Nonfinancial and Multiple Measures of Performance
Chapter 18
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Learning ObjectivesL.O. 1 Explain why companies use nonfinancial performance measures.
L.O. 2 Recognize the reasons why performance measures differ acrosslevels of the organization.
L.O. 3 Understand when the use of a single measure or multiplemeasures of performance is appropriate.
L.O. 4 Understand how the balanced scorecard helps organizationsrecognize and deal with their opposing responsibilities.
L.O. 5 Understand how to apply the methods involved in an effectiveperformance measurement system.
L.O. 6 Identify examples of nonfinancial performance measures anddiscuss the potential for improved performance resulting fromimproved activity management.
L.O. 7 Explain why employee involvement is important in an effectiveperformance measurement system.
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Beyond the Accounting Numbers
L.O. 1 Explain why companies use nonfinancial performance measures.
Problems with financial measures:
• Often not useful in identifying the causeof operational problems
• Commonly reported only on a monthly,quarterly, or annual basis
• Many people in the organization do not seehow their work translates into financial results.
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Nonfinancial MeasuresLO1
• Nonfinancial measures direct employees’attention to those things they control.
• In the case of a desk clerk at a hotel, measuringthe clerk's performance in terms of customersatisfaction would be meaningful
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Organization Environmentand Business Strategy
LO1
• Mission:Organization’s purpose
• Mission statement:Description of an organization’s values,definition of its responsibilities to stakeholders,and identification of its major strategies
• Business level strategy:Organization’s plan to compete in eachof its businesses
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Responsibilities Accordingto Level of Organization
L.O. 2 Recognize the reasons why performancemeasures differ across levels of the organization.
• Stakeholders:Groups or individuals, such as employees, suppliers,customers, shareholders, and the community, whohave a stake in what the organization does.
• Business model:Description of how different levels and employees inthe organization must perform for the organizationto achieve its goals.
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Business ModelLO2
BranchLeadership
SatisfyEmployees
ExcellentAdvisers
EfficientOperations
BuildKnowledge
ActEthically
SatisfyCustomers
BuildRevenues
ControlCosts
ReturnProfits
JYC InvestmentsBusiness Model
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Multiple Measures or aSingle Measure of Performance?
L.O. 3 Understand when the use of a single measure ormultiple measures of performance is appropriate.
Single Measure
Profit
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Multiple Measures or aSingle Measure of Performance?
LO3
Multiple Measures
Employee satisfaction
Employee learning
Branch costs
Customer satisfaction
Regulatory violations
Branch profitability
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Balanced Scorecard
L.O. 4 Understand how the balanced scorecard helps organizationsrecognize and deal with their opposing responsibilities.
• Balanced scorecard:Set of performance targets and results that showhow well an organization has performed in meetingits objectives relating to its stakeholders
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Four BalancedScorecard Views or Perspectives
Financialperspective
Customerperspective
Internalbusiness
processesperspective
Learningand growthperspective
Strategy
LO4
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Four BalancedScorecard Views or Perspectives
LO4
• Many, if not most, organizations includethe four perspectives listed here.
Objectives
Measures
Targets
Initiatives
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Four BalancedScorecard Views or Perspectives
Financial To succeedfinancially, how
should weappear to our shareholders?
• Increased revenues• Reduced costs
Customer To achieve ourmission how shouldwe should appearto our customers?
• Relationships• Timeliness
Crown Castle's scorecard includes the following:
LO4
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Four BalancedScorecard Views or Perspectives
Internal To satisfy ourshareholders and
customers, in whatbusiness processwe must excel?
• Reduce cycle time• Manage projects
Learningand
Growth
To achieve our missionhow will we sustain our ability to change
and improve?
• Employee satisfaction• Improved global knowledge• Promote career development
Crown Castle's scorecard includes the following:
LO4
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Strategy MapLO4
FinancialPerspective
Addcustomers
Improvereturn
Growrevenue
Satisfycustomers
Reduceerrors
Controlcosts
Improveefficiency
Buildknowledge
Developleaders
Satisfyemployees
CustomerPerspective
InternalBusiness
Perspective
Learningand GrowthPerspective
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Continuous Improvementand Benchmarking
L.O. 5 Understand how to apply the methods involved inan effective performance measurement system.
• Continuous improvement:Continuous reevaluation and improvement ofthe efficiency of the organization’s activities.
• Benchmarking:Continuous process of measuring a company’sown products, services, and activities againstcompetitors’ performance.
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Nonfinancial MeasuresL.O. 6 Identify examples of nonfinancial performance measures
and discuss the potential for improved performanceresulting from improved activity management.
Customer Satisfaction Measures
Quality control
Delivery performance
Bookings and purchase orders
Market share
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Nonfinancial MeasuresLO6
• Quality control:Increase customer satisfaction.
• Delivery performance:Deliver goods and services when promised.
• Bookings and purchase orders:A decrease in booking and purchase orderssends a signal to management to devotemore marketing effort to sales.
• Market share:If the market is growing faster than the company'ssales, the company is, in effect, experiencing adecline in sales.
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Nonfinancial MeasuresLO6
• Functional performance measures keep processesefficient and effective.
• Manufacturing cycle time:Time involved in processing, moving, storing, andinspecting products and materials.
• Manufacturing cycle efficiency:Measure of the efficiency of the total manufacturingcycle; equals processing time divided by themanufacturing cycle time.
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Nonfinancial MeasuresLO6
Productivity• Productivity focuses on the efficient
conversion of inputs into outputs.
• Partial productivity measuresexpress the relation betweenoutput and only one input.
Output (quantity or value)Single input such as labor (quantity or value)
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Nonfinancial MeasuresLO6
Productivity• Total factor productivity:
the ratio of the value of outputto the value of key inputs
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Employee InvolvementL.O. 7 Explain why employee involvement is important
in an effective performance measurement system.
Why employee involvement?
• Many managers believe that when workerstake on real decision-making authority, theircommitment to the organization and itsobjectives increases.
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Employee Involvement
Why employee involvement?
• When decision-making responsibility lieswith workers closer to the customer, workersare more responsive to customer concernsand can make informed decisions.
LO7
• Giving decision-making responsibility toworkers uses their skills and knowledge andmotivates them to further develop those skillsand knowledge in an effort to improve theorganization’s performance.
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Employee InvolvementLO7
• For effective employee involvementthe evaluation system must:
Convey the organization’s objectivesand critical success factors
Promote goal congruence
Be applied consistently and accurately
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Difficulties in Implementing Nonfinancial Performance Measurement Systems
LO7
• Fixation on financial measures
• Reliability of nonfinancial measures
• Lack of correlation between nonfinancialmeasures and financial results
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End of Chapter 18
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
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