Choosing Measures of Performance: Translating Strategy into Action v Why do we measure? 3Clarify and translate vision and strategy 3Communicate and link strategic objectives and measures 3Plan, set targets, and align strategic initiatives v How do we measure? 3Financial measures 3Customer measures 3Internal business process measures 3Learning and growth measures

Strategy, organizational design, and performance measures Contextual Factors Environment Technology Size & Life-cycle Strategic Choices Corporate Business Functional Design Choices Performance Measures Value Creation

Information Requirements of Organizations Complex Environment Non-routine Technology Interdependent Tasks Selection of Alternative Performance Information Uncertainty Ambiguity Richness of Information Amount of Information

Management Control Subsystems External Environment Corporate Strategy Budget Reward Systems Operating Procedures Statistical Reports Resource Production Process Departmental Inputs Task Activities Outputs

Performance and Control Measures objectives measures QualityDelivery Process Time Waste Customer satisfaction Flexibility Productivity Operations Market Financial Corp strategy Department & work centers Business operating systems Business Units EXTERNALINTERNAL

Balanced Scorecard Vision and Strategy Clarifying vision Translating strategy Gaining Consensus Communicating and Linking Setting goals Educating Setting rewards Linking rewards to measures Strategic Feedback and Learning Articulating shared vision Supplying strategic feedback Strategy review Facilitate learning Planning and Target Setting Setting targets Allocating resources Determining milestones Coordinating initiatives

Types of Organizational Strategies v Functional : Plan of action to strengthen an organization’s functional capabilities to create core competencies v Business : Plan of action to combine functional core competencies to create competitive advantage v Corporate : Plan of action to protect and/or enhance an organization’s domain of activities to sustain its competitive advantages

Business Level Strategy: Strategies to enlarge the organizational domain PRODUCT Existing New DOMAIN Existing New Market Penetration (HARVEST) Market Development (SUSTAIN) Product Development (SUSTAIN) Diversification (GROWTH)

Linking Financial Objectives to Business Unit Strategy Strategic Themes Revenue Growth and Mix Cost Reduction and Productivity Asset Utilization Business Unit Strategy Harvest Sustain Growth Sales Growth Rate % revenue from new products, services, and customers Revenue per employee Investment (%of sales) R&D (% of sales) Share of targeted customers Cross selling % sales from new applications Product line profitability Cost reduction rates Indirect expenses as % of sales Relative costs compared to industry Working capital ratios (cash to cash cycle) ROCE by key assets Asset utilization rates Customer and product line profitability % of unprofitable customers Unit costs for each output or transaction Payback Throughput

Core Customer Measures Market Share Proportion of business in a given market in terms of number of customers, dollars spent, or volume Customer Acquisition The rate at which a business unit attracts or wins new customers or business Customer Retention The rate at which a business unit retains or maintains ongoing relationship with its customers Customer Satisfaction The satisfaction level of customers along specific performance criteria within the value proposition Customer Profitability The net profit of a customer after allowing for the unique expenses required to support that customer

Customer Value Propositions Generic Model Value = Product/Service Attributes + Image + Relationship Functionality Quality Price Time Kenyon Stores: Direct Selling to Mass Market Price Fashion & Quality Brand Availability Shopping Benefits Design Image Experience Retail Mark-up Return Market Out-of-Stock Mystery Price Rate Share Shopper Transactions Target Item Premium on per store growth rate Brand label

Customer need Identified Customer need satisfied Internal Business Process Measures The Generic Value-chain Model Identify the Market Create product or Service Build the product or service Deliver the product or service Service the Customer Innovation Process Operations Process Postsale Service Process % of sales from new products Time to develop new products Time to market Manufacturing Cycle Effectiveness Processing Time Throughput Time

Learning and Growth Measures Employee Retention Employee Satisfaction Employee Productivity Results Staff Competencies Technology Infrastructure Climate for Action Enablers Core Measurements

Basic premises of measurement and control v Recognize that maximizing the performance of the whole organization does not necessarily mean that each sub-unit produces at maximum efficiency. v Managers manage activities not costs. Costs are the outcome of organizational activities. v Controls should focus on organizational rather than individual activities because of the explicit recognition of interdependence. v Simply comparing actuals to standards is not sufficient to set up control systems. v Control should assume a strategic orientation.