Chapter 11: Performance Measurement
The goal of PF is to implement strategy, therefore must select systems that best reflect
strategy. There is always a need for short-term/ongoing feedback to managers which
contradicts the fact that short-term focus tends to erode long-term shareholder value. Relying
solely on financial measures can be dysfunctional to the organization for four reasons:
1. Errors of commission: Encourages short-term actions (costly actions that are good in
the short run to maximize profits/bonuses)
2. Errors of omission: Not undertake useful long-term actions (in order to obtain shortterm profits, e.g. not doing sufficient R&D)
3. Distorted communication: setting targets they can easily meet which leads to
erroneous planning data, reluctant to admit that they will miss their targets etc.
4. Data manipulation: Borrow from future earnings, falsify data (cf. article).
Therefore, one needs to use multiple measures at all levels in the organization. Historically,
non-financial measures (leading indicators of future performance) have been used at lower
levels in the organization (task control) and financial at higher (management control).
Framework for designing a reward system
What
counts, gets
measured
What gets
rewarded,
really counts
strategy
What gets
measured,
gets done
What gets
done, gets
rewarded
The Balanced Scorecard
Business units should be assigned goals and be measured from the following perspectives
(that each addresses an aspect of the company’s strategy):
 Financial
 Internal business
 Innovation and learning
 Customer
Fosters balance to achieve goal congruence, encouraging employees to act in the company’s
best interest. It helps the company’s focus, improves communication, sets organizational
objectives and provides feedback on strategy (cf Kaplan & Norton (1996)). Executives must
choose a mix of measures that:
1. Accurately reflect the critical factors that will determine the success of the company’s
strategy
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2.
3.
Show the relationships among the individual measures in a cause-and-effect manner
(show how short-term affect long-term) and
Provide a broad-based view on the current status of the company.
A blend of different strategic measures
…to address the need of different stakeholders:
 Outcome and driver measures: Outcome measures/lagging indicators tell what’s
happened. Driver measures/leading indicators show the progress of key areas in
implementing a strategy. These are inextricably linked.
 Financial and nonfinancial measures: many organizations have failed to incorporate
nonfinancial measures into their performance reviews because they are less sophisticated
than financial measures.
 Internal and external measures: needs balance between external (customer) and internal
(manufacturing).
 Measurements drive change: most important aspect is the system’s ability to measure
outcomes and drivers that direct the company towards its strategies.
Measures must be…
 Strategy- and organization specific
 Linked from top to bottom (tied to specific targets and clarified by objectives)
 Show cause-and-effect relationships
 …and measures should not be a laundry list, but linked together. Relationships must be
understood
Process for implementing a performance measurement system (iterative
process):
1. Define strategy: BSC is a link between strategy and operational action. Single industry
firm: should be developed at the corporate level and cascaded down. Multi-business firm:
should be developed at the business unit level and aggregated in a corporate-wide BSC.
2. Define measures of strategy: focus on a few, linked measures that support the strategy.
One single measure is not sufficient, and too many measures make the system too
complex. By making trade-offs, the manager can choose btw behaviours that benefit the
short- or long-term success.
3. Integrate measures into the management system
4. Review measures and results frequently: to be able to revise the strategy. Most
important, the reviews should i) tell how and whether the strategy is working, ii) show
that the measures are really important, iii) keep the measures aligned and iv) improve
measurement.
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Possible implementation problems
…which could limit the usefulness:
 Poor correlation between nonfinancial measures and results: hard to determine the
cause-effect relationships/proxy measures for nonfinancial objectives.
 Fixation on financial results: … due to short-term pressure. This overwhelms the longterm, uncertain payback of nonfinancial measures. An incentive system that only rewards
financial results creates additional pressure.
 Measures are not updated
 Measurement overload (1<x<50)
 Difficulty in establishing trade-offs: could give weights to the individual measures in the
BSC. Without them, it is more difficult to establish trade-offs between financial and nonfinancial measures.
Interactive control/Learning organizations
In industries that are subject to rapid environmental changes, it is important that the
organization can continuously adapt to the changes through interactive controls; a way of
using the management control system as a source of information. Interactive controls alert
management to strategic uncertainties, which forms the basis for managers to adapt to the
changing environment by creating new business models. Examples are technological
discontinuities (internet, e-commerce growth, shifts from physical goods to services…) and
globalization discontinuities (deregulation, competition moving freely across borders…).
Chapter 14: Service Organizations
MC differs in service organizations from manufacturing organizations:
 Absence of an inventory buffer between production and sales
 Difficulty of measuring quality
 Labor intensive
Professional service organizations:
 No dominant goal of return on assets employed
 Behavioural characteristics do not include attention to costs
 Output measures are subjective
 No clear line between marketing and production
 Performance appraisal by peer revivews which are subjective
Financial services organizations:
 Raw material is money – the value in each unit of money in inventory is the same for all
organizations (cost of using money of course varies)
 Profitability cannot be measured until several years after a commitment has been made –
continual periodic audits are necessary
Healthcare organizations:
 Current control and deliver system is unworkable. Costs cannot be standardized.
Nonprofit organizations:
 Cannot use the profit measure for control but must account for contributed capital instead
 Expenditure decisions are subjective (are becoming more effective due to shrinking
sources of funds)
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