1. 1 Chapter 8 PerformanceMeasurement and Strategic InformationManagement

2. Key Idea A supply of consistent, accurate, and timely data across all functional areas of business provides real-time information for the evaluation, control, and improvement of processes, products, and services to meet both business objectives and rapidly changing customer needs.

3. 3 Information Management If you don’t measure results, you can’t tell success from failure If you can’t see success, you can’t reward it – and if you can’t reward success, you are probably rewarding failure If you can’t recognize failure, you can’t correct it

4. Process Flow Measures and Indicators Data Analysis Information

5. Customer Requirements Measurements ProcessesResults Design Control Prediction Validation Use of Information and Analysis Measurement supports executive performance review and daily operations and decision making.

6. Key Idea Measurement-managed companies are more likely to be in the top third of their industry financially, complete organizational changes more successfully, reach clear agreement on strategy among senior managers, enjoy favorable levels of cooperation and teamwork among management, undertake greater self- monitoring of performance by employees, and have a greater willingness by employees to take risks.

7. Benefits of Information Management Understand customers and customer satisfaction Understand customers and customer satisfaction Provide feedback to workers Provide feedback to workers Establish a basis for reward/recognition Establish a basis for reward/recognition Assess progress and the need for corrective action Assess progress and the need for corrective action Reduce costs through better planning Reduce costs through better planning

8. 8 Leading Practices (1 of 2) Develop a set of performance indicators that reflect customer requirements and key business drivers Develop a set of performance indicators that reflect customer requirements and key business drivers Use comparative information and data to improve overall performance and competitive position Use comparative information and data to improve overall performance and competitive position Continually refine information sources and their uses within the organization Continually refine information sources and their uses within the organization Use sound analytical methods to conduct analyses and use the results to support strategic planning and daily decision making Use sound analytical methods to conduct analyses and use the results to support strategic planning and daily decision making

9. 9 Leading Practices (2 of 2) Involve everyone in measurement activities and ensure that information is widely visible Involve everyone in measurement activities and ensure that information is widely visible Ensure that data are accurate, reliable, timely, secure, and confidential Ensure that data are accurate, reliable, timely, secure, and confidential Ensure that hardware and software systems are reliable and user-friendly Ensure that hardware and software systems are reliable and user-friendly Systematically manage organizational knowledge and identify and share best practices Systematically manage organizational knowledge and identify and share best practices

10. Key Idea To make decisions that further the overall organizational goals of meeting, or exceeding, customer expectations and making productive use of limited resources, companies need good data and information about customers and markets, human resource effectiveness, supplier performance, product and service quality, and other key factors, in addition to traditional financial performance and accounting measures.

11. Balanced Scorecard 1. Financial perspective 2. Internal perspective 3. Customer perspective 4. Innovation and learning perspective

12. Key Idea A good balanced scorecard contains both leading and lagging measures and indicators. Lagging measures (outcomes) tell what has happened; leading measures (performance drivers) predict what will happen.

13. 13 Baldrige Classification of Performance Measures Customer Customer Product and service Product and service Financial and market Financial and market Human resource Human resource Organizational effectiveness Organizational effectiveness Governance and social responsibility Governance and social responsibility

14. Customer Measures Customer satisfaction and dissatisfaction Customer satisfaction and dissatisfaction Customer retention Customer retention Gains and losses of customers and customer accounts Gains and losses of customers and customer accounts Customer complaints and warranty claims. Customer complaints and warranty claims. Perceived value, loyalty, positive referral, and customer relationship building Perceived value, loyalty, positive referral, and customer relationship building

15. Product and Service Measures Internal quality measurements Internal quality measurements Field performance of products Field performance of products Defect levels Defect levels Response times Response times Data collected from customers or third parties on ease of use or other attributes Data collected from customers or third parties on ease of use or other attributes Customer surveys on product and service performance Customer surveys on product and service performance

16. Financial and Market Measures Revenue Revenue Return on equity Return on equity Return on investment Return on investment Operating profit Operating profit Pretax profit margin Pretax profit margin Asset utilization Asset utilization Earnings per share Earnings per share

17. Human Resource Measures Employee satisfaction Employee satisfaction Training and development Training and development Work system performance and effectiveness Work system performance and effectiveness Safety Safety Absenteeism Absenteeism Turnover Turnover

18. Organizational Effectiveness Measures Cycle times Cycle times Production flexibility Production flexibility Lead times and setup times Lead times and setup times Time to market Time to market Product/process yields Product/process yields Delivery performance Delivery performance Cost efficiency Cost efficiency Productivity Productivity

19. Governance and Social Responsibility Measures Organizational accountability Organizational accountability Stakeholder trust Stakeholder trust Ethical behavior Ethical behavior Regulatory/legal compliance Regulatory/legal compliance Financial and ethics review results Financial and ethics review results Community service Community service Management stock purchase activity Management stock purchase activity

20. Key Idea Organizations need comparative data, such as industry averages, best competitor performance, and world-class benchmarks to gain an accurate assessment of performance and know where they stand relative to competitors and best practices.

21. Purposes of Performance Measurement Systems Providing direction and support for continuous improvement Providing direction and support for continuous improvement Identifying trends and progress Identifying trends and progress Facilitating understanding of cause-and- effect relationships Facilitating understanding of cause-and- effect relationships Allowing performance comparison to benchmarks Allowing performance comparison to benchmarks Providing a perspective of the past, present, and future Providing a perspective of the past, present, and future

22. Key Idea In designing a performance measurement system, organizations must consider how the measures will support senior executive performance review and organizational planning to address the overall health of the organization, and how the measures will support daily operations and decision making.

23. Practical Guidelines Fewer is better. Link to the key business drivers. Include a mix of past, present, and future Address the needs of all stakeholders. Start at the top and flow down to all levels of employees Combine multiple indexes into a single index Change as the environment and strategy changes Have research-based targets or goals

24. Linkages to Strategy Key business drivers (key success factors) Strategies and action plans Measures and indicators

25. Key Idea The things an organization needs to do well to accomplish its vision are often called key business drivers or key success factors. They represent things that separate an organization from its competition and define strengths to exploit or weaknesses to correct.

26. Process-Level Measurements Does the measurement support our mission? Does the measurement support our mission? Will the measurement be used to manage change? Will the measurement be used to manage change? Is it important to our customers? Is it important to our customers? Is it effective in measuring performance? Is it effective in measuring performance? Is it effective in forecasting results? Is it effective in forecasting results? Is it easy to understand and simple? Is it easy to understand and simple?

27. Key Idea Good measures and indicators are actionable; that is, they provide the basis for decisions at the level at which they are applied.

28. Common Process Quality Measures Nonconformities (defects) per unit Nonconformities (defects) per unit Errors per opportunity Errors per opportunity Dpmo – defects per million opportunities Dpmo – defects per million opportunities

29. 29 Creating Effective Performance Measures Identify all customers and their requirements and expectations Identify all customers and their requirements and expectations Define work processes Define work processes Define value-adding activities and process outputs Define value-adding activities and process outputs Develop measures for each key process Develop measures for each key process Evaluate measures for their usefulness Evaluate measures for their usefulness

30. Analyzing and Using Data Analysis – an examination of facts and data to provide a basis for effective decisions. Analysis – an examination of facts and data to provide a basis for effective decisions. Examples Examples –Examining trends and changes in key performance indicators –Making comparisons relative to other business units, competitor performance, or best-in-class benchmarks –Calculating means, standard deviations, and other statistical measures –Seeking to understand relationships among different performance indicators using sophisticated statistical tools such as correlation and regression analysis

31. Key Idea Organizations need a process for transforming data, usually in some integrated fashion, into information that top management can understand and work with.

32. Interlinking Quantitative modeling of cause-and-effect relationships between external and internal performance measures Quantitative modeling of cause-and-effect relationships between external and internal performance measures Facilitated by data mining – the process of of searching large databases to find hidden patterns in data, using analytical approaches and technologies such as cluster analysis, neural networks, and fuzzy logic Facilitated by data mining – the process of of searching large databases to find hidden patterns in data, using analytical approaches and technologies such as cluster analysis, neural networks, and fuzzy logic

33. The Cost of Quality (COQ) COQ – the cost of avoiding poor quality, or incurred as a result of poor quality COQ – the cost of avoiding poor quality, or incurred as a result of poor quality Translates defects, errors, etc. into the “language of management” – $$$ Translates defects, errors, etc. into the “language of management” – $$$ Provides a basis for identifying improvement opportunities and success of improvement programs Provides a basis for identifying improvement opportunities and success of improvement programs

34. 34 Quality Cost Classification Prevention Prevention Appraisal Appraisal Internal failure Internal failure External failure External failure

35. Key Idea In manufacturing, quality costs are primarily product-oriented; for services, however, they are generally labor- dependent, with labor often accounting for up to 75 percent of total costs.

36. 36 Quality Cost Management Tools Cost indexes Cost indexes Pareto analysis Pareto analysis Sampling and work measurement Sampling and work measurement Activity-based costing Activity-based costing

37. Return on Quality (ROQ) ROQ – measure of revenue gains against costs associated with quality efforts ROQ – measure of revenue gains against costs associated with quality efforts Principles Principles –Quality is an investment –Quality efforts must be made financially accountable –It is possible to spend too much on quality –Not all quality expenditures are equally valid

38. 38 Managing Data and Information Validity – Does the indicator measure what it says it does? Validity – Does the indicator measure what it says it does? Reliability – How well does an indicator consistently measure the “true value” of the characteristic? Reliability – How well does an indicator consistently measure the “true value” of the characteristic? Accessibility – Do the right people have access to the data? Accessibility – Do the right people have access to the data?

39. Key Idea In many companies, business information is only accessible to top managers and others on a need-to-know basis. In TQ- focused companies, business information is accessible to everyone.

40. Knowledge Management The process of identifying, capturing, organizing, and using knowledge assets to create and sustain competitive advantage – –Explicit knowledge includes information stored in documents or other forms of media. – –Tacit knowledge is information that is formed around intangible factors resulting from an individual’s experience, and is personal and content-specific.

41. Key Idea Knowledge assets refer to the accumulated intellectual resources that an organization possesses, including information, ideas, learning, understanding, memory, insights, cognitive and technical skills, and capabilities.

42. Internal Benchmarking The ability to identify and transfer best practices within the organization Process: – –Identify and collect internal knowledge and best practices – –Share and understand those practices – –Adapt and apply them to new situations and bringing them up to best-practice performance levels.

43. 43 Measurement and Information Management in the Baldrige Award Criteria The Measurement, Analysis, and Knowledge Management Category examines an organization’s information management and performance measurement systems and how the organization analyzes performance data and information. 4.1 Measurement and Analysis of Organizational Performance a. Performance Measurement b. Performance Analysis 4.2 Information and Knowledge Management a. Data and Information Availability b. Organizational Knowledge