacity) See Notes non-financial indicators, depending on the exact nature of the production process, might include the following :- production line efficiency ability to change the manufacturing schedule when the marketing plan changes production line repair record keeping failures of finished goods to a minimum ability to produce against the marketing plan product life cycle indicators concerned with controlling production quality - right first time tests for components, sub-assemblies and finished products fault analysis "most likely reasons" for product failures actual failure rates against target failure rates complaints received against the quality assurance testing programme annualised failures as a % of sales value failures as a % of units shipped various indicators of product / service quality various indicators of product / service reliability indicators concerned with the purchasing department's external relationships with its suppliers inventory levels and timing of deliveries "just in time" inventory control measurements stock turnover ratio weeks stocks held suppliers delivery performance analysis of stock-outs parts delivery service record % of total requests supplied in time % supplied with faults indicators of sales delivery and service shipments vs. first request date average no. of days shipments late response time between enquiry and first visit

Indicators > Sales and Marketing Sales per region Sales per model Marketing costs See Notes measurements based on "staying close to the customer" complaints re manuals complaints re packaging / ease of opening quality of packaging materials customer satisfaction analysis price of products comparisons check on unsuccessful visit reports monitoring repeated lost sales by individual salesmen sales commission analysis monitoring of enquiries and orders sales per 100 customers "strike rate" - turning enquiries into orders analysis of sales by product line by geographical area by individual customer by salesmen matching sales orders against sales shipments - the trend from the mismatch backlog of orders analysis flash reports on sales publication of sales teams performance internally analysis of basic salaries and sales commissions share of the market against competitors share of new projects in the industry new product / service launch analysis time to turn round repairs delays in delivering to customers (customer goodwill) value of warranty repairs to sales over the period

Indicators > People Labor turnover Overtime Absenteeism See Notes head count control head count by responsibility mix of staff analysis mix of business analysis vs. staff personnel needs skilled vs. non skilled management numbers vs. operations staff workload activity analysis vacancies existing and expected labour turnover vs. local economy absence from work staff morale cost of recruitment number of applicants per advert number of employees per advertising campaign staff evaluation techniques evaluation of staff development plans monitoring of specific departments, eg. accounting speed of reporting to internal managers vs. HQ accuracy of reporting as measured by misallocations and mispostings queries re what reports mean monitoring of departments performance long term pay and conditions vs. competition

Indicators > R&D R&D Expenditure Failure Rates Additional Revenue Created Value Analysis Savings See Notes evaluation vs. basic R&D objectives, strategic objectives and project objectives product improvement against potential market acceptance R&D against technical achievement criteria, against cost and markets R&D priority vs. other projects R&D vs. competition R&D technical milestones analysis of market needs over the proposed product / service life of R&D outcome top management audit of R&D projects major programme milestones failure rates of prototypes control by visibility - releases, eg. definition release, design release, trial release, manufacturing release, first shipment release, R&D release

Indicators > Environment Emissions Scrap and Wastage Accidents Litigation

‘Innovation Process’ Indicators Percentage of revenue attributable to recent innovations Percentage of ideas migrating to projects Number of projects per member of staff Percentage of staff involved in the generation of ideas or problems Percentage of actions originating outside the organization Percentage of indicators without actions Number of projects per strategic thrust Percentage of strategies without actions Percentage of actions delivered within planned constraints Percentage of actions abandoned during the innovation process Cost–benefit ratio of the portfolio undertaken

Performance Charts

Outcomes vs. Drivers Reflect the results or outcomes of strategies Also called “lagging metrics” (show past performance) Examples: profitability, market share, customer satisfaction. Reflect how to drive the outcomes to be achieved Also called “leading metrics” (show early signs of strategy success) Examples: cycle time, defect rates, efficiency, performance versus plan

Balanced Scorecard Developed by Robert Kaplan and David Norton (1996) Approach to strategic management and associated performance measurement and development initiatives Four perspectives:

Implementing the Balanced Scorecard Translate strategic objectives into operational actions Measure strategic objectives through leading indicators Make strategy a continuous and active process Allow strategy to be a periodic agenda item at meetings

Balanced Scorecard Perspectives Objectives Indicators Targets Firm   Firm Stretch Financial Maximum Returns Return on Equity 12% 13% Utilization of Assets Utilization Rates 7% 8% Revenue Growth % Change in Revenue +11% Customer Customer Retention Retention % 75% Customer Service Survey Rating 85% 88% Customer Relations % Self Initiated Calls 35% 40% Internal Processes Fast Delivery Turnaround Time 15m 14m Effective Service 1st Time Resolution 0.68 0.69 Optimal Cost % cost of sales 66% 64% Resource Utilization Productivity Indicator 77% 80% Learning & Growth High Skill Levels Skill set ratio 65% 68% Employee Satisfaction Survey Index

Samples

Example

Variation

Variation

Initiatives

Indicators

Invisible Thread Goals Actions Business Unit Department Individual Top Down Planning Bottom Up Implementation

Summary Describe the difference between financial and nonfinancial indicators Understand the importance of indicators for motivating employees Explain the balanced scorecard technique List a number of current or emergent indicators used in many organizations Create a simple form for capturing the critical data for an indicator Indicate the key data points in a performance chart

Sample Performance Indicators

Activities

Search Online Keyword: ‘Balanced Scorecard’ http://www.ted.com Chris Anderson on the four key stages of any viable technology Yochai Benkler on collaborative projects Charles Leadbeater that innovation isn't just for professionals anymore