IMChap 018

Chapter 18 - Performance Measurement to Support Business Strategy
Chapter 18
Performance Measurement to Support Business Strategy

Learning Objectives
1. !p"ain #hy management accountants shou"$ %no# the business strategy of their
organi&ation.
'. !p"ain #hy companies use nonfinancia" performance measures.
(. )n$erstan$ the reasons #hy performance measures $iffer across "eve"s of the
organi&ation.
*. )n$erstan$ ho# the ba"ance$ scorecar$ he"ps organi&ations recogni&e an$ $ea" #ith their
conf"icting responsibi"ities.
+. )n$erstan$ ho# to app"y the metho$s invo"ve$ in an effective performance measurement
system.
,. -$entify e!amp"es of nonfinancia" performance measures an$ $iscuss the potentia" for
improve$ performance resu"ting from improve$ activity management.
.. !p"ain #hy emp"oyee invo"vement is important in an effective performance
measurement system.
Chapter Out"ine
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0. Ba"ance$ scorecar$
B. Continuous improvement an$ benchmar%ing
<-. P9:O9M01C M0S)9M16 :O9 CO169OL
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> '?1* by Mc5ra#-3i"" $ucation. 6his is proprietary materia" so"e"y for authori&e$ instructor use. 1ot authori&e$ for sa"e or
$istribution in any manner. 6his $ocument may not be copie$@ scanne$@ $up"icate$@ for#ar$e$@ $istribute$@ or poste$ on a #ebsite@ in
#ho"e or part.
<--. SOM COMMO1 1O1:-101C-0L P9:O9M01C M0S)9S
0. Customer satisfaction performance measures
1. Aua"ity contro"
'. 7e"ivery performance
(. Boo%ings an$ purchase or$ers
*. Mar%et share
B. :unctiona" performance measures
1. Manufacturing cyc"e time
'. Manufacturing cyc"e efficiency
C. Pro$uctivity
7. 1onfinancia" performance an$ activity-base$ management
. Objective an$ subjective performance measures
<---. MPLO4 -1<OL<M16
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0. :i!ation on financia" measures
B. 9e"iabi"ity of nonfinancia" measures
C. Lac% of corre"ation bet#een nonfinancia" measures an$ financia" resu"ts
/. S)MM094
8ey Concepts
LO 18-1 Explain why management accountants should know the business
strategy of their organization.
B 6he performance measures that accountants $eve"op must tie $irect"y to concepts in strategy
an$ organi&ationa" behavior.
2e have to %no# #hat %in$ of performance a$$s va"ue to the company.
Business strategy is the companyCs specific approach for $ep"oying the
organi&ationa" assets an$ capabi"ities reDuire$ to meet its customersC nee$s #hi"e
$e"ivering the $esire$ returns to sta%eho"$ers.
LO 18! Explain why companies use nonfinancial performance measures.
B :inancia" performance measures@ especia""y those that come from the companyCs accounting
systems@ are common"y use$ to eva"uate emp"oyee performance.
18-'
#ho"e or part.
E :inancia" performance measures are easi"y Duantifiab"e an$ can motivate emp"oyees to
improve the companyCs accounting profits.
E :inancia" measures are goo$ at getting managersC attention.
E :inancia" measures suffer from severa" f"a#s that re$uce their va"ue as an operationa"
contro" $evice.
F1G 6hey are not usefu" in i$entifying operationa" prob"ems.

F'G 0s common"y reporte$ on"y on a month"y@ Duarter"y@ or annua" basis@ they $o not
provi$e rea"-time fee$bac% on performance.
F(G 6here is a $isconnect bet#een the #or% performe$ an$ the financia" resu"ts
E 9ecent"y@ nonfinancia" measures are use$ more often because
F1G 6hey $irect emp"oyeesC attention to those things that the emp"oyees can contro"@ an$
F'G 6hey are often reporte$ more freDuent"y an$ provi$e more time"y fee$bac% to
emp"oyees about their performance.
B Performance eva"uation starts by un$erstan$ing the organi&ationCs objectives an$ strategy.
E 6he organi&ation eva"uates performance by first $efining #hat it #ants to accomp"ish.
6hen it $eve"ops criteria that he"p it eva"uate its performance in achieving those
accomp"ishments.
E -n management contro" systems F$iscusse$ in Chapter 1'G@ performance measurement
must be consistent #ith the #ay in #hich subor$inates are authori&e$ to ma%e $ecisions.
6he assignment of $ecision authority@ in turn@ $epen$s on the subor$inateCs "oca"
%no#"e$ge.
E 9eca"" from Chapter 1' that conceptua""y@ the components of a management contro"
system an$ their re"ationship can be $epicte$ by the fo""o#ing $iagram.
18-(
#ho"e or part.
7e"egate$
$ecision
authority
Performance
eva"uation
system
Compensation
an$ re#ar$
system
B 6he $esign of an effective management contro" system $epen$s on the firmCs organi&ationa"
environment an$ business strategy.
E !p"icit"y articu"ating the goa"s of the firm@ an$ its mission@ is usefu" in $eve"oping
appropriate performance measures for managers an$ business units.
E "ission is an organi&ationCs purpose.
E 0 mission statement $escribes an organi&ationCs va"ues@ $efines its responsibi"ities to
sta%eho"$ers@ an$ i$entifies its major strategies.
E Businessle#el strategy is an organi&ationCs p"an to compete in each of its businesses.
E 0n organi&ationCs stakeholders are groups or in$ivi$ua"s@ such as emp"oyees@ supp"iers@
customers@ shareho"$ers@ an$ the community@ #ho have an interest in #hat the
organi&ation $oes.
E Mission statements shou"$ ans#er the fo""o#ing DuestionsH
F1G 2ho are the organi&ationCs sta%eho"$ers= 2ho matters to the organi&ation=
F'G 3o# #i"" the organi&ation a$$ va"ue to each sta%eho"$er group= F0ns#ering this
Duestion i$entifies the critical success factors@ the factors important for the
organi&ationCs success.G
LO 18$ %nderstand the reasons why performance measures differ across
le#els of the organization.
B ffective performance measurement is base$ on t#o factors.
F1G -t "ea$s a"" organi&ation members to focus on the organi&ationCs objectives an$ ref"ects ho#
in$ivi$ua"s or units contribute to those objectives.
F'G -t is $esigne$ to ref"ect the $ecision authority $e"egate$ to "oca" managers.
E Peop"e at $ifferent "eve"s in the organi&ation have $ifferent responsibi"ities.
E ffective performance measurement systems use measures that emphasi&e $ifferent
things at $ifferent "eve"s of the organi&ation.
18-*
#ho"e or part.
E -n genera"@ performance measures shou"$ re"ate to #hat peop"e at $ifferent "eve"s
contro".
E 0t the "o#er "eve"s in the organi&ation@ nonfinancia" performance measures focus on
factors these emp"oyees can contro"@ such as
- Customer satisfaction Ffor those $ea"ing #ith customers $irect"yG an$
- Pro$uct Dua"ity Ffor those in pro$uctionG.
E 0t mi$$"e "eve"s in organi&ations@ nonfinancia" performance measurement often focuses
on ho# #e"" the operating systems #or% together an$ ho# effective these systems are in
comparison #ith those of competitors@ such as
- 0mount of un#ante$ emp"oyee turnover@
- :reDuency of meeting customer $e"ivery reDuirements@
- mp"oyee $eve"opment performance@ an$
- Success in $ea"ing #ith business partners.
E 0t mi$$"e "eve"s in organi&ations@ coor$ination an$ improvement of ongoing activities
ta%e p"ace in a$$ition to re$esigning pro$ucts an$ processes.
E 0t the top "eve"s of the organi&ation@ performance measurement focuses on $etermining
#hether the organi&ation is meeting its responsibi"ities from the perspectives of its
sta%eho"$ers.
E Performance at top "eve"s reDuires $e"icate"y ba"ancing tra$e-offs.
B 0 business model is a $escription of ho# $ifferent "eve"s an$ emp"oyees in the organi&ation
must perform for the organi&ation to achieve its goa"s.
E 0 business mo$e" is a frame#or% that "in%s the ro"es of various emp"oyees an$ "eve"s in
the organi&ation an$ that i""ustrates ho# the successfu" comp"etion of these ro"es #i""
resu"t in achievement of the organi&ationCs goa"s.
E :or a given strategy an$ environment@ many possib"e business mo$e"s cou"$ be
appropriate.
18-+
#ho"e or part.
!amp"e 1H 6he business mo$e" for an investment firm $escribes ho# a profitab"e
branch operates in the retai" investment business. 6he branch manager e!ercises
"ea$ership to motivate an$ satisfy emp"oyees.
:or operating personne"@ their effectiveness $rives efficient operations an$ contro"
costs. :or investment a$visers to satisfy customers@ they must F1G be %no#"e$geab"e
an$ constant"y $eve"op their s%i""s@ an$ F'G act ethica""y to maintain the trust of the
c"ients.
Satisfie$ customers #i"" return to the branch@ bui"$ing revenues. Combine$ #ith
effective cost contro"@ the branch #i"" return profits to the company.
E :ai"ure to perform certain functions in the business mo$e" is "i%e"y to resu"t in a fai"ure
to achieve the organi&ationCs strategy an$ goa"s.
LO 18& %nderstand how the balanced scorecard helps organizations
recognize and deal with their conflicting responsibilities.
B One structure$ approach to imp"ementing a set of performance measures is the balanced
scorecard@ #hich is a set of performance targets an$ resu"ts that sho# ho# #e"" an organi&ation
has performe$ in meeting its objectives re"ating to its sta%eho"$ers.
E 0 ba"ance$ scorecar$ is a management too" that recogni&es organi&ationa" responsibi"ity
to $ifferent sta%eho"$er groups.
E 6he concept of a ba"ance$ scorecar$ is to measure ho# #e"" the organi&ation is $oing in
vie# of those competing sta%eho"$er concerns.
E 0n e!amp"e of a ba"ance$ scorecar$ is sho#n in !hibit 18.'.
18-,
#ho"e or part.
E 6he focus of the ba"ance$ scorecar$ is to ba"ance the efforts of the organi&ation in
meeting its financia"@ customer@ process@ an$ innovative responsibi"ities.
E 6he $istinctive feature of the ba"ance$ scorecar$ is that the performance measures are
$erive$ from i$entifying #hat $rives an organi&ationCs success as vie#e$ from the
perspectives of $ifferent sta%eho"$ers in the organi&ation.
E 6he ba"ance$ scorecar$ has four vie#s or perspectivesH
F1G :inancia"H 6o succee$ financia""y@ ho# shou"$ #e appea" to our shareho"$ers=
F'G CustomerH 6o achieve our mission@ ho# shou"$ #e appea" to our customers=
F(G -nterna" business processH 6o satisfy our shareho"$ers an$ customers@ in #hat business
process must #e e!ce"=
F*G Learning an$ gro#thH 6o achieve our mission@ ho# #i"" #e sustain our abi"ity to
change an$ improve=
E 0 ba"ance$ scorecar$ for any particu"ar organi&ation cou"$ be base$ on any other
perspectives if they are important for the organi&ationCs success.
E 2ithin each perspective@ the scorecar$ i$entifies the goa"s@ or objectives@ for the
organi&ation as often shape$ by the competitive environment.
E Once the organi&ation specifies the goa"s@ it i$entifies the measures that #i"" be use$ to
eva"uate its progress in meeting the goa"s.
E 6he organi&ation sets targets for each of the measures.
18-.
#ho"e or part.
:inancia"
perspective
-nterna" business
process perspective
Customer
perspective
Learning an$ gro#th
perspective
<ision an$
strategy
E 2ith the measures an$ the targets@ managers i$entify the initiatives@ or p"ans@ they have
for achieving these targets.
E 0 se"ect "ist of organi&ations using the ba"ance$ scorecar$ is in !hibit 18.(.
E 6he ba"ance$ scorecar$ primari"y has been use$ at the top management "eve" to support
the organi&ationCs $eve"opment of strategies.
E 6op an$ mi$$"e management must shape an$ c"arify the organi&ationIs goa"s an$
strategy in the face of competing sta%eho"$er e!pectations.
E 0 typica" $eve"opment of the ba"ance$ scorecar$ may invo"ve the fo""o#ingH
Step1H 0 companyCs top e!ecutives form a team to c"arify the companyCs strategy an$
objectives to meet responsibi"ities.
Step 'H 6he top an$ mi$$"e managers of the company are brought together to $iscuss the
ne# strategy an$ to $eve"op performance measures Fi.e.@ scorecar$sG for each part
of the company.
Step (H Managers begin e"iminating programs that are not contributing to the companyCs
objectives.
Step *H 6op management revie#s the scorecar$s for each part of the organi&ation.
Step +H Base$ on its revie#s in Step *@ top management goes bac% to Step 1 to refine an$
further c"arify the companyCs strategy an$ objectives.
E 6he -n-0ction bo! mentions Sun MicrosystemsCs use of scorecar$s to monitor an$
motivate supp"iers in four categoriesH Dua"ity@ "ea$-timeJ$e"ivery f"e!ibi"ity@ techno"ogy@
an$ support. 9esu"ts from the scorecar$ are combine$ #ith a price in$e! to compute
K6ota" Cost of O#nership F6COOGL for sourcing an$ purchasing $ecisions.
B 0 companyCs strategy@ as i""ustrate$ in the business mo$e"@ can be "in%e$ to the ba"ance$
scorecar$ through a strategy map@ as sho#n in !hibit 18.+. Specifica""y@ the strategy map "in%s
the objectives or goa"s in each of the perspectives.
E By $ra#ing the strategy map@ a company can $etermine if it is missing measures in any
of the perspectives or if it has goa"s that $o not seem to be "in%e$ to other parts of the
map.
E -n the strategy map@ each of the goa"s has at "east one arro# starting or en$ing at the
goa".
18-8
#ho"e or part.
E ach of the goa"s in the Learning M gro#th@ -nterna"@ an$ Customer perspectives has an
arro# "eaving@ in$icating that these are not the u"timate objective of the organi&ation@ but
goa"s that nee$ to be achieve$ if the u"timate objectives are to be met.
18-N
#ho"e or part.
'inancial perspecti#e
(nternal perspecti#e
5oa" 5oa"
5oa" 5oa" 5oa"
Learning and growth perspecti#e
5oa" 5oa" 5oa"
)ustomer perspecti#e
5oa" 5oa"
LO 18* %nderstand how to apply the methods in#ol#ed in an effecti#e
performance measurement system.
B Performance measurement is usefu" not on"y for eva"uation@ but a"so for contro".
E )ontinuous impro#ement means the continuous reeva"uation an$ improvement of the
efficiency of an organi&ationCs activities.
E Continuous improvement is a phi"osophy that see%s to
F1G -mprove the activities in
F'G #hich the organi&ation engages through $ocumentation an$ un$erstan$ing@
F(G "iminate activities that are nonva"ue-a$$e$@ an$
F(G -mprove the efficiency of activities that are va"ue-a$$e$.
E Benchmarking invo"ves continuous"y i$entifying an activity that nee$s to be improve$@
fin$ing an organi&ation Fsometimes in oneCs o#n organi&ationG that is the most efficient
in performing the activity@ stu$ying its process@ an$ then uti"i&ing that process.
E Benchmar%s are use$ to eva"uate the performance of an activity@ operation@ or
organi&ation re"ative to its performance by other companies.
E -mportant gui$e"ines for benchmar%ing inc"u$eH
- 7o not benchmar% everything at the best-in-the-business "eve". 1o company can
be the best at everything.
- Benchmar% on"y best-in-c"ass processes an$ activities that are of the most
importance to the company strategica""y.
- Loo% for interna"@ regiona"@ or in$ustry benchmar%s for "ess important support
activities.
E !hibit 18., presents some common Duestions raise$ in the benchmar%ing process.
18-1?
#ho"e or part.
LO 18+ (dentify examples of nonfinancial performance measures and
discuss the potential for impro#ed performance resulting from
impro#ed acti#ity management.
B Performance measures must be base$ on the organi&ationCs responsibi"ities@ goa"s@ an$
strategies@ #hich are "i%e"y to be $ifferent for each organi&ation.
E Customer satisfaction measures are important not as an en$@ but because the
organi&ation be"ieves there is a "in% bet#een satisfie$ customers an$ firm profitabi"ity.
E Customer satisfaction measures ref"ect the organi&ationCs performance on severa"
interna" factors@ inc"u$ing Dua"ity contro" an$ $e"ivery performance.
E Aua"ity contro"
- ObjectiveH 6o increase customer satisfaction #ith the pro$uct@ re$uce the costs
of $ea"ing #ith customer comp"aints@ an$ re$uce the costs of repairing pro$ucts or
provi$ing a ne# service.
- MeasuresH 1umber of customer comp"aints@ number of service ca""s@ an$ number
or returns.
E 7e"ivery performance
- ObjectiveH 6o $e"iver goo$s an$ services #hen promise$.
- MeasuresH Percentage of on-time $e"iveries an$ percentage of $e"iveries
$amage$.
E Boo%ings an$ purchase or$ers are a "ea$ing in$icator of revenues that have to be
measure$ off the boo% because companies $o not recor$ them as sa"es.
E Mar%et share must be measure$ re"ative to mar%et si&e Fi.e.@ its gro#thG. -f the mar%et
gro#s faster than the companyCs increasing sa"es@ the company is e!periencing a $ec"ine
in mar%et share.
B 0n organi&ation must eva"uate its interna" functiona" process performance #hi"e serving
e!terna" customers.
E Many activities are performe$ throughout the pro$uct "ife cyc"e. 6he "eve" of efficiency
of processing activities affects the organi&ationCs overa"" performance in meeting its
responsibi"ities to other sta%eho"$ers.
18-11
#ho"e or part.
E !hibit 18.. presents severa" interna" functiona" performance measures use$ by
organi&ations. Many interna" performance measures re"ate to the organi&ationCs
performance #ith respect to its customers as #e"".
E "anufacturing cycle time represents the time invo"ve$ in processing@ moving@ storing@
an$ inspecting pro$ucts an$ materia"s. -t is the tota" time ta%en to pro$uce a goo$ or
service.
E -t is be"ieve$ that a pro$uctCs service@ Dua"ity@ an$ costs are a"" re"ate$ to cyc"e time.
E "anufacturing cycle efficiency measures the efficiency of the tota" manufacturing
cyc"e.
Manufacturing cyc"e
efficiency for one unit
O Processing time
Processing time P Moving time P Storing time P -nspection time
.
6his formu"a ca"cu"ates a percentage representing the time actua""y spent processing the
unit. 6he higher the percentage@ the "ess the time Fan$ costsG that nee$s to be spent on
nonva"ue-a$$e$ activities.
!amp"e (H 6om operates a computer store that accepts custom or$ers for $es%top
computers. Customers can choose from a variety of components such as motherboar$s@
CP)s@ har$ $rives@ 790Ms@ graphics car$s@ soun$ car$s@ etc.
6he steps nee$e$ to fu"fi"" each or$er Fi.e.@ one in$ivi$ua" computerG an$ the time it
ta%es areH
7iscuss an$ fina"i&e
specifications
F1 hourG
5ather components
into a %it
F1 hourG
2ait in the Dueue
F1J' hourG
0ssemb"e
F( hoursG
7e"iver
F*8 hoursG
Pac%age
F1J' hourG
6est
F1 hourG
2ait in the Dueue
F1J' hourG
6he tota" manufacturing cyc"e time is ++.+ hours@ out of #hich the processing time is
on"y ( hours Fassemb"eG. So the manufacturing cyc"e efficiency for a typica" or$er is
?.?++ FO ( hours Q ++.+ hoursG.
18-1'
#ho"e or part.
E ,roducti#ity is a measure that e!presses the efficient conversion of inputs into outputs.
,artial producti#ity measures the re"ation bet#een output an$ a sing"e input@ or
Partia" pro$uctivity O Output FDuantity or va"ueG
Sing"e input such as "abor FDuantity or va"ueG
.
E Partia" pro$uctivity measures are c"ose"y re"ate$ to the manufacturing efficiency
variances F$iscusse$ in Chapter 1,G.
E 9eca"" that efficiency variance is the $ifference bet#een bu$gete$ an$ actua" resu"ts
arising from $ifferences bet#een the inputs that #ere bu$gete$ per unit of output an$ the
inputs actua""y use$.
E 6he efficiency variance is a goo$ basis for assessing ho# a manufacturing p"ant is $oing
as compare$ to engineering stan$ar$sR if these stan$ar$s $o not change over time@ they
are a"so a basis for assessing #hether the p"ant is improving.
E Partia" pro$uctivity is an abso"ute measure that can be use$ to compare $ifferent
business units an$@ #hen pub"ic"y avai"ab"e $ata permit it@ to a""o# benchmar%ing against
competitors. Both Duantity an$ va"ue shou"$ be eva"uate$ to ensure comparabi"ity.
E One approach for comparing the pro$uctivity of business units that use a $ifferent mi!
of inputs For even $ifferent inputsG is to ca"cu"ate total factor producti#ity@ a ratio of the
va"ue of output to the va"ue of a"" %ey inputs.
OOOOOOOOOOOOOOOOOOOOOO
7emonstration Prob"em
Chem)S0 operates t#o high"y automate$ chemica" processing p"antsH ast P"ant an$ 2est
P"ant. 6he same pro$uction process ta%es p"ace in the t#o p"ants an$ turns materia" / into
chemica" compoun$ 4. -n or$er to eva"uate their pro$uctivity measures@ the managers of
Chem)S0 have the accounting $epartment gather comparative operating an$ financia" $ata in
the fo""o# tab"e.
East ,lant -est ,lant
This year Last year This year Last year
-nputs
/ (?@??? "b S T.+ 'N@??? "b S T.( +?@??? "b S T.' +'@??? "b S T.1
Labor *@??? h S T1+ (@.*? h ST1* ,@?+? h S T1* ,@18? h S T1(
Overhea$ T(@1+?@??? T'@8.8@??? T+@*8?@??? T+@,.'@+??
Outputs
4 ',@+?? "b '*@,+? "b *(@1?? "b **@'?? "b
18-1(
#ho"e or part.
<a"ue T.@(8?@??? T,@.,(@+?? T11@?8N@(?? T11@*'8@(??
9eDuire$H
7etermine re"evant partia" pro$uctivity an$ tota" factor pro$uctivity measures for both p"ants
an$ compare the resu"ts.
So"utionH
6he accounting $epartment recommen$s the ca"cu"ation of t#o partia" pro$uctivity measures
correspon$ing to the use of materia" input F/G an$ "abor input FhoursG@ respective"y.
Materia" partia" pro$uctivity O Output in poun$s F"bs.G Q -nput in poun$s F"bs.G
Labor partia" pro$uctivity O Output in poun$s F"bs.G Q -nput in "abor hours.
-n a$$ition@ tota" factor pro$uctivity is a"so ca"cu"ate$ an$ inc"u$es as %ey inputs materia"
F/G@ "abor an$ overhea$. 6hat is@
6ota" factor pro$uctivity O
Output va"ue
-nput va"ue Fcosts of materia"@ "abor an$ overhea$G
.
6he resu"ts are presente$ in the fo""o#ing tab"eH
East ,lant -est ,lant
This year Last year This year Last year
Materia" partia" pro$uctivity ?.88
a
?.8+ ?.8, ?.8+
Labor partia" pro$uctivity ,.,'+
b
,.+N ..1' ..1+
6ota" factor pro$uctivity 1.(+
c
1.(* 1.'1 1.'1

a
?.88 O ',@+?? Q (?@???

b
,.,'+ O ',@+?? Q *@???

c
1.(+ O T.@(8?@??? Q FT.+ U (?@??? P T1+ U *@??? P T(@1+?@???G
2est P"ant has a higher capacity than ast P"ant an$ enjoys "o#er input costs for both
materia" an$ "abor for the t#o years stu$ie$. Because of process improvements over the
years@ the managers are p"ease$ #ith higher materia" partia" pro$uctivity at both p"ants.
3o#ever@ 2est P"ant suffers a setbac% in terms of "abor partia" pro$uctivity #hi"e its tota"
factor pro$uctivity stays the same. 6he managers #ou"$ "i%e to fin$ out more about the "abor
practices Frecruitment@ training@ retention@ etc.G at 2est P"ant an$ encourage ast P"ant to
continue its pace for improvement.
OOOOOOOOOOOOOOOOOOOOOO
B Organi&ations shou"$ manage by using activity $ata rather than cost $ata to i$entify prob"ems@
to suggest an approach to so"ve prob"ems@ an$ to prioriti&e improvement efforts.
18-1*
#ho"e or part.
E Organi&ations fin$ va"ue in %no#ing the amount of time it ta%es to comp"ete a seDuence
of activities.
E By e"iminating "ong cyc"e times@ companies can re$uce costs@ improve Dua"ity@ an$ a$$
va"ue to customers.
E 1ot a"" companies see a performance improvement because they fai" to "in% the
measures to the firmCs goa"s.
E Companies often ma%e four mista%es #hen trying to measure nonfinancia" performance.
F1G 1ot "in%ing measures to strategy.
F'G 1ot va"i$ating the "in%s.
F(G 1ot setting the right performance targets.
F*G Measuring incorrect"y.
E)sing a business mo$e" that i$entifies the connections bet#een the measures an$ the
firmCs goa"s he"ps avoi$ these prob"ems.
B Objective performance measures are such that $ifferent peop"e can "oo% at them an$ agree that
the metho$ use$ to ca"cu"ate the measure is correct@ even though the choice of the measures is in
$ispute.
E Subjective performance measures are such that t#o managers can vie# the same set of
facts an$ come to $ifferent conc"usions.
E Subjective measures a""o# managers to consi$er many factors@ inc"u$ing those outsi$e
the emp"oyeeCs contro"@ that cou"$ $istort an objective measure.
LO 18. Explain why employee in#ol#ement is important in an effecti#e
performance measurement system.
B 1onfinancia" measures have the a$vantage that they are more "i%e"y to be un$erstan$ab"e by
emp"oyees $irect"y invo"ve$ in operations.
E 6he measures use$ to eva"uate performance ref"ect each unitCs un$erstan$ing of its
contribution to the organi&ation.
E Line emp"oyees are thus encourage$ to participate in performance improvement
activities.
18-1+
#ho"e or part.
E Suggestion bo!es@ #or%er circ"es@ an$ team meetings are #ays for emp"oyees to suggest
i$eas for improvements.
E 2or%er invo"vement is important for three reasonsH
F1G 2hen #or%ers ta%e on rea" $ecision-ma%ing authority@ their commitment to the
organi&ation an$ its objectives increases.
F'G 2hen $ecision-ma%ing responsibi"ity "ies #ith #or%ers c"oser to the customer@
#or%ers are more responsive to customer concerns an$ can ma%e informe$ $ecisions.
F(G 5iving $ecision-ma%ing responsibi"ity to #or%ers uses their s%i""s an$ %no#"e$ge an$
motivates them to further $eve"op those s%i""s an$ %no#"e$ge in an effort to improve
the organi&ationCs performance.
E Companies nee$ to eva"uate their o#n performance in getting #or%ers invo"ve$ an$
committe$.
E !hibit 18.1? "ists performance measures that organi&ations can use to assess their
accomp"ishments in terms of #or%er invo"vement an$ commitment.
E 2or%er invo"vement an$ commitment measures inc"u$e
F1G 2or%er $eve"opment Fpercentage of #or%ers in mentor programsG@
F'G 2or%er empo#erment Fpercentage of #or%ers authori&e$ to issue cre$itG@
F(G 2or%er recognition Fpercentage of #or%ers recogni&e$ by a#ar$sG@
F*G 2or%er recruitment Fpercentage of emp"oyment offers accepte$G@
F+G 2or%er promotion Fpercentage of positions fi""e$ from #ithin the organi&ationG@ an$
F,G 2or%er succession p"anning Fpercentage of e"igib"e positions fi""e$ through
succession p"anningG.
E -ncreasing the percentages on these measures $emonstrate the organi&ationCs attempt to
increase #or%er invo"vement an$ commitment to it.
E ffective #or%er invo"vement presents three cha""enges for management.
F1G Management must create a system that conveys the organi&ationCs objectives an$
critica" success factors to a"" members.
F'G 6he measures the organi&ation uses to eva"uate in$ivi$ua" performance $etermine the
systemCs success in promoting goa" congruence. 6hese measures must
- promote the $esire$ behavior@
- be comprehensive@
- support the achievement of organi&ation objectives@ an$
18-1,
#ho"e or part.
- ref"ect in$ivi$ua" unitCs ro"e in the organi&ation.
F(G Management must ensure that the performance measures are app"ie$ consistent"y an$
accurate"y.
B Companies benefit from using nonfinancia" performance measures@ but their use is not free of
imp"ementation $ifficu"ties.
E 0 strong fi!ation on financia" measures #or%s against effective use of nonfinancia"
performance measures.
E 1onfinancia" measures suffer from the "ac% of e!terna" revie#@ are more subjective an$
"ess re"iab"e.
E 6he casua" re"ationship bet#een nonfinancia" measures an$ financia" resu"ts is not c"ear
for a number of reasons.
F1G 6he nonfinancia" measures cou"$ be f"a#e$.
F'G 6here might not be a rea" economic "in% bet#een cost"y activities an$ profit.
F(G -t is a"so $ifficu"t to measure the financia" performance that resu"ts from the
activities.
Matching
0. Ba"ance$ scorecar$ :. Manufacturing cyc"e efficiency
B. Benchmar%ing 5. Manufacturing cyc"e time
C. Business-"eve" strategy 3. Mission
7. Business mo$e" -. Mission statement
. Continuous improvement V. Sta%eho"$ers
WWWWW 1. 7escription of ho# $ifferent "eve"s an$ emp"oyees in the organi&ation must perform
for the organi&ation to achieve its goa"s.
WWWWW '. 0n organi&ationCs purpose.
WWWWW (. 7escribes an organi&ationCs va"ues@ $efines its responsibi"ities to sta%eho"$ers@ an$
i$entifies its major strategies.
WWWWW *. 0n organi&ationCs p"an to compete in each of its businesses.
18-1.
#ho"e or part.
WWWWW +. 5roups or in$ivi$ua"s@ such as emp"oyees@ supp"iers@ customers@ shareho"$ers@ an$ the
community@ #ho have an interest in #hat the organi&ation $oes.
WWWWW ,. 6he continuous reeva"uation an$ improvement of the efficiency of an organi&ationCs
activities.
WWWWW .. 0 set of performance targets an$ resu"ts that sho# ho# #e"" an organi&ation has
performe$ in meeting its objectives re"ating to its sta%eho"$ers.
WWWWW 8. 6he time invo"ve$ in processing@ moving@ storing@ an$ inspecting pro$ucts an$
materia"s.
WWWWW N. Continuous"y i$entifying an activity that nee$s to be improve$@ fin$ing an
organi&ation Fsometimes in oneCs o#n organi&ationG that is the most efficient in
performing the activity@ stu$ying its process@ an$ then uti"i&ing that process.
WWWWW 1?. Measures the efficiency of the tota" manufacturing cyc"e.
0ns#ers
1. 7
'. 3
(. -
*. C
+. V
,.
.. 0
8. 5
N. B
1?. :
18-18
#ho"e or part.
Mu"tip"e Choice
1. 2hich of the fo""o#ing is a nonfinancia" measure=
a. 1umber of customer comp"aints.
b. 9eturn on investment.
c. Prevention cost.
$. Opportunity cost.
'. 2hich of the fo""o#ing statements is correct=
a. 6he business mo$e" can suggest #ays to eva"uate performance that ma%es sense to the
organi&ation.
b. 0 sing"e measure of performance typica""y eva"uates the resu"t.
c. Mu"tip"e measures emphasi&e ho# the resu"t #as achieve$.
$. 0"" of the above.
(. Ba"ance$ scorecar$
a. mphasi&es financia" performance.
b. Caters to the nee$s of emp"oyees.
c. 6ries to meet the organi&ationCs responsibi"ities to sta%eho"$ers.
$. -s just a set of mu"tip"e performance measures.
*. Manufacturing cyc"e time is an e!amp"e of a ba"ance$-scorecar$ measure of
a. :inancia" performance.
b. Customer perspective.
c. -nterna" business process.
$. Learning an$ gro#th.
+. Continuous improvement
a. -s a phi"osophy of running the business.
b. -s in$epen$ent of benchmar%ing.
c. -s "oo%ing to improve the efficiency of activities.
$. Both a an$ c.
,. 2hich of the fo""o#ing can be use$ to measure customer satisfaction=
a. 1umber of customer comp"aints.
b. 1umber of service ca""s.
c. 1umber or returns.
$. 0"" of the above.
6he fo""o#ing information is for Duestions . X 8.
0 manufacturing company has the fo""o#ing average times.
Pro$uct transportationH ?.'+ hour.
18-1N
#ho"e or part.
Pro$uct manufacturingH (.+ hours.
-nspectionH ?.'+ hour.
-nventory storageH 1? hours.
.. 2hat is the average manufacturing cyc"e time Fin hoursG=
a. 1*.??.
b. 1(..+.
c. 1(.+?.
$. 1?.??.
8. 2hat is the manufacturing cyc"e efficiency=
a. 1+Y.
b. '+Y.
c. (+Y.
$. *+Y.
N. 2hich of the fo""o#ing is an e!amp"e of subjective measurement=
a. conomic con$itions of the city #here a branch is "ocate$.
b. mp"oyee turnover.
c. Branch profits.
$. 7efect rates.
1?. 2hich of the statements regar$ing emp"oyee invo"vement is incorrect=
a. 2hen #or%ers ta%e on rea" $ecision-ma%ing authority@ their commitment to the
organi&ation increases.
b. 2hen $ecision-ma%ing responsibi"ity "ies #ith #or%ers farther a#ay from the customer@
#or%ers are more responsive an$ ma%e informe$ $ecisions.
c. Management must create a system that conveys the organi&ationCs objectives to a""
members.
$. Management must ensure that the performance measures are app"ie$ consistent"y an$
accurate"y.
11. 2hich of the statements is incorrect=
a. Peop"e at $ifferent "eve"s in the organi&ation have $ifferent responsibi"ities.
b. 0t the "o#er "eve"s@ financia" measures are critica".
c. 0t the mi$$"e "eve"s@ it is important to coor$inate ongoing activities.
$. 0t the top "eve"s@ performance measures focus on meeting sta%eho"$ersC nee$s.
1'. 2hich of the fo""o#ing performance measures are appropriate for a regiona" manager=
e. Profitabi"ity.
f. mp"oyee turnover.
g. Customer an$ emp"oyee satisfaction.
h. 0"" of the above.
18-'?
#ho"e or part.
0ns#ers
1. a LO1
'. $ LO'@ LO(
(. c LO*
*. c LO*@ LO,
+. $ LO+
,. $ LO,
.. a LO,
?.'+ P (.+ P ?.'+ P 1? O 1* hours.
8. b LO,
(.+
1*
U 1??Y O '+Y.
N. a LO,
1?. b LO.
11. b LO'
1'. $ LO(
18-'1
#ho"e or part.

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Chapter 18 - Performance Measurement to Support Business Strategy

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