22421: Management Decisions and

Control
Lecture 2: Introduction to performance measurement

Lecture objectives
Theory recap from last week:
Johnson & Kaplan (1987) Relevance Lost
This week: to understand the basic
principles of performance
measurement:

Why measure performance?

What is performance in organisations?
Basics of measurement
Performance measurement systems
Design criteria

Theory Recap Questions

Theory Recap Questions

Johnson & Kaplan (1987, p.6-12)
describe the development of
management accounting techniques
throughout history, explaining why
the needs of types of organisations
drive the emergence of innovationChin1
management accounting.

Theory Recap Questions

1. Draw a timeline mapping the key
phases in the development of
management accounting techniques
and systems. Try to show the
approximate periods in time and the
Ch 1
corresponding advances in the types
of management accounting
information.

Theory Recap Questions

2. Explain the benefit of the following
innovations in management accounting
information:
a. Basic conversion efficiency measures (e.g.
cost/hr, cost/pound)
b. Segment reporting and summary performance
measures of managerial performance
Ch 1
c. Standard costing procedures
d. Overhead allocation methods
e. Divisional Return on Investment
f. Responsibility accounting

Why measure performance?

Why measure
performance?
What gets measured gets done
- Robert Kaplan

Why do organisations
measure performance?
Implement and monitor strategy
Support managerial decision making
Motivate managers and employees
(evaluation and/or rewards)
Communicate with stakeholders
Ch 12

Ch 1

Q: But why do most

organisations use
measurement to do this?
Why not something else?

Why do organisations
rely on measurement?

As organisations grow:
Decentralisation
Specialisation
Inter-dependencies

Ch 12

What is performance in
organisations?

What is performance?
Depends on the level:
Individual?
Division, department or function?
Whole-organisation?

Performance of activity (process) or

outcome (output)

Organisational
performance
is
Achievement of organisational
objectives:
What is the organizational unit trying to
achieve?
Profit and
Reputation and
Specific
returnsaims?
to shareholders customer satisfaction
Quality products
Long term growth

Organisational
unit

Innovation
Stakeholder
management

Safety

Employee
satisfaction
Environmental
management

Organisational
performance
Objective
To have shareholder return in top
quartile (compared to peers) on 5 year
rolling basis
Performance
Relative magnitude of financial returns
(over 5 years)

Task: Take one of the

following objectives and
translate it into a relevant
definition of performance

1. To offer a wide range of wellObjective

designed,
functional home
furnishing products at prices so
low that as many people as
possible will be able to afford
them
2. To organize the worlds
information and make it
universally accessible and useful
3. To inspire and nurture the human
spirit one person, one cup and
one neighborhood at a time

Performance?

How do we achieve
objectives?
Organisational strategy:
The long term direction to achieve an
organisations mission and objectives
3 levels:
Corporate strategy
Competitive strategy
Operational strategy

Ch 1

Corporate strategy
Choices about the types of
businesses
How best to structure and finance
the organisation
Single business
units

vs.

HQ
multi-business

portfolio vs. leverage

Porter (1980)

Competitive (business)
strategy
The way a business competes within
its chosen market
Distinct business strategies for each
business unit
Cost Leadership vs. Differentiation vs.
Niche

Operational strategy
Tactical and operational decisions about
how the organisations will deliver
competitive strategy:
How does the business function on a daily
basis?
What are the core activities or processes?
How do we structure our processes and
activities?

Basics of measurement

What is a measure?
A measure transforms something in reality into
a quantified, standardised unit of information
Can also be referred to as:

Indicator
Metric
Scale
Index

Measures must have units

Performance
measure

Activity

Outcome of
activity

Measured
output
Essay
marking
guide:

Use of research
Communication.

Performance measures generally focus on the

outcome of activity, process or behaviour

Performance measurement
systems

Performance
measurement systems
a set of processes that includes the
collection, analysis and reporting of
actual performance, usually compared
to a target
Ch 12

Cybernetic
loops

How do performance
measurement systems
work?

Pre-conditions of cybernetic control:

1. There are measures that enable the
quantification of an underlying phenomenon
activity or system
2. There are standards of performance or targets to
be met
3. There is a feedback process
4. There is a comparison of the outcome to the
standard
5. There is the ability to modify the phenomenon,
activity or system

Elements of P.M. system

Activity
Informat
or
ion
outcomes

Measur
Informati
Measur
ed
on
es
output
system

Productio
n report
____________
Receipts
____________
____________
____________
ERP
Inventory
____________
____________
System
Audit
____________
____________ (e.g.
____________
____________ SAP)
____________
____________

Chain
produced
(metre) per
hr
Cost ($) per
metre
produced
Material
wastage
(%) per
metre
produced

Stand
ard
/
target

85m/h 72m/h

$0.65/
m

$0.35/
m

35%

8%

Evaluat
ion

Design criteria

Design criteria
1. Validity: the extent to which a measure
captures what is intended
2. Reliability: the extent of accuracy,
objectivity and precision of the
measurement
3. Clarity: the extent to which the measure
(and measured output) is easy to
understand, without vagueness in
interpretation
From Malmi & Brown (2009) CPA 104 Strategic Management Accounting

Design criteria
4. Cost efficiency: the cost of collecting
and measuring performance information
does not outweigh the information
benefits
5. Timeliness: the extent to which
information arrives in time for analysis
and action to be taken
6. Access: the extent to which the
measurer has
the right to access to the
From Malmi & Brown (2009) CPA 104 Strategic Management Accounting

Design criteria
7. Controllability: the extent to which you
can improve or reduce the value of the
measured output through action
8. Cannot be gamed: gaming when a
measure alters the behavioural patterns
of employees
9. Cannot be manipulated: manipulation
is when managers or employees influence
a measure so
that it no longer reflects
From Malmi & Brown (2009) CPA 104 Strategic Management Accounting

 Q: How good is the performance

measurement of this Guinness World
Record attempt
Criteria

Criteria

Validity

Access

Reliability

Controllability

Clarity

Gaming

Cost efficiency

Manipulation

Timeliness

Q: Any questions?

Lecture summary
Why measure performance?
Need for information in large
decentralised organisations
Performance measurement is more
efficient than other mechanisms

What is performance in
organisations?
Can be individual, unit or organisational
Relates to achievement of organisational
objectives and strategy

Lecture summary
(contd)
Basics of measurement

Translate the real world (activities,

outcomes) into numbers (measured
output)
Measures require units

Performance measurement systems

Based on cybernetic loops
Comprise different elements (e.g.
information, measures, standards etc.)

Design criteria
There are 9
Important for evaluating our designs