MODULE 3 SMA

1. Explain how performance measurement is used for implementing and monitoring strategy, decisionmaking, motivation and signalling. Performance measurement (pm) has four main roles in most organisations: Effective measurement criteria 1. to help management implement and monitor strategy 2. to support management in decision making 3. to motivate managers and other employees and 4. to communicate with or signal to stakeholders Ethics of a CPA act with - integrity - pm need to be valid and reliable -objectivity no bias, conflict of interest, undue influence -competence adequate understanding of the validity and reliability of non financial performance -due care -confidentiality Making decisions Performance measures help managers make better decisions by providing information for decision making. The decision making model has four parts: a. statement of objective b. identification of alternative strategies c. assessment of strategies in terms of cost, benefits and expected values d. choice of optimal decision determined by measuring its expected outcome against a target or benchmark Performance measures relevant to decisions are: a. market share b. manufacturing capability c. time to market and d. competitors cost and prices Motivation Performance measurement helps managers to motivate employees to focus on organisational goals and to do their best for the organisation. Motivation is most effective when -objectives are measurable -there are clear targets set for each measure -targets are negotiated rather than imposed from above -mangers own activities cause the performance being measured -managers are held accountable for achieving their negotiated targets -performance measurement is used in a positive way to learn and improve, not to assign blame and -managers are rewarded (directly or indirectly) for achieving performance targets In addition to motivating desired behaviour, performance measurement systems can discourage undesirable behaviour. If employees know that their behaviours and results are measured and monitored,

they are less likely to take inappropriate risks in pursuing their own private interests. Badly designed performance measures can motivate dysfunctional behaviour. Unrealistic targets set or inappropriate accountabilities established, employees may ignore perceived irrelevant targets and even become dissatisfied with their jobs and their employers Signalling Occurs when a measure is used to communicate information. -financial report is a signal for the performance of management -performance measure can be used internally. Managers who cannot achieve their goals are given increased access to resources MCS link strategy to performance by providing guidance to line managers on implementing organisational strategy and feedback to top management about the organisations success in this endeavour Strategy - is the interface between the external competitive environment and the organisations capabilities. Three categories a. Business Strategy kind of business and industry b. Competitive Strategy how the org will compete c. Operational Strategy tactical and operational decision on how to deliver its competitive strategy. Management Control System (MCS) provides interface between the strategy of an organisation, its operation, and the organisations performance MCS link strategy to performance by providing guidance to line managers on implementing organisational strategy and feedback to top management about the organisations success in this endeavour 1.ANTHONY 1965 defines MCS as the process by which managers ensure that resources are obtained and used effectively and efficiently in the accomplishment of the organisations objective - takes the economic focus in effective and efficient use of resources a. efficiency relationship between inputs ( scarce resources) and outputs measured by profitability b. effectiveness achieving the nominated goal of the org 2. ABERNETHY AND CHUA 1996 defines MCS as a system that comprises a combination of control mechanisms designed and implemented by management to increase the probability that organisational actors will behave in ways consistent

with the objectives of the dominant organisationsal coalition. -takes the behavioural view MCS elements: -budgets -policies and procedures -strategic performance measurement system , ex. Balanced scorecards -value based controls MCS less formal elements -recruitment, training and socialisation -supervision through the organisation hierarchy -performance appraisal process
There is no specific discussion titled 'characteristics of effective management control systems'. However, we can see that elements of the MCS include budgets, policies and procedures, and strategic performance measurement systems such as balanced scorecards... The discussion in Part B (page 3.15 onwards) specifically focuses on 'effective performance measures' and building these into suitable scorecards. So, from this we can identify several characteristics of effective MCS.

costs to the product. In this way, backflushing simplifies the costing process (as opposed to detailed costing and variance analysis).

5. Timeliness - provides information early enough to allow action to be taken. 6. Accessibility - authorised organisational participants who need the information should be able to find and use it. 7. Controllability - the ability to improve or reduce the value of the measure through action. What is measured should be controllable 8. Resistance to gaming or manipulation Gaming - decisions that alter the outcomes of performance measures in ways that do not benefit the organisation Manipulation - influencing performance measures so that they no longer reflect what was originally intended - it is a dysfunctional behaviour that occurs to influence performance measures so that they do not reflect what was originally intended. -it is akin to fraud 9. Relevance / Applicability - selected measures are consistent with the achieving the organisations goals Even if a performance measure has many desirable characteristics (i.e. it is valid, reliable, clear, cost effective, timely, accessible and controllable) we still need to consider whether it: provides information that is useful for decision-making. motivates behaviour that makes a difference for the organisation. prevents behaviour that may be dysfunctional. supports signalling objectives.

2. Identify the characteristics of effective operational, strategic and csr related performance measures and management control system Criteria for effective performance measures 1. Validity / Accuracy - how well a measure captures the key issue of importance. 2. Reliability / Replicability - how replicable a measure is
Validity is typically related to accuracy. We want to know whether the performance measure is appropriate for (i.e. directly related to) the goal or outcome we want to achieve. As such, the measure needs to be accurate, or 'on target'. Reliability is typically related to precision. A reliable measure is one that results in the same output regardless of how the data was collated. As such, repeated measurement attempts that result in the same output are termed 'precise'. Our aim is to be both accurate and precise (i.e. continuously hit the target). But sometimes there will be a trade off between these measures (as per Figure 3.2 on SG 3.18).

Specific Measurable Acceptable Realistic Time-based What you measure is what you will get. 3. define benchmarking and explain the different approaches to benchmarking performance against what may be regarded as best practice Benchmarking involves comparing your organisations activities, products or outcomes against a relevant reference point. Benchmarking enable you to -make comparison of your performance relative to another organisation -identify best practice within and outside your industry -obtain a better understanding of how to undertake your processes -avoid mistakes made by other organisation or business units and - implement a culture of continuous improvement

3. Clarity or Understandability - the extent to which a measure is able to be understood with little or no ambiguity in interpreting the results A measure that is not understood by its user is useless. Simplicity is always desirable. 4. Low Cost - where expected benefits exceed the associated costs of measurement. Cost/benefit is difficult to assess, as benefits rarely received in cash, they come in terms of clarity, usability, and impact on motivation
Backflushing refers to a type of automated measurement or costing system. Instead of itemising the inventory and manufacturing costs throughout the whole production process, a backflushing system waits until a product is finished and then simply assigns standards

Best practice refers to the best reference point for comparison. It is often the best performer within the industry. Best practice is not a limiting factor, but more like a moving target. Its purpose is developing ways of improving performance and ultimately surpassing the benchmark and continuing to improve. Deciding on performance measures 1. be sure that you are benchmarking a performance that is actually what you want your organisation to achieve 2. selecting measures for benchmarking is ensuring that reasons can be identified and strategies developed for improving your organisations relative performance on this measure. Benchmarking partner Internal benchmark use of historical data, readily available and understandable. Unlikely to provide new ideas for organisational change. Example is traditional budgeting. SPLITZER 2007 the cultural and motivational benefits of making performance measurement an opportunity to learn and improve instead of to blame and punish are very strong in organisations that adopt an approach of comparing the performance of business units. Comparison between business units can be useful. However, competition can foster dysfunctional behaviour because winning becomes the end game, replacing organisational goal achievement. Mix another benchmark that perhaps results in a reward (intrinsic and extrinsic) if overall organisational goals are met or exceeded. Industry Benchmark - comparison of an organisations performance measures against either industry averages or best practice. Same market segment, similar products, process or technology. External Benchmark best practice organisation outside organisations industry Obtaining benchmarking measures 1. obtain data directly from the organisation with best practice 2. competitors in the same industry but in different geographical location; set up benchmarking partnership, search trade journals and other public data 3. rely on secondary sources- refer to consulting organisations who maintain benchmarking database and provide benchmarking services Problems with benchmarking 1. level of participation 2. does not explain why there are differences 3. context of data may be different

4. non-standardised data 5. historical nature of data 4. explain the role played by the strategic performance measurement system as a part of the corporate governance system, in particular supporting the implementation of strategy and complementing other aspects of csr Business Excellence Model developed by the European Foundation for Quality Management (EFQM) -integrated self assessment tool comprising nine elements and divided into two groups: results and enabling criteria Results Criteria business results measured through people satisfaction, customer satisfaction, impact on society Enabling Criteria processes, people, policy and strategy, partnership and resources, and leadership Balanced Scorecard, innovation and learning permeate this model. Performance Prism multiple stakeholders inside and outside the organisation and their expectation needs to be reconciled. NEELY 2002 - Performance prism differs from other non financial performance measurement systems in that it considers all stakeholders such as regulatory agencies, pressure groups, and suppliers. BALANCE SCORECARD
A balanced scorecard refers to an organisational performance measurement system that caters for a combination of financial, non-financial, short-term, long-term, leading and lagging performance measures and objectives. While Kaplan & Norton proposed the balanced scorecard with four perspectives (as noted in SG 3.36), balanced scorecards can be designed in any number of ways, and have more or less than four perspectives. Note that some organisations will include sustainability and environmental issues in a separate standalone perspective, whereas other organisations will integrate these issues into the existing perspectives. Balanced scorecards can be produced at an organisational, divisional or business unit level. The measures in these scorecards typically relate to the objectives or desired outcomes of those entities/units. Strategy maps can reveal the relationships between all the measures in the balanced scorecard, mapping them out as cause-and-effect chains. Note that strategy maps can be used on their own, or in conjunction with balanced scorecards.

KAPLAN AND NORTONS 1996 - scorecard has four perspectives 1. financial perspective 2. customer perspective 3. internal process perspective 4. learning and growth perspective Balance means -traditional focus on the financial viewpoint is incomplete and therefore potentially unbalanced. -trade-off between different aspects of performance

-financial measures are often lagging indicators that describe past or historical performance -leading indicators provide a pointer for the future - both leading and lagging indicator should be included in the BSC
Consider an organisation that is concerned with product quality. An example of a leading indicator might be the number of training sessions for processing staff. An example of a lagging indicator might be the number of defective products. The leading indicator (i.e. number of training sessions) is a measure of an action that creates outcomes (i.e. less defective products). The lagging indicator (i.e. number of defective products) is a measure that reveals the outcome of previous actions (or inactions

system. It is a cause and effect chain of strategic objectives through which strategy will be implemented. -the key point to understand is that in constructing a strategy map, the top-level objectives and measures need to be supported by a set of subordinate objectives and measures. (top to bottom) - this should only include those objectives and related measures to be strategically important. - the top of the map is the aim of the organisation to create value for its shareholders. This is measured using EVA = profit less capital charge Three main strategies to increase market share: -increase brand loyalty develop customer service, continuous contact, after sales contact is measured -develop corporate sales -provide better service for its dealers Cascading Measures measures and targets have to be translated to the levels where the activity occurs. This means that each organisation unit will have their own BSC or the extreme, each employee. Three possible approaches 1. direct cascading when a measure in a in a top level scorecard is a sum of measures from lower levels. 2. cascading by perspective example synchronise production time and delivery time 3. logical thinking is used to connect BSCs at different levels and across perspectives . e g. reduce cost/ lower price/ higher market share Target Setting - develop appropriate targets for the measures 5. demonstrate how performance measurement system can affect employees motivation to achieve organisational objectives and to act in an ethical manner MOULANG AND FERREIRA 2009 - points out that environmental strategies are poorly integrated with overall business strategy. -56.6% of organisations had no KPIs addressing environment related matters Sustainability means living off the interest, and preserving the capital CSR making the business and the community mutually dependent, and hence united in their definition of successful goals. Eco green green image to customers Practical guidance for sustainability reporting is available form the GRI guidelines in six areas: Economic, environment, human rights, labour, product responsibility and society.

Types of Scorecard 1. Key performance indicator (KPI) scorecard contain fairly large number of measures, both controllable and uncontrollable. Designed to support and monitor decision making 2. Strategy scorecard measures are interlinked an a causal chain and should be controllable. Used to set targets and create accountability. 3. Stakeholder scorecards used for signalling Strategy Map
1. The strategy map is identifying the top layer from the map using the organisation's vision. But the map is derived from the top-down process . However, the arrow on the example is derived from bottom to the top. Could you please explain why While we might use a top-down approach to create the strategy map, the organisation needs to implement a bottom-up approach in order to achieve the vision or goal. This is why the arrows are pointing upwards 2. how strategy map relates to Sustainability balanced scorecard Strategy maps can provide a visual representation of how measures in the balanced scorecard all link together to achieve organisational objectives. Figure 3.7 is a complex strategy map that incorporates sustainability into the business strategy. Note that balanced scorecards do not necessarily need to follow a matrix format, nor do they need to have the same four perspectives as highlighted by Kaplan & Norton. 3. Cascading by perspectives: At the top-level, in the Customer perspective, assume that the relevant measure is 'Customer satisfaction levels'. If internal research reveals that customer satisfaction levels are based on the quality of products, then, at the lower-level, measures relating to 'Quality control' initiatives may also be in the Customer perspective. We can see that the measures cascade down through the organisation, within the same perspective. 4. Logical linking: At the top-level, in the Financial perspective, assume that the relevant measure is 'Revenue Growth'. At a lower-level, in the Internal process perspective, measures such as the 'Sales conversion rate' may be appropriate. That is, the ability for the sales team to convert marketing opportunities into sales will likely increase customer numbers, and therefore revenues. We can see that there is logical linking between different levels and different perspectives

Strategy map is a useful tool to link an organisations vision, mission and strategy with its measurement

Motivation ROBBINS 1994 the willingness to exert high levels of effort to reach organisational goals, conditioned by the ability to satisfy some individual need. Goal (Desire) + Effort (Drive) Maslows Hierarchy of Needs 1. Physiological food, drink and shelter 2. Security safety and protection from physical and emotional harm 3. Social affection, belonging, acceptance and friendship 4. Esteem self-esteem (internal, self-respect, autonomy, and achievement 5. Self actualisation - growth, achieving ones potential and self-fulfilment Hertzbergs hygiene and motivation factors 1. Hygiene factors- eliminate dissatisfaction; do not motivate employees but their absence is demotivating. Ex providing a higher salary will not motivate them to perform better. If you pay twice the salary, the employee is not going to perform at twice the level. 2. Motivation factors achievement, recognition, the work itself, responsibility and achievement Vrooms expectancy theory of motivation Motivation is a function of two things -expectancy the expectation that effort will lead to a desired outcome -instrumentality the expectation that achieving the outcome will lead to the reward that an individual seeks Two main types of reward -intrinsic -extrinsic SKILLS & KNOWLEDGE - while an individual my be highly motivated, without the requisite skills and knowledge, low performance will result. -skills and knowledge be measure by a strategic jobcoverage ratio. To measure this ratio, the skills required to fulfil an organisations strategic objectives are identified; then a skills audit of the current workforce is undertaken Rewards should match performance/attainment of goals Gainsharing the sharing of increased profits resulting from improvements in productivity Linking rewards to performance Timing Group and Individual Performance Agency Theory