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Modules 1 and 2
Strategies

Strategic Planning
Modules 6, 8 and 9 Module 3

Evaluation Revise Budgeting


Budget

Measurement and
Reporting

Modules 4, 5, 6, 7 and 8

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 Purposes of performance measures
 Problems and limitations of conventional
performance measures
 Non-financial performance measures
 Problems with non-financial performance measures
 The Balanced Scorecard
 Features of a good Balanced Scorecard.
 Implementation Pitfalls

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 Communicate the strategy and plans of the
business, and goal alignment
 Track performance against targets
 Identify problem areas
 Evaluate subordinates’ performance and as a
basis of rewards
 Guide senior managers in developing future
strategies and operations

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 Return on investment (ROI)
 Residual Income (RI)
 Economic Value Added (EVA)
 Profit
 Revenue
 Cost
 Cost variance

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 They are not actionable
 Financial measures emphasise one perspective
 Financial performance measures provide
limited guidance for future actions
 May encourage actions which decrease
shareholder and customer value

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 Financial measure focus on the outcome of
past actions
 Not on the determinant of the outcome

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 Non-financial measures reflect the drivers of
future financial performance

 More actionable and provide feedback on


individual aspects of a manager’s performance

 More understandable and easier to relate to

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Raw Material & Scrap Product Quality
Control  Warranty claims
Quality
 Customer complaints
Lead time
 Defective products

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Production Delivery
 Manufacturing cycle % of on-time
time deliveries
 Velocity
% of orders filled
 Manufacturing cycle
efficiency Delivery cycle time

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 Wide choice available
 Development can be ad-hoc and undirected
 Some measures lack integrity
 Some measures not easily translated into
financial outcomes

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 Non-financial and financial measures
 Have a strategic orientation—directly measure
areas that provide competitive advantage
 Many companies have introduced a Balanced
Scorecard to manage the implementation of
their strategies

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 The balanced scorecard translates an
organisation’s mission and strategy into a
comprehensive set of performance measures
for each key strategic area.
◦ A combination of financial and non-financial
measures.

◦ Evaluate both short-run and long-run performance in


a single report.

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 There are four perspectives of the balanced
scorecard:
1 Financial perspective
2 Customer perspective
3 Internal operations perspective
4 Learning and growth perspective

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 Non-financial and operational indicators
measure fundamental changes that a company
is making.
 The financial benefits of these fundamental
changes may not be captured in short-run
earnings.
 Strong improvements in non-financial
measures signal the prospect of creating
economic value in the future.

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◦ Reflects perspective of the shareholder
◦ Summarises the financial outcomes of
decision and actions
◦ Measures include various cost and product
measures, return on investment, cash flow
measures, shareholder value measures

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Measures of the company’s success in
achieving customer value
◦ Outcome (lag) measures include customer
profitability, market share, number of new
customers
◦ Lead indicators include on-time delivery,
number of defects

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◦ Objectives relate to specific processes that
contribute to achieving customer and
financial objectives
◦ Processes critical to delivering products to
customers and achieving financial strategies
◦ Measures of cost, product quality, time-
based measures, new product development

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Focuses on the capabilities of the organisation
to achieve superior internal processes that
create both customer and shareholder value
◦ To deliver long-term growth and
improvement
◦ Measures focus on employee capabilities,
information systems capabilities and
organisational climate

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 Shows the cause and effect linkage

 Lead indicators
◦ Measures that drive the outcomes and provide
information that is actionable and management

 Lag indicators
◦ Monitor progress towards the organisation's objectives

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 Measures in the balanced scorecard provide
balance between
◦ Short-term and long-term objectives

◦ Outcome measures and drivers of those outcomes

◦ Objective and easily quantified measures and


subjective performance measures

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 Improvements in non-financial measures will
not result in improved profits if:
◦ Management has selected the wrong critical success
factors

◦ Management fails to utilise freed up resources

◦ The performance measurement system is incorrectly


designed

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 Commitment and leadership from top
management

 Helps communicate the strategy to all


members of the organization

 Tells the story of a firm’s strategy, articulating


a sequence of cause-and-effect relationships

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 Must motivate managers to take actions that
eventually result in improvements in financial
performance

 Limits the number of measures, identifying


only the most critical ones

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 Managers should not assume the cause-and-
effect linkages are precise: they are merely
hypotheses

 Managers should not seek improvements


across all of the measures all of the time

 Emphasize the positive

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 Embrace participation and empowerment

 Managers should not use too many measures


– keep it simple

 Link to rewards

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Compensation

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