Performance Measurement Flashcards
(116 cards)
1
Q
Describe the Theory of Scientific Management.
A
Taylor:
- Poor administration and inefficient management is a national loss
- training the workforce and developing a heart cooperation in the production process
- Main Focus on lowest level of organisation to make employee-supervisor relationship more efficient
Key elements:
- standardisation, rationalisation, specialisation, intensification of work
- planning process = separated from implementation = alienation of workers from its objective
Ford:
- systematic approach towards personell management
- shares responsibilities + hierarchical structure
Weber:
- administrative hierarchy and specialisation of labor
- shift from wertrational to zweckrational
- ideal bureaucracy = coherent system: fixed jurisdictional areas, firmly ordered hierarchy (supremacy + subordination), management based on written records, expert training, official prioritys over other activities
- bureaucracy as larger machine for attaining objectives of an organisation
2
Q
Describe the Theory of Administration.
A
- improved governance and administration at all levels of the organisation
- priority of efficiency for the company as a whole
- organisations objectives and management are defined as: Planning, Organisation and Control
five principals:
- plan, organise, command, coordinate, control
Fayol:
- personal efforts and team dynamics were part of an ideal organisation
- importance of team spirit as key to efficiency
3
Q
Describe the Human Relations Movement.
A
- Result out of neglect for human factor when attempting to improve performance
- adopted achievements from sociology and psychology
- knowledge of orga culture, types of motivation and behaviour
- focus on interpersonal relationships of people within the orga (not only production process and people)
- interactions of employees become essential (leader = informal integration without relying on authority or official power)
- group dynamics, social compositions as extremely important factors for productivity
- trust and openness in workforce environment
- change in leadership: group dynamics, teamwork, social systems
4
Q
Describe the Behavioural Management Theory.
A
- Close interactions between internal capacity and personal needs of employees
- efficiency increase by management of employees as key task
- bureaucratic mgmt incompatible with individual needs of employees
- Main task: create conditions where employees will direct their effort towards achieving the goals of the orga in a way that will allow individual employee to achieve the personal goal
- informal organisation: understanding how decisions are made:
risk orientation, leadership, ambiguity of present and past, politics + interest of stakeholders, challenges giving + receiving advice, challenges orga + individual learning, challenges exploration and exploitation
5
Q
Describe the Theory of Quantitative Management.
A
Theory of rational choice, equilibrium solutions, theories and models of optimisation and game theories.
- from static to dynamic mgmt
- changes of internal + external environment as essential
- dependency of complex hierarchical multi-component structure linked to outside world
- key factor to success based on internal and external environment
- corporate governance to boost performance through effective resource and inventory mgmt
6
Q
Describe the Strategic Management Theory.
A
Organisation constantly adopting to external environment and changing internal structures at the same time.
- evaluation of performance due to influence from environment
- focus on approach of orga on all stakeholders (employees, individuals, stakeholders, groups, whole society)
- Organisational culture important for optimal performance
Three principals:
- alternation of role and value of manufacturing (result of scientific and technological change) importance on quality
- orga culture more important; democratic corporate governance, behavioural and social aspect of mgmt
- usage of product-market model for measuring orga performance
Modifications:
- TQM
- CRM
7
Q
What is the TQM?
What are the basic principles?
A
- Total quality management (performance measurement approach)
- Part of Strategic Management Theory
- basic principles:
- continuous improvement of productivity and performance
- fact-based approach towards involvement of employees into decision making
- customer-oriented focus
- leadership and mutually beneficial relationships with suppliers (long term)
8
Q
What is CRM?
A
- Customer Relationship Management
- Part of Strategic Management Theory
- Customer-oriented management strategy for orgas
Elements:
- strategic mgmt
- opportunity mgmt
- strategy for marketing mgmt
- documentation mgmt
Front office: customer faced
* marketing mgmt + customer service
back office:
* effectiveness optimization of sales and processing, logistics, monitoring financial flows and others
9
Q
What is Performance Management?
A
- Performance of people as HR greatly contribute to orga performance
- regognizes strategic value of HRM integrated as functional system
- management of performance of orga or individual
- based on BSC
- measuring, managing and improving operational performance
- variety of activities including: planning, execution of actions required to ensure performance objectives are achieved
10
Q
What is the difference between Performance Management and Performance Measurement?
A
Performance Measurement:
- deals specifically with performance measures
- how can progress of strategy implementation be tracked?
Performance Management:
- goes beyond measurement, requires process to evaluate and respond to indicators
- how can strategy be managed
11
Q
What is the main criticism of traditional approaches of performance measurement?
A
Main criticism:
- accounting based performance measure
- encourage short term decision making
- inapplicability to modern manufacturing techniques
- potential to damage not only individual businesses but entire company
12
Q
What types of performance measures focusing on financial aspects can be classified?
A
1 measures based on accounting data
2 market-based measures derived from stock or other financial market values
13
Q
What are Accounting based performance measures?
What are interest groups?
A
- financially based
- internally focused
- retrospective
- local department oriented
- can differ significantly based on accounting standard used (US-GAAP, IFRS)
- Main focus on profitability
Groups:
- investors/shareholders
- employees
- lenders
- suppliers
- customers
- government
- public
14
Q
What are the accounting-based interest groups?
What interest in accounting-based results do they have?
A
Groups:
- investors/shareholders
- employees
- lenders
- suppliers
- customers
- government
- public
interests:
1 comparison of current years result vs previous year (identify trends and performance drivers)
2 current year vs result vs company in same line of business (establish the orga is performing better or worse than its competitors)
3 current performance vs standard (benchmark of performance)
4 comparison of one segment or division of a business with each other (establish which parts of the business are achieving their goals)
15
Q
What are financial performance indicators?
A
- profitability
- liquidity
- utilization
- financial structure
- investment-shareholder ratio
16
Q
What is ROE and how is it calculated?
A
ROE = return on equity
How much profit a company generates with the money shareholders have invested
ROE = net income / shareholder equity
17
Q
What is ROA and how is it calculated?
A
Return on asset
how profitable a company is relative to its total assets
how efficient management is at using its assets to generate earnings
ROA = net income / average total assets
18
Q
What is ROI and how is it calculated?
A
Return on investment
Represents after-tax return which owners are receiving and should be compared with alternative investment forms
ROI = (gains from investment - cost of investment) / cost of investment
19
Q
What is EPS and how is it calculated?
A
earnings per share
indicator of company’s profitability
EPS = Profit / weighted average common share
20
Q
What is dividend payout-ratio and how is it calculated?
A
calculates the percentage of earnings paid to shareholders in dividends
dividend payout-ratio = dividends / net income for the same period
21
Q
What is cash flow and how is it calculated?
A
Cash flow = liquidity of a company
CF = earnings + depreciation
22
Q
What is the problem with ROE?
A
Return on equity = main number of company performance
obscures a lot of problems:
- artificially maintain high ROE temporarily by financial strategies
- high debt = debt leverage
- stock buybacks funded by accumulate cash
all of these “hide” deteriorating operational profitability
23
Q
What is the problem with ROA?
A
Return on assets
avoids issues of ROE
- difficulty for asset heavy or asset light companies
- outsource asset intensive tasks to be asset light
24
Q
What is capability leverage?
A
Outsourcing of activities to improve ROA
specialized outsourcing providers to supply key assets and capabilities quickly and profitable
- focus on specialised activities only
- option against financial leverage
- support vs all phases of economic cycle
- efficient downscale in downturn and easily upscalable
25
What is stock turnover-days?
| How is it calculated?
number of times inventory is sold or used in a time period.
The lower, the faster stock is sold.
Inventory turnover = cost of goods sold / average inventory
IR used to calculate average days it takes to sell the inventory:
average days to sell inventory = 365 days / inventory turnover ratio
26
What is receivables turnover ratio?
| How is it calculated?
average length of time from sale to cash collection
the lower the quicker an account is paid
accounts receivable turnover = net credit sale / average accounts receivable
average days to collect can be calculated:
average collection period = 365 / average receivable turnover
27
What is current asset/liability ratio?
| How is it calculated?
extent to which current assets cover current liabilities
ability to meet short-term obligations (rule of thumb ratio is 2:1)
current ratio = current assets / current liabilities
28
What is debt/equity ratio?
| How is it calculated?
measure the extent to which a business relies on external borrowings to fund its ongoing operations
debt/equity ratio = total liabilities / shareholders equity
29
What is interest coverage ratio?
| How is it calculated?
measures the ability of the business to meet its interest commitments through profits
rule of thumb used by bank is 3:1
Interest coverage ratio = EBIT / interest expense
30
What is gross profit margin?
| How is it calculated?
profitability of a business
reflection of control over cost of goods sold (COGS) and pricing policies
gross profit margin = revenue - COGS / revenue
31
What is breakeven sales?
The sales which need to be generated in order to cover expenses
32
What is the issue with accounting based financial measures?
| What alternatives could be used?
- retrospective (performance over the last year)
- reflection of former performance but no reflection of future developments
- lagging indicator
- indicators might not be static and allow room for interpretation
- accounting principles are different (US-GAAP, IFRS):
goodwill, taxation, valuation of inventory, capitalization of losses
alternatives:
- enquiries
- numbers of customers per day
- average sales value
- number of quoted jobs lost
- customer satisfaction
33
What are market-based performance measures?
MVA
reflect the present value of future streams of income
- fluctuate daily
- incorporate internal as well as external factors in development in valuation
- focus on whole company not on individual projects
based on market capitalization (number of shares * price of share)
difference between company's market cap vs shareholder equity + debt
34
What is price-to-book ratio (P/B)?
| How is it calculated?
compare a stock's market value with its book value
P/B Ratio = market cap / total assets - liabilities
35
What is price-to-earnings ratio (P/E)?
| How is it calculated?
valuation ratio of companies market cap to its earnings
P/E = market cap / earnings
36
What is dividend yield?
| How is it calculated?
shows how much a company pays out in dividends each year relative to its share price
dividend yield = annual dividends per share / price per share
37
What is NPV?
| How is it calculated?
net present value
capital budgeting to analyze the profitability of specific investments
NPV = SUM( cash flow t / (1+r)^t) - C0
38
What is IRR?
internal rate of return
the higher the more desirable to undertake investment
IRR = rate of growth a project is expected to generate
39
What are key trends in performance management?
* reviewing and enhancing organizational management profitability and the methodologies of recounting them
* emphasizing the use of business-unit key performance indicators
* refining customer- and channel-profitability measurement and analytics
* improving alignment of the components of the performance management process
* improving systems support and automation of the performance management process
* improving data quality and consistency
40
What is EVA?
| How is it calculated?
measuring the value of a company creates or destroys by subtracting the capital charge from the cash returns generated on the capital invested
builds on residual income approach
how much profit remains for investment in the business or distribution to the owners after subtracting expected returns on investment
residual income = profit - capital charge
If possible, results in increase of total market value
MVA is the present value of all future EVA
EVA = (NOPAT + AcctAdj) - [c * (IC + AcctAdj) ]
41
What are the main differences between EVA and traditional approaches?
How are both calculated?
- inclusion of capital cost
- post-tax profits: incentivies management to actively take taxes into consideration
- interest is not deducted to avoid double accounting interest
```
EVA calculation:
revenue
- operational cost
= EBIT
- taxes
= NOPAT
- WACC
= EVA
```
```
traditional calculation:
revenue
- operational cost
= EBIT
- interest
= earnings before taxes
- taxes
= profit after taxes
```
42
What is EBEI?
| How is it calculated?
Earnings before extraordinary items
provision for the cost of debt
EBEI = cash flow operating activities + total operating accruals
difference between EBEI and NOPAT:
EBEI is taking after tax interest expense into account
NOPAT - interest expense after provision for tax = EBEI
43
What is RI?
| How is it calculated?
Residual Income
RI = NOPAT - ( c* IC)
positive IC generates profits in excess of their total cost of capital
44
What are alternative value-based financial performance measures?
-CVA
(cost value added) = alternative to EVA; deprecations and accruals are added when calculating the operating cash flow values in CVA
Pro/Cons with different deprecation policies
CFROI
(cash flow return on investment) = inflation adjusted investment in asset
Using inflation adjusted cash flow generated by employed assets
Input:
- average life of the depreciating asset
- total amount of assets (both depreciating + non-d) adjusted for inflation
- inflation adjusted cash flows generated by the asset over their lifetime
- final inflation adjusted residual value of the non-d asset at the end of lifetime
45
What are basic shared elements of value-based management?
organisation management:
- gain understanding of value creation in each business
- transform the company to align with the ultimate goal of shareholder value maximization
- communicate results internally and externally
managerial bonus plan:
- awards targets for meeting expectations
- usually exceeding expectation is capped (no further motivation)
- use of value-based bonus plan to include fixed percentage of excess value
- bonus bank to balance downfalls
- not motivating if: older manager near retirement; strong wealth incentives; cyclical industry; start-up EVA is not relevant
Communication:
- good clear com
- holistic view
- well coordinated inside and outside (esp. banks)
46
What are notions of value according to value-based mgmt?
- shared ethical values-belief in intrinsic value of each person
- success in the marketplace based on delivering max value to the customer
- rewards based on the value people contribute to the orga; as team; individually, as employees; as owners
supported by strong corporate culture:
- orga core values; ethical principles
- code of ethics - habits of good behaviour
- service to the customer as primary goal
supported by compensation and reward system:
- monthly, bimonthly, quarterly bonuses liked to each worker's profit center
- annual corporate-wide performance bonuses rewarding each worker's contribution to overall profits
- structured, profit-based program of shared ownership (ESOP) by cash dividend payouts
47
What are the key management areas affected by value based management?
* corporate values and vision
* leadership style and skills
* corporate governance
* ‘open book’ management
* operations (policies and procedures)
* communications and information sharing
* training and education
* payment and rewards
* grievances and adjudication
* collective bargaining with labor unions
* employee shareholder education and participation
* future planning
48
Considered alongside similar value-based measures, which shortcomings of other approaches can the EVA overcome?
- traditional income measures: net income and earnings per share, can be easily manipulated and they do not account for cost of equity
- market-based measures (MVA) excess return and future growth value can only be calculated for publicly traded entities
- cash flow measures (CFO and CFROI) do not include cost of equity nor cost of debt
49
What are pros/cons of the EVA?
Pros:
- focus on cost of capital
- motivational tool on several levels of hierarchy
- single-period measure allows for annual measurement of actual, non-estimate or forecasted value-created performance
- eva measures behavioural change by providing incentive to promote shareholders interest as main goal
Cons:
- period over which profits are to be maximized is not in focus
- no strong enough incentive to overcome short-terminism
- tied to accounting derived figures such as capital charge
- economic book value and strategic, marked based aspects are neglected
- fails to consider industry and competitive context
- no strategic long-term focus on sustainable value creation
50
What is necessary for companies to benefit from EVA?
- corporate structure performs in autonomous business units rather than one large unit (matrix orga with shared resources)
- strong managerial wealth incentives are tied to BU-performance rather than corporate wide goals
- CEO is an enthusiastic advocate
- BU heads are personally involved with well-being of the orga (motivated by long term incentives)
51
What are facets of EVA?
```
goals
communication
planning
budget
decision
measurement
incentives
```
52
What characterizes a well-designed EVA based management system?
- on going ownership sharing culture
- employee stock ownership program (ESOP)
- individual and team performance feedback
- ownership education
- sharing of financial information
- checks and balances in governance and accountability system
53
What are business measures that help to drive operational performance?
- improve executive visibility to operational drivers
- replace "intuitive" decisions with fact-based decisions
- gain an understanding of operational performance drivers
54
What are the five operations performance objectives?
- quality
- dependability
- speed
- cost
- flexibility
55
What are the five operations performance objectives?
| Name all possible sub-dimensions.
Quality:
- performance
- features
- reliability
- conformance
- technical durability
- serviceability
- aesthetics
- perceived quality
- value for money
dependability
- schedule adherence
- delivery performance
- price performance
- ability to keep promises
speed:
- quote generation
- delivery speed
- delivery frequency
- production speed
- new product development speed
flexibility:
- material quality
- output quality
- new product
- modified product
- deliverability
- volume
- mix
- resource mix
cost:
- manufacturing cost
- value added
- selling price
- running cost
- service cost
- profit
56
What are elements of key performance drivers?
- leading indicators: early warning system to poor results (e.g. customer satisfaction, % sla compliance)
- KPI components: preceding step in value stream (e.g. % customer retention)
- KPI metric: direct measurable result (e.g. existing customer revenue growth)
57
What are four key performance metics used to determine excellent performance?
- customer satisfaction
- customer issue resolution capability
- conversion of inquiries to sales lead
- sales forcast-to-plan performance
58
What are elements of performance drivers?
1 Process:
* business change and realignment of PMS; regular employing method for identifying, incorporating and reviewing PMS and framework
```
2 Organization:
adopting KPI suitable for respective organisation
formal committee (cross-dicipline team) to develop and manage KPI
```
- knowledge mgmt.
* operational KPI and performance driven culture
* clear and effective corporate communication
* peer and competitor performance by comparision
* internal training program
* time-to-information improvements to enable faster mission-critical info
- performance mgmt.
* insight on operational performance to executives
* KPI to measure performance over time
* obtain comparative capabilities to ensure alignment across the orga with strategy
* clear communication of performance goals
3 technologies:
* business intelligence software
* data mgmt; integration and cleansing
* data modeling and development of business rules
* scorecarding to allow easy access to all stakeholders incl. non-technical
* automated alerting to learn about performance changes
59
What is the profitability analysis?
- focus on assigning cost and revenue to segments of customer base
- goal to calculate cost/revenue per segment
- highest degree of efficiency with lowest degree of cost
- ensures maximum benefit from current use of resources
- re-allocation if needed
60
How is the profitability analysis calculated?
| What is the difference compared to traditional profitability?
- focus on assigning cost and revenue to segments of customer base
1 general ledger with salary, benefits, etc.
2 match each account in general ledger to resources
3 utilize resources drivers to calculate activity cost
4 use activity drivers to determine customer cost
5 compare customer cost with customer revenue to get the profitability
Traditional vs customer profitability:
* Traditional: revenue - product cost - admin cost = operating profit
* customer: revenue - product cost - customer cost - asset opportunity cost = customer profit
61
What are elements that increase customer costs?
must be analyzed as part of the customer profitability analysis
- smaller order quantities
- customized and/or more frequent deliveries
- producing and/or stocking a greater number of products
- requirement to hold inventory
- increasing necessity for post-sales support
62
What is the customer lifetime value?
| What issues does it address?
- focus on how many purchases each customer makes instead of only number of customers
- CLV measures the profit streams of a customer across the entire customer life cycle
- contribution to profit of each customer (ranking possible)
Issues addressed:
- understanding how much can be invested to retain a customer by focusing on ROI
- optimally allocate limited resources to maximize returns + choosing the right marketing strategy
- marketing metric helps incentivising on customer service and long-term customer satisfaction rather than short-term sales increases
63
What are elements of the CLV?
| Explain them.
customer lifetime value
1 retention rate
* loyalty, customer satisfaction, switching barriers, variety seeking behaviour; attractiveness of alternative
* customer loyalty model: contractual (lost for good model) vs. non contractual (migration models, markovs chains)
* always a share = retention rate is unstable dynamic factor is chaning purchasing behaviour throughout CLV
2 revenue
* autonomous revenue: not directly influenced / mass marketing
* up-selling revenue: additional sale of same product; frequency; higher price alternatives
* cross-selling revenue: complementary product of other category
* contribution margins: from referral activities
3 cost
* acquisition cost: first initial contact; irreversible investment in customer
* marketing cost: continuous invest in customer; development of customer, marketing methods; retention cost; recovery cost
* sales cost: all cost related to serving customer
64
How is the CLV calculated?
1 recurring revenues - recurring cost = gross contribution margin
2 gross contribution margin - marketing cost = net margin
3 net margin * expected # purchases in 3 years = accumulated margin
4 accumulated margin - acquisition cost = CLV
--> calc of CLV discounted per period with WACC
65
What is benchmarking?
| What could be possible comparison targets?
- important tool for customer analysis, performance measurement and business improvement in general
- improve performance and competitiveness
- comparison with successful competitors
- learning + improving activities, processes, and mgmt
five different comparison targets:
- performance
- technology
- process
- competence
- strategy
66
What are the phases of benchmarking as a CI process?
```
1 What to survey
2 Select Method
3 Gather Data
4 Iterative: Report output
5 Focus on best practices
6 Implement ideas
7 Track
8 Repeat
```
67
What types of benchmarking can be differentiated?
| Describe the characteristics.
Informal benchmarking: unconsciously practised
* talking to colleagues (experience)
* consulting with experts
* talking to ppl at conferences, fairs, presentations
* online dbs and publications to benchmark agains
Formal benchmarking: consciously practised
- Performance benchmarking:
* comparing the performance lvl of orga for a specific process
* opportunities for improvement or setting performance targets
* Involves: financial measures (expenditure, cost of labor, adherence to budget, CF, revenue); non-financial measures (staff turnover, % of admin staff, complaints)
- Best practise benchmarking:
* focus on actual processes within businesses rather than just the performance lvl
* mutually beneficial agreements with benchmarking partner
* benchmarking code of conduct
* whole process by: identifying, capturing, analyzig, implementing best practicies
68
What is intellectual capital?
| Why is it important?
- intellectual resources to "formalize, capture and leverage" to create higher value
- development of brands, stakeholder relationships, reputation and culture of an organization are significant sources for growth and gains
- stronger focus on intellectual material: knowledge, information, intellectual property and experience to create wealth
69
What are differences between tangible and intangible assets?
Tangible assets: Required for business operations
* readily visible
* rigorously quantified
* part of the balance sheet
- investment produces know returns
- easily duplicated
- depreciates with use
- finite application
- best mgmt with "scarcity" mentality
- best leveraged through control
- can be accumulated
Intangible asset: key to competitive advantage in knowledge era
* invisible
* difficult to quantify
* not tracked by accounting standards
- assessment based on assumptions
- cannot be bought or imitated
- appreciates with purposeful use
- multiple use does not reduce value
- best mgmt with "abundance" mentality
- best leveraged through alignment
- Dynamic, short lived when not used
70
How can intellectual capital be classified?
Human Capital:
- employee competence (training, investment, etc.)
- Relationship ability and values
Organizational Capital:
- supportive infrastructure to enable human capital to function
- process capital: techniques, procedures and programs to deliver goods and services
- innovation capital: intellectual properties and intangible assets; R&D; patents; training courses; software applications
Customer capital:
- Relationships with customers: combined value of relationships (partners, suppliers, customers, associations, etc.)
- customer satisfaction: loyalty, repeated business, financial well-being, price sensitivity, etc.
71
What are advantages of intellectual capital measurement?
1 identification and mapping of intangible assets
2 recognition of knowledge flow patterns
3 prio of critical knowledge issues
4 acceleration of learning patterns
5 best practice identification and dispersion
6 constant monitoring of asset value + ways to increase it
7 increased understanding of how knowledge creates interralationships
8 understanding of social networks within an orga + identifying agents which drive the change
9 increase innovation
10 increase collaborative activities + knowledge sharing culture to increase awareness
11 increase identification of employee with orga
12 create performance-oriented culture
72
What are the phases of Monitoring and Managing Intellectual Capital?
Getting started:
- review vision/mission/strategy
- list the possibilities
- review with senior mgmt
- adjust to minimum measures
- define benchmark
Manage the process:
- monitor the measures
- take action when improvement is needed
- identify appropriate IC projects
- implement IC projects
- measure payoff of IC projects
- adjust stratrgy
73
What are methods to measure intellectual capital?
- Direct intellectual capital method:
$ value of intangible asset by identifying individual components (TVC total value creation: discounted projected cf to analyze how events affect planned activities)
- Market cap method:
market-to-bok value difference is IC
- ROA method:
pre tax earnings / average tangible assets = ROA
ROA * average tangible assets = average annual earnings from intangible assets
average annual earnings from intangible assets / WACC = IC
- Scorecard method:
identify components of intangible assets by various indicators, indices and generates a scorecard
not tied to $ value
74
What are advantages and disadvantages of different IC measures?
Perceptual measure:
+ perception affects attitudes and behaviour
+ culture is a measure of normative behaviour
+ knowledge of employee perception.= orga design and more acceptable processes to bring behavioural change
- difficult to establish causal relationship = cannot be generalized
- subjective in nature = baised
- not correlated with performance or profit
Process measure:
+ involves mapping and establishing current processes
+ determine process/system usefulness and effectiveness
+ predict future performance/infra requirements
- formalism
- confusing when dealing with many knowledge domains
- not linked to profit or tangible improvements
Financial measure:
+ provide shareholders with financial value of intangible assets
+ clearly link spending on intangible assets with profits
+ by linking process and financial side IC effectiveness can be improved
- often too complex
- may not always be possible to account for earnings from intangible assets
- do not take people and process factors into account; no problem identification and no improvement design possible
Other measures including social measures:
+ social networks measure the optimum intangible resource allocation and utilisation
+ human capital value addition measures to improve processes
+ econometrics measures reveal tangible benefits and value of intangible assets + resources
- measures do not consider individual perceptions and hence no behavioural change
75
What are elements of performance measurement systems?
- individual measures which quantify the efficiency and effectiveness of actions
- combined measures to assess the performance of an organisation as a whole
- supporting infrastructure which enables an association of acquired data (collection, sorting, analysis and interpretation)
76
What are reasons for managing performance/reasons why PMSs are used?
- formulate a strategy to determine objectives of orag
- manage the strategy implementation process
- challenge assumptions by focusing not only on implementation of strategy but on content validity
- check progress with expected performance
- comply with non-negotiable parameters (minimum standards)
- communicate direction to employees (strategic goals)
- communicate with external stakeholders
- provide feedback by reporting to employees (performance too expected goals)
- evaluate and reward behavior
- benchmark performance
- encourage improvement and learning
77
What are the three key categories of PMS?
- Strategy: roles of mgmt strategy + implementation & challenging assumptions
- Communication: check progress, non-neg parameters;direction to employees
- Motivation: evaluate and reward behaviour
78
What are characteristics of performance measurement frameworks?
- set of measure that provide a "balanced picture" reflecting internal vs. external; non-financial vs. financial; efficiency vs. effectiveness
- framework of measures to provide an overview of the performance (simple and intuitive)
- set of performance measures which are multi-dimensional
- all possible measures have to be mapped onto the applied theoretical account in order to identify where there is a need to focus
- integrated measures into orga functions + orga hierarchy: encouraging goals and actions
- results need to be measured: data for monitoring past performance and planning future performance (contribute to "feed forrward" and "feedback")
79
What is a BSC?
| What are the components?
Balanced Scorecard
- Kaplan and Norton
- strategy centric approach
- translation of mission, vision and strategy into multi-dimensional and actionable goals and objectives
- strongly linked with strategy
```
Core: Vision and Strategy
Customer
Internal Processes
Financial
Learning and Growth
```
80
Describe the four perspectives of the BSC.
- Financial: What needs to be done to succeed financially, asset utilization, investment strategy, measures: EVA, ROI, ROCE, sales growth, CF
- Customer: Who are the target customers? What is the value proposition in serving them? Choosing value prop = strategic decision (operational excellence; product leadership; customer intimacy)
- Internal Processes: identify key processes in order to add value to customers and shareholders; efficient operation; how well is the orga running? Sales development and delivery
- Learning, Growth, Innovation: employee training; corporate culture; foundation for other perspectives; reveal gaps and set goals to achieve; measures: employee skill lvl, employee satisfaction, availability of information
81
What is a success map?
| Give an example.
demonstrates non-financial, internal, leading and short term measures of the BSC and how they affect long-term, financial, external, lagging measures
success or strategy map provides a model of the performance of the orga which covers all aspects of the strategy
Basis: learning & growth
internal processes
financial
customer
Example:
improve knowledge of customer (learning & growth) --> improve marketing (internal processes) --> increase net income (financial) --> improve public confidence (customer)
82
What are strengths and weaknesses of the BSC?
+ clarity of vision and strategy adopted
+ consistent monitoring of strategy
+ concentration on strategy
+ cross-disciplinary hierarchy traversing communication process
+ integration of performance measures for operational objectives at an appropriate lvl
+ cause/effect relationship
- does not express interest of all stakeholders
- lack of long-term commitment and leadership of mgmt
- too many/few metrics = development unattainable metrics
- lack of employee awareness or failure to communicate info to all employees
- constructed as a controlling tool rather than improvement tool
- inappropriate for benchmarking
83
What are different stakeholders from a holistic viewpoint?
- investors
- customers and intermediaries
- employees (incl. labor unions)
- suppliers and partners
- regulators
- pressure groups, communities, media
84
What is the performance prism?
| What elements does it consist of?
- measures of stakeholder satisfaction, stakeholders contribution, strategies, processes and capabilities are taking into account when developing a strategy
- allow to plan for wider improvements across the company
- stakeholder satisfaction is the first viewpoint of performance
- strategy, process and capabilities must be aligned and integrated
- stakeholder-focused measurement and mgmt.
- non-prescriptive framework
Five perspectives:
- Stakeholder satisfaction: Who are key stakeholders and what do the want/need?
- Stakeholder contribution: What is wanted and needed from them on a mutual basis?
- Strategies: What strategies are needed to put n place to satisfy the wants/needs?
- Processes: What processes need to be put in place to support the strategy?
- Capabilities: What capabilities need to be put in place to allow the company to operate and improve these processes?
85
What are strengths and weaknesses of performance prisms?
+ reflects new stakeholders (employees, suppliers, alliance parters) who are usually neglected by other performance measures
+ considers stakeholders' contribution to performance
+ ensures that the performance measures have a strong fundation
- offers little about how perf measures are implemented
- some measures are not effective in practice
- short of logic among the measures; no link between result and drivers
- no consideration of PMSs already in place
86
What is the smart pyramid?
| What elements does it include?
Strategic measurement and reporting technique
- connect orga strategy with operational lvl (objectives based on customer prio remitted top-down; measures from bottom up)
- encourages attention of executives towards horizontal flows of material/info
- define strategy and objectives based on stakeholders perspective and expectation
- central question: "how can stakeholders help to realise the strategy and as a result achieve orga objectives?"
Elements:
(internal efficiency and external effectiveness)
* Top = corporate vision
* Business unit lvl = market (external) and financial (internal)
* core business process = customer satisfaction (ext); flexibility (ext/int); productivity (int)
* department/groups = quality (ext), delivery (ext), cycle time (int), waste (int)
--> all supported by PMS
87
What are strengths and weaknesses of the SMART pyramid?
+ Integrates corporate objectives with operational indicators
+ manages PM systematically
- does not provide mechanism to identify KPIs
- fails to specify form of measures
- does not explicitly integrate concept of CI
88
What are common elements of performance measurement concepts?
- deciding which elements to select and which ones to ignore
- limit number of measures actually needed and reach clarity
- determine performance measures by key objectives which orgas need to improve and design appropriate measures to track the improvement
- very good communication tool by demonstrating how actions of employeees contribute to overall objectives
89
What is the TQM?
Total Quality Management
- considered as management system for a customer-focused organization
- involves all employees in continual improvement of all aspects of the orga
- uses strategy data, and affective communication to integrate the quality principles into the culture and activities
- helps refining and improving internal processes and customer satisfaction
- changes in style of mgmt results in decreased cost, corrective or preventative maintenance, better overall performance, increased number of satisfied and loyal customers
90
What are the principles of TQM?
Total Quality Management = management system for a customer-focused organization; employee involvement in all aspects
1 Be customer focused (only customers determine quality and efforts)
2 Ensure total employee involvement (remove fear + empowerment)
3 Process centered (process improvement)
4 Integrated system (all employees must know vision, mission + work to result)
5 Strategic and systematic approach (effective plan must include quality)
6 Continual improvement (analytical improvement of quality)
7 Fact-based decision making (based on data)
8 Quality must be measurable (QMS)
9 Quality is a long term investment
10 Communication (strategy, timing, methods)
91
How are TQM approaches implemented?
1 Train top management on TQM principles.
2 Assess culture, customer satisfaction, and quality management system.
3 Top management determines the core values and principles and communicates them.
4 Develop a TQM master plan
5 Identify and prioritize customer needs and determine products or services to meet those needs.
6 Determine the critical processes which produce customer quality products or services.
7 Create process improvement teams.
8 Managers support the efforts by planning, training, and providing resources to the team.
9 Management integrates changes for improvement in daily process management.
10 Evaluate progress against plan and adjust as needed.
11 Provide constant employee awareness and feedback.
92
What are the fundamental concepts of the EFQM?
European Foundation for Quality Management Excellence Model (EFQM)
1 Adding value for customers
2 Creating a sustainable future (economic, environmental, social conditions)
3 Developing organisational capability (effectively managing change)
4 Harnessing creativity and innovation (value increase through CI)
5 Leading with vision, inspiration, and integrity (leaders shape the future)
6 Managing with agility (respond to opportunities and threats)
7 Succeeding through the talent of people (empowerment)
8 Sustaining outstanding results
93
What are elements of the EFQM?
| What is the underlying management logic?
Enables:
- Leadership: Mission/Vision/Ethics and role model
- People: planning, managing, improving - fairness + equality, empowerment
- Policy & Strategy: present and future needs
- Partnerships & Resources: external relationships; internal resources; balance
- Processes: design, manage and improve
Results:
- People Results
- Customer Results
- Society Results
- Key Performance Results
Management logic based on RADAR:
R Results need to be determined and should be achieved
A Approaches have to be planned+developed as integrated set of directives
D Deploy approaches systematically to ensure implementation
AR Assess and Refine deployed approaches; monitor results, improve, learn
94
What are key elements describing EFQM?
- Diagnostic tool for self-assessment to grade and benchmark
- self-assessment as systematic regular comprehensive way to review orga activities and results
- identify strengths and areas for improvement
- increasing performance
- continual improvement
- flexibility in application and can be used as over-arching framework alongside other tools and standards such as BSC
95
What are the steps to carry out Self-Assessment within the EFQM?
```
1 Develop commitment
2 Plan Self-Assessment
3 Establish teams to perform self-assessment and educate them
4 Communicate self-assessment plans
5 Conduct self-assessment
6 Establish action plan
7 Implement action plan
8 Review progress
```
96
What are strengths and weaknesses of the EFQM?
+ Systematic and non-prescriptive model
+ Uses self-assessment approach to achieve orga excellence
+ Strengthens sense of quality
+ Recognises strengths and weaknesses of orga
+ Creates conditions for comparative analysis of business processes with external businesses (benchmark)
+ Feedback from results help to improve enablers (CI)
- No focus/Priorities - no links
- Criteria are not specific within a company
- Not a strategic mgmt tool and therefor not an instrument for strategy implementation
- not suitable for enterprise communication
- promotes tendency to bureaucracy
- no guidelines on how to design and conduct effective performance measurement
97
What are the three pillars of performance measurement?
Features: basic features of PerfM to be system which measures orga performance
Roles: role of PerfM to implement orga strategies
Processes: information provision as key area for process of PMS
98
What is a PMS?
Performance Measurement System (PMS)
- provides orga with the information necessary to identify strategies that offer greatest potential for meeting targets set by the orga
- provision of useful info to effectively fulfil required tasks
- help to identify and develop the most feasible set of actions for successful achievement of its objectives
- gives employees more tangible understanding of how their daily actions contribute to the orgas goals and mission
99
Describe the underling characteristics of the BSC vs. EFQM.
Origins:
* BSC: performance measurement, value creation
* EFQM: TQM
Aspiration and benefit:
* BSC:
> performance improvement
> translate strategy into focused, operational and measurable terms
> enable strategic performance
* EFQM:
> performance improvement
> identify strengths/weaknesses and areas for improvement in processes
> Encourage and enable best management practice
Deliverables:
* BSC: logic
> set of principles of four dimensions (leading + lagging)
> alignment with strategic objectives and measures
* EFQM:
> benchmark and assessment of quality of orgas processes
> scoring against 9 criteria
> areas of relative process strengths and weaknesses
Development approach:
* BSC:
> Strategy-driven, iterative, hypothesis-driven, mgmt-involved, macro-view
> future-looking
> set of objectives and measures unique to orga
> step change in performance
* EFQM:
> Process-driven, data collection, scoring-based, detail-oriented
> present-focused
> set of criteria and measurement areas are the same for all orgas
> CI
Success Factors:
* BSC:
> mgmt sponsorship + commitment
> ongoing process embedded into governance process
* EFQM:
> mgmt sponsorship + commitment
> ongoing process embedded in day-to-day mgmt
100
What are district differences of the characteristics between the BSC and EFQM?
List them briefly.
BSC:
* Context dependent (tailored every time)
* Prescriptive and focused
* Hypothesis driven and subjective
* Aspirational (to-be-view)
* Explicit cause/effect model
* External variables unsystematically addressed
EFQM:
* Context independent (best practice oriented)
* Descriptive and comprehensive
* Fact-based and objective
* Current (as-is-view)
* Implicit cause/effect model
* External variables systematically adressed
101
What are district differences of the characteristics between the BSC and EFQM?
Describe them in detail.
BSC:
* Context dependent (tailored every time):
> every BSC is different based on unique strategy + objectives
> specific measures and objectives f/e company
* Prescriptive and focused
> unique and focused set of priorities by mgmt
> promotes the idea of focusing on key drivers of success
* Hypothesis driven and subjective
> BSC forces assumptions and value judgements about perf lvls
> represents insights, opinions, ideas, expertise of mgmt team
* Aspirational (to-be-view)
> built on vision (2-5 years) - what does the orga want to achieve
> start from vision and works backwards to identify gaps in present
> defines highest requirements for change to fulfil strategy
> no analysis of quality of processes and activities today
* Explicit cause/effect model
> cause and effect driven within four dimensions
> interlinked objectives
* External variables unsystematically addressed
> environmental impact on society etc is not system addressed
> external factors are only included when key part of strategy
> only when setting targets for measures (benchmark)
EFQM:
* Context independent (best practice oriented)
> self-assessment process against pre-determined criteria
> industry influences the interpretation
* Descriptive and comprehensive
> comprehensive description of how processes are managed & deployed
> no inherent prio
* Fact-based and objective
> populated with facts and data gathered within orga
> criteria and measurement used are the same for all orga (benchmarking)
* Current (as-is-view)
> self-assessment outcomes describe current state of processes
> strengths and weaknesses today based on objective criteria
> no judgement where focus needs to be
> encourage CI
* Implicit cause/effect model
> includes enables and results that are linked
> link is not drawn explicitly together between enablers and results
* External variables systematically adressed
> society as an explicit part of the results with feedback
> focus on competitor and best in class (benchmark)
102
What are pros and cons of merging BSC and EFQM?
| How are they fit together?
+ useful dimension and leverage knowledge and insight of each other
+ enriches mgmt dialogue and process by providing additional sources of intelligence
- risk of misleading goals
- creating an unnecessarily cumbersome process not fit for purpose
Fitting BSC and EFQM together:
* strategy development + self assessment to set objectives
* Objectives based on balanced scorecard objectives, measures and action plans
* Plan based on. business planes & budgets
* Act based on operations
103
What are potential pitfalls of Performance Measurement and Management?
1 Efforts to implement (laborious) destroy positively influence on performance
2 information overload for mgmt (paralysis by analysis)
3KPI does not reflect orga goal
4 KPI is not quantifiable
5 KPI is not long term oriented
6 perverse incentives provided by false or short-term KPIs
7 KPIs undermining each other (failure to consider KPIs together)
8 cost of measurement
9 cultural resistance of employees
10 changing business environments with changing KPIs
11 adding more and more KPIs without discarding old ones
12 changing priorities not reflected in KPIs
104
What are potential pitfalls of Performance Measurement and Management?
1 Efforts to implement (laborious) destroy positively influence on performance
2 information overload for mgmt (paralysis by analysis)
3KPI does not reflect orga goal
4 KPI is not quantifiable
5 KPI is not long term oriented
6 perverse incentives provided by false or short-term KPIs
7 KPIs undermining each other (failure to consider KPIs together)
8 cost of measurement
9 cultural resistance of employees
10 changing business environments with constantly changing KPIs
11 adding more and more KPIs without discarding old ones
12 changing priorities not reflected in KPIs
105
What are strategic goals/outcomes according to the baldridge classifications?
- Customer
- Product and Services
- Human Ressources
- Financial and markets
- Oranizational effectiveness
- Governance and Social Responsibility
106
What are customer measures that could form a KPI according to the Baldridge Classification?
- Customer satisfaction
- Customer retention
- Gains and losses of customers and customer accounts
- Customer complaints and warranty claims
- Perceived value, loyalty, positive referral, relationship building
107
What are product and service measures that could form a KPI according to the Baldridge Classification?
- internal quality measurement
- defect levels
- field performance of products
- response times
108
What are financial measures that could form a KPI according to the Baldridge Classification?
- Revenue
- ROE
- ROI
- Operating Profit
- Pretax profit margin
- Asset utilization
- EPS
109
What are HR measures that could form a KPI according to the Baldridge Classification?
- employee satisfaction
- training and development
- work system performance and effectiveness
- safety
- turnover
110
What are organizational measures that could form a KPI according to the Baldridge Classification?
- Cycle times
- Production flexibility
- Time to market
- Cost efficiency
- productivity
111
What are Governance and Social Responsibility measures that could form a KPI according to the Baldridge Classification?
- stakeholders trust
- Ethical behaviour
- regulatory/legal compliance
- Financial ethics review
- Community service
112
What are different types of KPI metrics?
| Give three examples each.
Behavioural metrics: (what employees do to build a brand)
* employee understanding of strategy
* experience delivery
* communication
Interaction metrics: (how customers interact)
* awareness
* product reviews
* demo trails
Perception metrics: (customer perceptions)
* customer satisfaction
* purchase intent
* positive assosications
Performance metrics
* lead generation
* purchases / re-purchases
* lifetime value
113
What is a major difference between the 'customer profitability' and 'traditional profitibility' approaches?
The incusion of asset opportunity costs.
114
What is ABC?
| What are pros/cons?
Accounting based calculation
Managerial accounting method and element of profitability analysis
```
Pro:
+ more accurate cost price
+ impact of changes in production processes can be simulated
+ cost drivers stimulates improvement
+ better cost price can support strategy
```
Cons:
- ABC is complex
- significant time need to identify all resources and cost drivers
- complicated and difficult to maintain
115
What is the goal of profitability analysis?
- forward looking: right decisions about current and potential customers
- backward looking: identify what is actually working to increase profitability
- operational: analyse and improve resource allocation
116
What are tools/methods for performing self-assessment?
- Questionnaire
- Matrix Chart
- Workshop
- Pro-forma
- Award simulation
