Non-financial performance indicators p5

Assumed knowledge

 

11 builds on your knowledge of financial and non-financial performance measurement from PM.

 

2      Introduction

 

In  s 8 and 9 we looked at a wide range of financial performance measures. However, in order to fully appraise the performance of an organisation, and to understand if the best techniques are being used to drive its success, it is useful to use a range of financial performance indicators (FPIs) and non-financial performance indicators (NFPIs) to evaluate performance.

 

3      Drawbacks of sole reliance on financial performance measures

 

There are a number of problems associated with the sole use of FPIs to monitor performance:

 

Short-termism

 

The problem of short-termism was discussed in   8. Linking rewards to financial performance may tempt managers to make decisions that will improve short-term financial performance but may have a negative impact on long-term profitability. For example, a manager may decide to delay investment in order to boost the short-term profits of their division.

 

Non-financial performance indicators

 

 

 

Internal focus

 

Financial performance measures tend to have an internal focus. In order to compete successfully it is important that external factors (such as customer satisfaction and competitors’ actions) are also considered.

 

Manipulation of results

 

Most managers will act in good faith and have an honest approach to performance management. However, in order to achieve target financial performance (and hence their reward), some managers may be tempted to manipulate results, e.g. costs recorded in the current year may be wrongly recorded in the next year’s accounts in order to improve current year performance.

 

It is important to point out that NFPIs can also be open to manipulation by managers (in fact they may be even more open to manipulation due to their subjective nature). However, using a comprehensive range of FPIs and NFPIs should assist in achieving a true and fair view of organisational performance and any problems associated with manipulation of results should be minimised.

 

Do not convey the whole picture

 

The use of FPIs has limited benefit to the company since they do not convey the full picture regarding the factors that drive long-term success and maximisation of shareholder wealth, e.g. customer satisfaction, ability to innovate, quality.

 

Backward looking

 

Financial performance measures are traditionally backward looking. This is not suitable in today’s dynamic business environment.

 

  • Solution = use financial and non-financial performance indicators

 

In order to overcome the problems discussed in section 3, a broader range of measures should be used.

 

The optimum system for performance measurement and control will include:

 

  • Financial performance indicators (FPIs) – it is still important to monitor financial performance, e.g. using ROCE, EBITDA, EVA.

 

  • Non-financial performance indicators (NFPIs) – these measures will reflect the long-term viability and health of the organisation.

 

The measures used should be tailored to the circumstances in the organisation.

 

By focusing on the examination and improvement of upstream determinants (e.g. quality, flexibility, resource utilisation and innovation), improvements in downstream results (e.g. competitiveness and financial performance) should occur.

 

The models used to evaluate financial and non-financial performance will be reviewed in detail in section 7.

 

 

FPIs and NFPIs

 

 

 

The following table gives examples of possible FPIs and NFPIs:

 

Financial • cost
performance • profitability
• liquidity
• budget variance analysis
• market ratios
• level of bad debts
• return on capital employed (ROCE).
Competitiveness • sales growth by product or service
• measures of customer base
• relative market share and position.
Activity • sales units
• labour/machine hours
• number of passengers carried
• number of material requisitions serviced
• number of accounts reconciled
• whichever measurement is used it may be
compared against a pre-set target.
Productivity • efficiency measurements of resources planned
against consumed
• measurements of resources available against
those used
• productivity measurements such as production
per person or per hour or per shift.
Quality of • quality measures in every unit
service • evaluate suppliers on the basis of quality
• number of customer complaints received
• number of new accounts lost or gained
• rejections as a percentage of production or
sales.

 

 

Customer • speed of response to customer needs
satisfaction • informal listening by calling a certain number of
customers each week
• number of customer visits to the factory or
workplace
• number of factory and non-factory manager
visits to customers.
Quality of • days’ absence
working life • labour turnover
• overtime
• measures of job satisfaction.
Innovation • proportion of new products and services to old
ones
• new product or service sales levels.

 

5      NFPIs and business performance

 

5.1 Introduction

 

There are a number of areas that are particularly important for ensuring the success of a business and where the use of NFPIs plays a key role. These include:

 

  • product and service quality

 

  • brand awareness and company profile. Each of these will be reviewed in turn.

 

5.2 Product and service quality

 

Problems with product or service quality can have a long-term impact on the business and they can lead to customer dissatisfaction and loss of future sales.

NFPIs are particularly useful when assessing product and service quality.

Measures may focus on:

 

  • the quality of incoming supplies, e.g. a sample of incoming supplies may be inspected to determine the level of quality

 

  • the quality of work completed – again, a sample of output may be checked to verify the levels of quality

 

  • customer satisfaction – one definition of quality is ‘the ability of a product or service to meet customers’ needs’. Customer satisfaction, loyalty and repeat business go hand in hand and it is important to measure customer satisfaction, e.g. using customer surveys.

 

Product and service quality

 

 

 

  • A product (or service) and its components should be critically and objectively compared both with competition and with customer expectation and needs, for example:

 

–    Is it good value?

 

–    Can it really deliver superior performance?

 

–    How does it compare with competitor offerings?

 

– How will it compare with competitor offerings in the future given competitive innovations?

 

  • Product and service quality are usually based on several critical dimensions that should be identified and measured over time. Performance on all these dimensions needs to be combined to give a complete picture. For example:

 

– an automobile firm can have measures of defects, ability to perform to specifications, durability and ability to repair

 

– a bank might be concerned with waiting time, accuracy of transactions, and making the customer experience friendly and positive

 

– a computer manufacturer can examine relative performance specifications, and product reliability as reflected by repair data.

 

  • The relative importance of different factors will vary from company to company and between customers, but achieving high quality means ensuring all the factors of the product or service package meet customer requirements.

 

  • Measures should be tracked over time and compared with those of competitors. It is the relative comparisons and changes that are most important.

 

  • One of the most important assets of many firms is the loyalty of the customer base. Measures of sales and market share are useful but are crude indicators of how customers really feel about a firm.

 

  • Often the most sensitive and insightful information comes from those who have decided to leave a brand or firm. Thus, ‘exit interviews’ for dissatisfied customers who have ‘left’ a brand can be very productive.

 

  • Another key area is access and availability of products and services, as failure in these areas can cause a loss of customers.

 

  • Other possible sources of non-financial information related to product and service quality and customer satisfaction are:

 

– repeat business ratings, which is useful as a complement to measurements of absolute sales

–    general customer satisfaction surveys

 

–    monitoring of the number and type of complaint.

 

 

Illustration 1 – Quality of service at Heathrow Airport

 

 

 

Heathrow Airport Holdings Limited owns and runs London Heathrow Airport, one of the world’s busiest airports. It uses regular customer surveys for measuring customer perceptions of a wide variety of service quality attributes, including, for example, the cleanliness of its facilities, the helpfulness of its staff and the ease of finding one’s way around the airport. Public correspondence is also analysed in detail, and comment cards are available in the terminals so that passengers can comment voluntarily on service levels received. Duty terminal managers also sample the services and goods offered by outlets in the terminals, assessing them from a customer perspective.

 

They check the cleanliness and condition of service facilities and complete detailed checklists which are submitted daily to senior terminal managers. The company has also a wealth of internal monitoring systems that record equipment faults and failures, and report equipment and staff availability. These systems are supported by the terminal managers who circulate the terminals on a full-time basis, helping customers as necessary, reporting any equipment faults observed and making routine assessments of the level of service provided by Heathrow Airport Holdings Limited.

 

Heathrow Airport Holdings Limited
Quality Measures Mechanisms
characteristic
Access Walking distance/ease of Surveys/operational
finding way around data
Aesthetics Staff appearance/airport Surveys/inspection
appearance/quality of
catering
Availability Equipment availability Internal fault monitors
Cleanliness Environment and equipment Surveys/inspection
Comfort Crowdedness Surveys/inspection
Communication Information clarity/clarity of Surveys/inspection
labelling and pricing
Competence Staff efficiency Management inspection
Courtesy Courtesy of staff Surveys/inspection
Friendliness Staff attitude Surveys/inspection
Reliability Equipment faults Surveys/inspection
Responsiveness Staff responsiveness Surveys/inspection
Security Efficiency of security Surveys/internal data
checks/number of urgent
safety reports

 

 

5.3 Brand awareness and company profile

 

Brand awareness is an indicator of the strength of a product’s/service’s place in the customers’ minds.

 

Developing and maintaining a brand and/or a company profile can be expensive. However, it can also enhance performance due to customer loyalty which results in repurchasing and continued use of the products. The value of a brand/company profile is based on the extent to which it has:

 

  • high loyalty

 

  • name awareness

 

  • perceived quality

 

  • other attributes such as patents or trademarks.

 

A range of FPIs and NFPIs will assist in measuring customer loyalty.

 

FPIs may focus on areas such as:

 

  • marketing spend against sales

 

  • market share

 

  • elasticity of demand to price (i.e. the change in demand as a result of a change in price) and

 

  • profit margins compared to other companies who make similar products but whose brand strength is much stronger/weaker.

 

NFPIs may focus on areas such as:

 

  • customer awareness and

 

  • consumer opinions.

 

Brand awareness and company profile

 

 

 

  • If potential customers do not know about a company, they will not purchase from it. Therefore, one of the main goals of any business should be to build brand awareness.

 

  • Assessment of brand awareness means identifying the product or company’s associations in the minds of customers, and its perceived quality. This is related to but can be very different from actual quality – but ultimately it is the consumer who decides what a brand is really worth.

 

  • Associations can be monitored in an effective way by talking to groups of customers informally on a regular basis. The identification of changes in important associations is likely to emerge from such efforts. More structured tools are also available.

 

 

  • A brand or firm can be scaled on its key dimensions using a representative sample of customers. Key dimensions can then be tracked over time.

 

  • For companies with a high company profile it is particularly important that brand awareness is positive.

 

  • Measures of brand awareness can either look at the direct link between the brand and overall results, e.g. by considering the price premiums which the company obtains, or monitor the more intangible aspects such as awareness and consumer opinion.

 

Test your understanding 1

 

 

 

Required:

 

How are the measures of product and service quality related to brand awareness and company profile?

 

6      Difficulties in using and interpreting qualitative data

 

In   6 we discussed the difficulties in recording and processing data of a qualitative nature and looked at how a business can deal with qualitative data.

Most NFPIs are in qualitative terms. These qualitative factors can often:

 

  • be difficult to measure. For example, two separate customers may be provided with an identical product or service but may have different perceptions as to how well it satisfied their needs

 

  • be difficult to express in quantitative terms. This problem can be addressed, for example, by using a scoring system on a customer survey for the level of customer satisfaction.

 

Qualitative data

 

 

 

Difficulties in using and interpreting qualitative information

 

Particularly at higher levels of management, non-financial information is often not in numerical terms, but qualitative, or soft, rather than quantitative. Qualitative information often represents opinions of individuals and user groups. However there are issues related to its use:

 

  • Decisions often appear to have been made on the basis of quantitative information; however qualitative considerations often influence the final choice, even if this is not explicit.

 

  • Conventional information systems are usually designed to carry quantitative information and are sometimes less able to convey qualitative issues. However the impact of a decreased output requirement on staff morale is something that may be critical but it is not something that an information system would automatically report.

 

  • In both decision making and control, managers should be aware that an information system may provide a limited or distorted picture of what is actually happening. In many situations, sensitivity has to be used in interpreting the output of an information system.

 

  • Information in the form of opinions is difficult to measure and interpret. It also requires more analysis.

 

  • Qualitative information may be incomplete.

 

  • Qualitative aspects are often interdependent and it can be difficult to separate the impact of different factors.

 

  • Evaluating qualitative information is subjective, as it is not in terms of numbers – there are no objective formulae as there are with financial measures.

 

  • The cost of collecting and improving qualitative information may be very high.

 

  • Difficulties in measurement and interpretation mean that qualitative factors are often ignored.

 

Working with qualitative information

 

Despite the challenges it presents, there may be ways of improving the use of qualitative information.

 

  • Where it is important to make use of qualitative information, it is essential to ensure that users are aware of any assumptions made in analysis and of the difficulties involved in measuring and counting it.

 

  • It is sometimes possible to quantify issues which are initially qualitative, by looking at its impact. For example, when looking at service quality, considering the cost of obtaining the same quality of service elsewhere.

 

Even if it is not possible to quantify issues precisely, attempting to do so is likely to improve decision making as the issues are likely to have been thought through more thoroughly.

 

 

Test your understanding 2

 

 

 

Required:

 

Your company is considering replacing its current products with a new range which will use different production techniques. What qualitative issues will you need to consider?

 

7      Models for evaluating financial and non-financial performance

 

7.1 Introduction

 

There are three key models that an organisation can use to evaluate its financial and non-financial performance.

 

  • Kaplan and Norton’s balanced scorecard

 

  • Fitzgerald and Moon’s building block model

 

  • The performance pyramid.

 

These are highly examinable. Each one will be reviewed in turn but remember that questions may ask you to compare and contrast the methods rather than just discussing each one in isolation.

 

7.2 The balanced scorecard

 

What is the balanced scorecard?

 

Kaplan and Norton’s balanced scorecard was designed to be used as strategic performance measurement and management framework. It provides a framework which can be utilised to develop a multi-dimensional set of performance measures for strategic control of the business.

 

The balanced scorecard includes:

 

  • financial measures (these reveal the results of actions already taken)

 

  • non-financial measures (these are drivers of future financial performance)

 

  • external as well as internal information.

 

The balanced scorecard allows managers to look at the business from four important perspectives:

Within each of these perspectives a business should seek to:

 

  • identify a series of goals (i.e. CSFs) and

 

  • to establish appropriate measures (KPIs).

 

These should be in line with the overall strategic objectives and vision of the organisation.

 

Illustration 2 – Examples of goals and measures

 

 

 

A balanced scorecard for an electronics company could include the following goals and measures:

 

Goals (CSFs) Measures (KPIs)
Customer Low cost Benchmark cost vs
perspective competitor’s cost
High quality % defects
Responsive service % on-time deliveries
Internal Operational excellence Production cycle time,
perspective rectification time, % of
production completed on
time and within budget
Employee satisfaction Staff turnover
Innovation Innovation % of income from new
and learning products
Internal learning Number of employee
suggestions and %
implemented, % of time
spent on staff development
Financial Growth and development Quarterly sales growth
perspective
Survival Cash flow
Profitability ROCE

 

It would be beneficial to rank the goals and measures in order of importance.

 

 

Test your understanding 3

 

 

 

Required:

 

Using the four perspectives of the balanced scorecard, suggest some performance measures for a building company involved in house building and commercial property and operating in a number of different countries.

 

Evaluation of the balanced scorecard as a performance management tool

 

  • The balanced scorecard provides a balanced view of organisational performance in that:

 

– it includes a mixture of financial and non-financial measures – it covers internal and external matters

 

– it links the fulfilment of long-term and short-term objectives to the achievement of overall strategy and vision. Success in the four key areas should lead to the long-term success of the organisation.

 

  • ‘What gets measured gets done’. If managers know they are being appraised on various aspects of performance, they will pay attention to these areas.

 

  • Managers are unlikely to be able to distort performance as bad performance is difficult to hide if multiple measures are used.

 

  • It is flexible, as what is measured can be changed over time to reflect changing priorities.

 

However, the balanced scorecard is not without its problems.

 

Test your understanding 4

 

 

 

Required:

 

Discuss the disadvantages of the balanced scorecard.

 

Implementing the balanced scorecard

 

There are four essential activities which have to be executed rigorously if the implementation of the balanced scorecard is to succeed:

Steps involved in implementing the scorecard

 

 

 

  • Make the strategy explicit

 

The starting point in producing a balanced scorecard is identifying the strategic requirements for success in the firm. Typically, those strategic requirements will relate to products, markets, growth and resources (human, intellectual and capital).

 

For example, businesses like Dell may want to be low-cost producers achieving competitive advantage from selling undifferentiated products at lower prices than those of competitors, or a business may have a product development strategy to become a leader in technology and command a premium like Apple. Their strategy may also be to develop and maintain market share, like Microsoft, or their strategy may be to occupy the number-one or number-two position in their lines of business.

 

  • Choose the measures

 

Performance measures have to be selected that clearly relate to the achievement of the strategies identified in the earlier process. As has been seen throughout the discussion of performance measures in this text, the selection of appropriate indicators and measures is critical. The selected measures form the goals that management communicates to staff as being important. Those goals are what staff will strive to achieve. If the wrong goals are selected then the firm may find itself doing the wrong things.

 

The general problem is that performance measures that relate to limited parts of the business can be very prone to inducing dysfunctional behaviour. For example, a firm might minimise its inventory holding in order to meet some inventory holding target – but at the expense of total operating costs.

 

  • Define and refine

 

Management reporting systems and procedures need to be set up to track and report the measures regularly. This involves all the issues relating to the processing of data and the reporting of information discussed earlier in this text.

 

The precise requirements of reporting associated with the use of the balanced scorecard will make demands on both the management accounting and IT systems in an organisation. Fully satisfying those demands has a cost and sometimes compromises may have to be made in order to contain that cost.

 

All sorts of practical problems may be encountered in reporting on an indicator. For example, when reporting on revenue:

 

–    How is revenue calculated and when is it recorded?

 

–    Should it include the non-core business activity?

 

– Should revenue be reported under product, region or customer headings?

 

–    How should interdivisional transactions be reported?

 

Operating the management accounting system associated with the balanced scorecard requires that the things being reported should be defined and periodically refined.

 

  • Deal with people

 

The balanced scorecard is an exercise in modifying human behaviour. It is its interaction with people that determines whether or not it will work.

 

Balanced scorecards can easily become a confusing mass of measures, some of which even contradict each other. There may be too many measures and action to achieve some of them may contribute to failure to achieve others. The measures may not always be prioritised.

 

To be effective, the measures contained in the scorecard should be limited in number, reasonably consistent and ranked in some order of priority. Further, performance measures should be aligned with the management structure. Career progression and remuneration should be appropriately linked to scorecard measure linked performance. Organisations which adopt a balanced scorecard but continue to reward managers on the basis of a narrow range of traditional financial measures are likely to be disappointed by the results.

 

Practical example of scorecard implementation

 

 

 

One example reported in management literature of how the balanced scorecard might be applied is the US case of Analog Devices (a semi-conductor manufacturer) in the preparation of its five-year strategic plan.

 

Analog Devices had as its main corporate objective: ‘Achieving our goals for growth, profits, market share and quality creates the environment and economic means to satisfy the needs of our employees, stockholders, customers and others associated with the firm. Our success depends on people who understand the interdependence and congruence of their personal goals with those of the company and who are thus motivated to contribute towards the achievement of those goals.’

 

Three basic strategic objectives identified by the company were market leadership, sales growth and profitability.

 

The company adopted targets as follows:

 

Customer perspective

 

  • Percentage of orders delivered on time: a target was set for the five-year period to increase the percentage of on-time deliveries from 85% to at least 99.8%.

 

  • Outgoing defect levels: the target was to reduce the number of defects in product items delivered to customers, from 500 per month to fewer than 10 per month.

 

  • Order lead time: a target was set to reduce the time between receiving a customer order to delivery from 10 weeks to less than three weeks.

 

Internal perspective

 

  • Manufacturing cycle time: to reduce this from 15 weeks to 4 to 5 weeks over the five-year planning period.

 

  • Defective items in production: to reduce defects in production from 5,000 per month to fewer than 10 per month.

 

Learning and innovation perspective

 

  • Having products rated ‘number one’ by at least 50% of customers, based on their attitudes to whether the company was making the right products, performance, price, reliability, quality, delivery, lead time, customer support, responsiveness, willingness to co-operate and willingness to form partnerships.

 

  • The number of new products introduced to the market.

 

  • Sales revenue from new products.

 

  • The new product sales ratio: this was the percentage of total sales achieved by products introduced to the market within the previous six quarters.

 

  • Average annual revenues for new products in their third year.

 

  • Reducing the average time to bring new product ideas to market.

 

Financial targets were set for revenue, revenue growth, profit and return on assets, but the idea was that the financial targets would flow from achieving the other targets stated above.

 

Analog Devices sought to adopt financial and non-financial performance measures within a single system, in which the various targets were consistent with each other and were in no way incompatible.

 

 

Strategy mapping

 

 

 

Strategy mapping was developed by Kaplan and Norton as an extension to the balanced scorecard and to make the implementation of the scorecard more successful.

 

The steps involved are:

  • At the head of the strategy map is the overriding objective of the organisation which describes how it creates value. This is then connected to the organisation’s other objectives, categorised in terms of the four perspectives of the balanced scorecard, showing the cause-and-effect relationships between them.

 

  • The strategy map helps organisations to clarify, describe and communicate the strategy and objectives, both within the organisation and to external stakeholders by presenting the key relationships between the overall objective and the supporting strategy and objectives in one diagram.

 

Issues when implementing the strategy map:

 

  • Organisations have often found it difficult to translate the corporate vision into behaviour and actions which achieve the key corporate objectives.

 

  • In practice, many employees do not understand the organisation’s strategy, and systems such as performance management and budgeting are not linked to the strategy.

 

Question practice

 

The following question is of the same standard and style as the real exam. It examines the balanced scorecard, amongst other areas, and effectively demonstrates the linkages between different performance management techniques. Take the time to attempt the question in full and learn from the answer, considering both content and style.

 

Test your understanding 5

 

 

 

Jump is a listed business operating a chain of quality health clubs in a European country. The company has a strong reputation for the quality of its service but there are a number of other health clubs operating in the country and the market is fiercely competitive.

 

The country in which Jump is located is currently in recession. Consumer spending is falling throughout the economy and there is no immediate likelihood of a resumption of growth. Appendix 1 shows the financial data for Jump for the past two years.

 

Jump’s Chief Executive Officer (CEO) has recently conducted a strategic review of the business in the context of the current economic recession. He has identified the following strategy as critical for Jump’s success:

 

  • Focus on key customers.

 

  • Ensure Jump’s offerings meet the needs of these customers.

 

  • Reduce or eliminate costs which do not address the needs of these customers.

 

  • Build for the future using a programme of sustainable development.

 

Jump recognises that it operates in a highly competitive environment and periodically monitors its share of the market and compares its prices with those of its competitors. The CEO has identified the need to operate a more systematic method of performance improvement. To this end, he believes that competitor benchmarking is necessary and has information that at least one of Jump’s main competitors benchmark already.

 

Appendix 2 contains data analysing Jump and its two main competitors;
Fitness Matters and Active First.
Appendix 1: Financial data for Jump
20X0 20X1
€m €m
Operating profit 51.9 42.7
Interest 4.2 6.1
Profit before tax 47.7 36.6
Profit for the year 37.2 26.3
EVA 20.6 7.2

 

20X0 20X1
Average number of shares in issue 140 million 140 million
Stock market information:
Country’s market index 1,020.7 704.3
Health club sector index 1,711.3 1,320.3
Jump’s average share price €1.22 €1.03
383

 

 

 

Appendix 2: Comparative data
Fitness Matters Active First Jump
20X0 20X1 20X0 20X1 20X0 20X1
Revenue €m 246 239 521 508 483 522
Profit for the year €m 19.3 17.4 40.4 25.9 37.2 26.3
No. of health clubs 18 20 26 35 20 21
Market share 12.4% 12.2% 16.9% 15.6% 16.0% 16.0%
Revenue per health 13.7 12.0 20.0 14.5 24.2 24.9
club €m

 

Required:

 

  • Describe the different perspectives of the balanced scorecard showing how the new strategy as outlined by the CEO links to these perspectives. Suggest appropriate performance measures for Jump for each of the detailed points within the strategy.

 

(8 marks)

 

  • Assess the financial performance of the company using share price, EPS and EVA. Critically evaluate the use of these performance metrics and how they may affect management behaviour.

 

(11 marks)

 

  • Prepare a report for the board on a bench marking exercise using the information given in appendix 2.

 

  • Evaluate the benefits and difficulties of benchmarking in this situation.

 

  • Evaluate the performance of Jump using the data given in the question. Conclude as to the performance of the company.

 

(13 marks)

 

Professional marks for appropriateness of format, style and structure of the report.

 

(3 marks)

 

(Total: 35 marks)

 

Student accountant articles: visit the ACCA website, www.accaglobal.com, to review the article on ‘performance measures to support competitive advantage’.

 

7.3 The building block model

 

Fitzgerald and Moon have developed an approach to improving the performance measurement system in service organisations. It suggests that the performance measurement system should be based on the three building blocks of dimensions, standards and rewards.

Dimensions

 

The dimensions are the CSFs for the business. Suitable metrics must be developed to measure each performance dimension.

 

Dimensions fall into two categories: downstream results (competitiveness and financial performance) and upstream determinants (quality of service, flexibility, resource utilisation and innovation).

 

Dimension Type of measure
Competitiveness Relative market share
Financial performance Turnover growth
Quality of service Product reliability
Flexibility Delivery time
Resource utilisation Productivity
Innovation New product numbers

 

Dimensions of performance

 

 

 

The table above identifies the dimensions of performance. The first two of these relate to downstream results, the other four to upstream determinants. For example, a new product innovation will not impact on profit, cash flow and market share achieved in the past – but a high level of innovation provides an indicator of how profit, cash flow and market share will move in the future. If innovation is the determinant of future performance, it is a key success factor.

 

Standards

 

The standards are the targets (KPIs) set for the metrics chosen from the dimensions measured. The standards set should have the following characteristics:

 

  • Ownership: Managers who participate in the setting of standards are more likely to accept and be motivated by the standards than managers on whom standards are imposed.

 

  • Achievability: An achievable, but challenging, standard is a better motivator than an unachievable one.

 

  • Fairness: When setting standards across an organisation, care should be undertaken to ensure that all managers have equally challenging standards.

 

Rewards

 

Rewards are the motivators for the employees to work towards the standards set. Remember:

 

  • what gets measured gets done

 

  • what gets measured and fed back gets done well

 

  • what gets rewarded gets repeated.

 

To ensure that employees are motivated to meet standards, the standards need to be clear (e.g. the target is to ‘achieve four product innovations per year’ rather than to simply ‘innovate’) and linked to controllable factors. The actual means of motivation may involve performance related pay, a bonus or a promotion.

 

The building block model thus makes an explicit link between achievement of the corporate strategy and the management of human resources.

 

Fitzgerald and Moon example

 

 

 

Fitzgerald and Moon applied to a Washing Machine Manufacturer:

 

Dimension = Flexibility – On Quality of Financial
CSF time delivery service performance
Standard = KPI Delivery speed Reliability Profitability
Reward Points for each % commission Management
on time delivery for repair profit related
– leading to a engineers from bonuses
bonus fee or warranty
paid

 

Test your understanding 6

 

 

 

FL provides training on financial subjects to staff of small and medium-sized businesses. Training is at one of two levels – for clerical staff, instructing them on how to use simple financial accounting computer packages, and for management, on management accounting and financial management issues.

 

Training consists of tutorial assistance, in the form of workshops or lectures, and the provision of related material – software, texts and printed notes.

 

Tuition days may be of standard format and content, or designed to meet the client’s particular specifications. All courses are run on client premises and, in the case of clerical training courses, are limited to 8 participants per course.

 

FL has recently introduced a ‘helpline’ service, which allows course participants to phone in with any problems or queries arising after course attendance. This is offered free of charge.

 

FL employs administrative and management staff. Course lecturers are hired as required, although a small core of technical staff is employed on a part-time basis by FL to prepare customer-specific course material and to man the helpline.

 

Material for standard courses is bought in from a group company, who also print up the customer-specific course material.

 

Required:

 

Suggest a measure for each of the six dimensions of the building block model.

 

Question practice

 

The question below is an extract from a past exam question. It is a great question to attempt to ensure that you fully understand the building block model and that you can apply your knowledge in the context of the scenario.

 

Test your understanding 7

 

 

 

The Sentinel Company (TSC) offers a range of door-to-door express delivery services. The company operates using a network of depots and distribution centres throughout the country of Nickland. The following information is available:

 

  • Each depot is solely responsible for all customers within a specified area. It collects goods from customers within its own area for delivery both within the specific area covered by the depot and elsewhere in Nickland.

 

  • Collections made by a depot for delivery outside its own area are forwarded to the depots from which the deliveries will be made to the customers.

 

  • Each depot must therefore integrate its deliveries to customers to include:

 

  • goods that it has collected within its own area; and

 

  • goods that are transferred to it from depots within other areas for delivery to customers in its area.

 

  • Each depot earns revenue based on the invoiced value of all consignments collected from customers in its area, regardless of the location of the ultimate distribution depot.

 

  • Depot costs comprise all of its own operating costs plus an allocated share of all company costs including centralised administration services and distribution centre costs.

 

  • Bonuses for the management team and all employees at each depot are payable quarterly. The bonus is based on the achievement of a series of target values by each depot.

 

  • Internal benchmarking is used at TSC in order to provide sets of absolute standards that all depots are expected to attain.

 

  • The Appendix shows the target values and the actual values achieved for each of a sample group of four depots situated in Donatellotown (D), Leonardotown (L), Michaelangelotown (M), and Raphaeltown (R). The target values focus on three areas:

 

  • depot revenue and profitability

 

  • customer care and service delivery; and

 

  • credit control and administrative efficiency.

 

The bonus is based on a points system, which is also used as a guide to the operational effectiveness at each depot. One point is allocated where the target value for each item in the Appendix is either achieved or exceeded, and a zero score where the target is not achieved.

 

Appendix: Target and actual value statistics for Donatellotown (D), Leonardotown (L), Michaelangelotown (M), and Raphaeltown (R) for the Quarter ended 31 October 20X1.

 

  11
Revenue and Profit Statistics:
Revenue (1) Profit (2)
Target Actual Target Actual
$m $m $m $m
Company overall 200 240 30 32
Selected depots:
D 16 15 2.4 2.3
L 14 18 2.1 2.4
M 12 14 1.8 2.2
R 18 22 2.7 2.8

 

Note: For the purpose of calculation of each depot’s points it is essential that actual profit as a percentage of actual revenue must exceed the target profit (%).

 

Customer Care and Service Delivery Statistics:
Target Actual
Selected Depots: D L M R
Measure (% of total): % % % % %
(3) Late collection of consignments 2.0 1.9 2.1 1.8 2.4
(4) Misdirected consignments 4.0 4.2 3.9 3.3 5.1
(5) Delayed response to complaints 1.0 0.7 0.9 0.8 1.2
(6) Delays due to vehicle breakdown 1.0 1.1 1.4 0.3 2.0
Measure (% of revenue):
(7) Lost items 1.0 0.6 0.9 0.8 1.9
(8) Damaged items 2.0 1.5 2.4 1.5 1.8
Credit Control & Administration
Efficiency Statistics:
(9) Average debtor weeks 5.5 5.8 4.9 5.1 6.2
(10) Debtors in excess of 60 days 5% ? ? ? ?
(% of total)
(11) Invoice queries (% of total) 5% 1.1% 1.4% 0.8% 2.7%
(12) Credit notes as a % of revenue 0.5% ? ? ? ?
Other information: D L M R
Aged Debtor analysis (extract):
$000 $000 $000 $000
Less than 30 days 1,300 1,500 1,180 2,000
31 – 60 days 321 133 153 552
Value of credit notes raised during 45 36 28 132
the period ($000)
Note: TSC operates all year round.

 

 

 

Required:

 

Prepare a report for the directors of TSC which:

 

  • contains a summary table which shows the points gained (or forfeited) by each depot. The points table should facilitate the ranking of each depot against the others for each of the

12 measures provided in the Appendix

 

(9 marks)

 

  • evaluates the relative performance of the four depots as indicated by the analysis in the summary table prepared in (a)

 

(5 marks)

 

  • assesses TSC in terms of financial performance, competitiveness, service quality, resource utilisation, flexibility and innovation and discusses the interrelationships between these terms, incorporating examples from within TSC; and

 

(10 marks)

 

  • critiques the performance measurement system at TSC.

 

(5 marks)

 

Note: this requirement includes 4 professional marks.

 

(Total: 33 marks)

 

Evaluation of the building block model

 

The building block model has a number of advantages:

 

  • All key determinants of success (financial and non-financial) in performance will be measured.

 

  • It covers internal and external matters.

 

  • It differentiates between downstream results and upstream determinants.

 

  • It is specifically tailored to the service industry.

 

  • The reward system will operate in a way to optimally motivate the individual staff members, i.e. rewards should be clear and linked to controllable factors.

 

  • Targets are set in such a way to engage and motivate staff, i.e. through ownership, achievability and fairness.

 

  • Managers are unlikely to be able to distort performance.

 

However, it is not without its drawbacks:

 

  • It is not suitable for non-service companies.

 

  • It can be difficult to see how the building blocks link to the strategic objectives.

 

In addition, many of the drawbacks discussed in TYU4 are also relevant here.

 

7.4 Performance pyramid

 

  • The performance pyramid, developed by Lynch and Cross, includes a hierarchy of financial and non-financial performance measures.

 

  • The aim is to produce a set of performance measures which are comprehensive in examining the results and the determinants of those results for the organisation.

 

  • It is based on the belief that each level of the organisation has different concerns but they must support each other in order to achieve the overall objective of the organisation.

 

The pyramid shape is to emphasise that the measures from the operational up to the strategic levels should support the corporate vision.

Level 1: At the top of the organisation is the corporate vision through which the organisation describes how it will achieve long-term success and competitive advantage.

 

Level 2: This focuses on the achievement of an organisation’s CSFs in terms of market-related measures and financial measures. The marketing and financial success of a proposal is the initial focus for the achievement of corporate vision.

 

Level 3: The marketing and financial strategies set at level 2 must be linked to the achievement of customer satisfaction, increased flexibility and high productivity at the next level. These are the guiding forces that drive the strategic objectives of the organisation.

 

Level 4: The status of the level 3 driving forces can be monitored using the lower level departmental indicators of quality, delivery, cycle time and waste.

 

The left hand side of the pyramid contains measures which have an external focus and which are predominantly non -financial. Those on the right are focused on the internal efficiency of the organisation and are predominantly financial.

 

Test your understanding 8

 

 

 

Required:

 

Suggest two measures (KPIs) for each of the three categories at the business operating systems level, i.e. customer satisfaction, flexibility and productivity.

 

Student accountant article: visit the ACCA website, www.accaglobal.com, to review the article on ‘the pyramids and pitfalls of performance measurement’.

 

Evaluation of the performance pyramid

 

Many of the strengths covered for the balanced scorecard and the building block model also apply for the performance pyramid, i.e.

 

  • It includes a mixture of financial and non-financial measures.

 

  • It covers internal and external matters.

 

  • Managers are unlikely to be able to distort performance.

 

  • If managers know they are being appraised on certain aspects of performance, they will pay attention to these.

 

  • It is flexible and measures can change over time.

 

Supporters of the performance pyramid claim that it is better than the balanced scorecard and the building block model since:

 

  • It is hierarchical, requiring senior managers to set objectives for each level of the organisation. The performance measures will then be specific to each level.

 

  • It is process focused. It considers how processes combine to achieve the organisation’s goals. Measures interact both horizontally (for example, cutting production cycle time should shorten delivery time) and vertically (for example, cutting production cycle time should increase productivity).

 

  • It recognises that financial and non-financial measures can support each other. For example, improved flexibility should improve market position by meeting customer’s needs, while also improving financial performance by increasing revenue and reducing fixed costs.

 

However, there are a number of drawbacks:

 

  • Implementation of the performance pyramid will use vital management time and resource.

 

  • Some measures may conflict, for example there will be a trade-off between quality and cost.

 

  • In addition, many of the drawbacks discussed in TYU4 are relevant here.

 

 

  11
8 Exam focus
Exam sitting Area examined Question Number of
number marks
Mar/June 2017 Building block model 1(iv) 6
Sept/Dec 2016 Balanced scorecard 1(i) 8
Sept/Dec 2015 Balanced scorecard 4 25
June 2015 Balanced scorecard 3(a),(b) 16
December 2014 NFPIs in the public sector 2(a) 6
December 2013 Performance pyramid 2(a) 15
June 2013 Balanced scorecard and 1(iii)(iv)(v) 33
building block model
December 2011 Performance pyramid 2(b)(c) 18
June 2011 Building block model 3 20
June 2011 Balanced scorecard 2(a)(b)(d) 21

Test your understanding 1

 

The experience of existing customers and their perception of the quality of the products or services will help to determine whether the company profile is positive or negative. This is particularly important for a high profile company, about which everyone will have an opinion whether or not they have any experience as a customer. This will be based on the opinions of customers with whom they have contact, and on press reports which discuss the quality of the company’s offering.

 

Test your understanding 2

 

 

 

  • The impact on and the views of employees. Any decision which affects working practices will have a morale effect on employees. Some decisions, such as to close a department, will have a greater effect than others, for example an increase in production, but both will affect employees.

 

  • The impact on and opinion of customers who will be affected by any decision which changes the finished product or its availability. For example, the deletion of a product will force customers to choose an alternative item.

 

  • Suppliers will be affected by changes to production which require different raw materials or delivery schedules. For example, an increase in production may cause the supplier to increase production of the raw material.

 

  • The response of competitors. Any decision to changes in product specification or pricing will affect competitors who will then choose whether or not to respond.

 

  • The impact on demand for scarce resources. A change in production as a result of the decision may alter the demand for individual resources and the result of the decision may alter availability.

 

  • Any social and environmental effects.

 

 

Test your understanding 3

 

Financial perspective

 

  • ROCE and RI – overall and by SBU.

 

  • Margins – overall and by product/customer/country.

 

  • Different costs as a percentage of sales – e.g. labour costs/sales, sub-contractor costs/sales.

 

  • Sales growth.

 

  • Cash flow targets.

 

  • Market share.

 

Customer perspective

 

  • Percentage of scheduled targets met – especially whether contracts are finished on time.

 

  • Percentage of repeated business.

 

  • Number of complaints received.

 

  • Targets for new customers won.

 

  • Percentage of apartments sold off-plan.

 

Internal business perspective

 

  • Percentage of tenders won.

 

  • Percentage of utilisation of fixed assets – vehicles, plant and machinery.

 

  • Percentage of contracts with cost overruns.

 

  • Cost overrun as percentage of budgeted cost.

 

  • Targets for employee productivity.

 

For staffing, environmental and health and safety measures.

 

Innovation and learning perspective

 

  • Number of patents established for new methods/technologies.

 

  • Percentage of new materials used compared with total materials.

 

  • Percentage of total revenue coming from new buildings using new structural innovations in their design.

 

 

Test your understanding 4

 

 

The disadvantages are as follows:

 

  • It is difficult to record and process data of a non-financial, i.e. qualitative, nature.

 

  • Information overload due to the large number of measures that may be chosen. However, Kaplan and Norton recommended that only a handful of measures are used.

 

  • Potential conflict between measures, e.g. profitability may increase in the short-term through a reduction in product development.

 

  • The measures chosen may not align with the strategy and/or vision of the organisation.

 

  • Poor communication to employees/managers – organisations which adopt the balanced scorecard but continue to reward managers on the basis of a narrow range of traditional financial measures are likely to be disappointed with the results.

 

  • Lack of commitment by senior management will lead to an inevitable failure of the scorecard.

 

  • The lack of some key perspectives. For example, Tesco introduced a fifth perspective focusing on CSR.

 

  • The cost involved in establishing suitable measures and in measuring the performance of all four perspectives.

 

  • It focuses on the strategic level. However, a similar approach can be implemented at the tactical or operational level.

 

 

Test your understanding 5

 

 

 

  • The balanced scorecard allows managers to look at the business from four important perspectives:

 

Customer – how do our customers see us and how do we present ourselves to them?

 

Internal business process – what processes must we excel at in order to meet the needs of our customers and shareholders?

 

Innovation and learning – can we continue to improve and create value?

 

Financial – how do we look to our shareholders and how do we optimally serve their interests?

 

Cost cutting – this focuses mainly on the internal business process perspective and seeks to focus the business on value added activities.

 

Appropriate performance measures may include efficiency savings generating by removing or reducing unnecessary processes or products.

 

Build for the future using sustainable development – the future focus ties into the innovation and learning perspective but may also have a knock on impact on the other three perspectives.

 

In terms of appropriate performance measures, Jump may monitor its energy efficiency.

 

The new strategy focuses on four key areas which will address the balanced scorecard perspectives in different ways:

 

Focus on key customers – this will directly address the customer perspective but will also have implications for the other three perspectives.

 

In terms of appropriate performance measures, Jump should begin by segmenting the market, e.g. by age, gender, income or the family lifecycle. Jump should then analyse each segment in terms of profitability and changing market share and should then target the most profitable segment(s) of the market.

 

Ensure Jump’s offerings meet the needs of these customers – this will directly address the customer perspective but may also result in a change in internal business processes and an increase in innovation and learning. This, in turn, should have a knock on impact on the financial perspective.

 

In terms of appropriate performance measures, from a customer perspective, Jump should monitor levels of customer satisfaction (e.g. via surveys) and repeat business. Internal business processes could be benchmarked against competitors or could be monitored internally, again through the review of customer satisfaction. Innovation and learning could be monitored by looking at the number of new products and staff training time, e.g. are target customers satisfied with a range of new aerobics classes offered and the competence of the staff leading these classes? The financial perspective could be monitored using, say, ROCE, EPS or profit margin.

 

  • Assessment of financial performance

 

The year on year performance has declined. EPS (W1) has fallen by 29% which would normally result in a fall in shareholder satisfaction. However, when reviewing the share price it would seem that Jump’s shareholders would be encouraged by the company’s future prospects. Although Jump’s share price has fallen by 16% year on year, the market as a whole has fallen by 31% and more importantly the health sector has fallen by 23%.

 

Furthermore, even though Jump’s EVA has fallen by 65% year on year it has remained positive so the company continues to create value for its shareholders.

 

 

  11
(W1) EPS
20X0 20X1
EPS = PAT ÷ average €37.2m ÷ 140m   €26.3m ÷ 140m
number of = shares in = €0.266 = €0.188
issue
Evaluation of performance metrics
Advantages Disadvantages
EPS • Widely used • Based on accounting
measure. profit which is subject to
• Important to manipulation.
•
shareholders Comparison is only
since relates to between two years which
dividend growth. can be misleading.
Share • Widely used by • Volatile
price shareholders to • Subject to fluctuations
monitor
outside of manager’s
investments.
control.
• Managers may be
encouraged to make
decisions which boost
short term share price.
EVA • Widely used and • Numerous adjustments to
measured. profit must be made.
• Adjustments are
made to profit.
Conclusion as to impact of metrics on management

 

Both EPS and share price may encourage managers to make decisions which improve short term financial performance but may impact on long term profitability. EVA aims to partially tackle this issue through the adjustment of accounting figures but the large number of adjustments can make this measure unwieldy.

 

  • To: Board of Jump

 

From: A Accountant

 

Date: Today

 

Subject: Benchmarking performance

 

This report describes the benefits and problems associated with benchmarking the company’s performance. Then, the performance of Jump and its two main competitors is calculated and evaluated.

 

Benchmarking is the use of a yardstick to compare performance. The yardstick, or benchmark, is based upon the best in class. Competitor benchmarking uses a direct competitor with the same or similar processes as the benchmark.

 

  • Advantages of benchmarking Improved performance

 

Benchmarking could be a key tool in enabling Jump to improve its performance and increase profitability in this highly competitive market. There should be improvements across all areas, e.g. quality, customer service.

 

Achievability

 

The improvements will be seen as achievable since the new methods have actually been used in another organisation. This should encourage managers and employees to buy-in to the change process.

 

Improved understanding of environmental pressures

 

The benchmarking process should enable Jump to get back in touch with the needs of its customers and to better understand its competitors. The industry is highly competitive and so this greater awareness will be essential for future success.

 

Eliminates complacency

 

Benchmarking can help Jump to overcome complacency and to drive organisational change.

 

Continuous improvement

 

Benchmarking can be carried out at regular intervals and can therefore drive continuous improvement in the business.

 

Disadvantages of benchmarking Identifying best practice

 

It may prove difficult to identify the organisations that are best in class.

 

Cost

 

The actual benchmarking exercise will be costly for Jump. It is essential that the benefits of the exercise are greater than the associated costs.

 

Impact on motivation

 

If comparisons are unfavourable the information could have a negative impact on employee motivation and this would result in further inefficiencies.

 

Deciding which activities are to be benchmarked

 

This is a difficult process. Jump may not realise that there are better ways of doing things until they have seen their competitors carrying out certain processes.

 

Managers become too target driven

 

Benchmarking can result in managers becoming obsessed with hitting targets. This could sometimes be counterproductive.

 

Collection of data

 

The actual collection of data can be time consuming and costly. Data may not be readily accessible for all areas of performance measurement and competitors may be unwilling to share details.

 

  • Comparing Jump to its competitors, it is clear that Jump has done well to increase its total revenue (8% increase) but this comes at the cost of a significant fall in profit compared with Fitness matters (Fitness Matter’s fall in profit was 10% compared with a 29% fall for Jump). Jump should look into its pricing policy since it may have been buying sales by offering heavy discounts and these may not be sustainable in the long term.

 

Active Matters drop in profit is greatest of all but this may be explained by problems in the range and quality of its services. Active matters opened nine new health clubs in the period but there has been an overall fall in revenue of 2%. Jump could analyse Active Matter’s offerings to its customers in order to avoid making the same mistakes.

 

In terms of market share, Jump has maintained its position against slight falls in its competitors.

 

In revenue per health club, Jump has outperformed its competitors. However, this may be due to Jump having a larger average health club. The average club area for the three companies should be investigated.

 

Conclusion

 

In conclusion, Jump seems to be performing well with increased revenues and the maintenance of market share during the decline. The company must guard against the danger of eroding margins too far.

 

Test your understanding 6

 

 

 

Possible measures include:

 

Financial performance

 

  • Fee levels.

 

  • Material sales.

 

 

  • Net profit.

 

  • Outside lecturer costs.

 

Competitiveness

 

  • Market share.

 

  • Sales growth.

 

  • Success rate on proposals.

 

Quality of service

 

  • Repeat business levels.

 

  • Number of customer complaints.

 

  • Help-line use may be related to tuition quality.

 

Flexibility

 

  • Availability and use of freelance staff.

 

  • Breadth of skills and experience of lecturers.

 

Resource utilisation

 

  • Use of freelance lecturers.

 

  • Levels of non-chargeable staff time.

 

Innovation

 

  • Number of new in-company courses.

 

  • Time to develop new courses.

 

  • New course formats.

 

Note: only one measure was required for each dimension.

 

Test your understanding 7

 

 

 

Report:

 

To: The Directors of TSC

 

From: Management Accountant

 

Subject: The performance of our depots

 

Date: 5 December 20X1

 

  • Summary analysis of points gained (1) or forfeited (0) for quarter ended 31 October 20X1

 

Revenue and Profit D L M R
Statistics:
Revenue 0 1 1 1
Profit (see note below) 1 0 1 0
Customer Care and
Service Delivery Statistics:
Late collection of consignments 1 0 1 0
Misdirected consignments 0 1 1 0
Delayed response to complaints 1 1 1 0
Delays due to vehicle breakdown 0 0 1 0
Lost items 1 1 1 0
Damaged items 1 0 1 1
Credit Control & Administration
Efficiency
Statistics:
Average debtor weeks 0 1 1 0
Debtors in excess of 60 days 1 1 1 1
Invoice queries (% of total) 1 1 1 1
Credit notes as a % of revenue 1 1 1 0
Total points gained 8 8 12 4

 

Workings:

 

  • Profit point calculation:

 

Actual results, e.g. Donatellotown = 2.3/15 = 15.3% (1 point) and Leonardotown = 2.4/18 = 13.3% (0 point)

 

 

  • Debtors in excess of 60 days (% of total)

 

D L M R
Revenue ($000) 15,000 18,000 14,000 22,000
Debtor weeks 5.8 4.9 5.1 6.2
Therefore debtors 1,673 1,696 1,373 2,623
Less than 30 days (1,300) (1,500) (1,180) (2,000)
31–60 days (321) (133) (153) (552)
More than 60 days 52 63 40 71
Debtors in excess of 3.1 3.7 2.9 2.7
60 days (% of total)

 

  • Value of credit notes raised as a % of revenue g. Donatellotown = $45,000/$15,000,000 = 0.3%

 

  • The summary analysis in (a)(i) shows that using overall points gained, Michaelangelotown has achieved the best performance with 12 points. Donatellotown and Leonardotown have achieved a reasonable level of performance with eight points each. Raphaeltown has underperformed, however, gaining only four out of the available 12 points.

 

Michaelangelotown is the only depot to have achieved both an increase in revenue over budget and an increased profit revenue percentage.

 

In the customer care and service delivery statistics, Michaelangelotown has achieved all six of the target standards,

 

Donatellotown four; Leonardotown three. The Raphaeltown statistic of achieving only one out of six targets indicates the need for investigation.

 

With regard to the credit control and administrative efficiency statistics, Leonardotown and Michaelangelotown achieved all four standards and Donatellotown achieved three of the four standards. Once again, Raphaeltown is the ‘poor performer’ achieving only two of the four standards.

 

  • The terms listed may be seen as representative of the dimensions of performance. The dimensions may be analysed into results and determinants.

 

The results may be measured by focusing on financial performance and competitiveness. Financial performance may be measured in terms of revenue and profit as shown in the data in the appendix of the question in respect of TSC. The points system in part (a) of the answer shows which depots have achieved or exceeded the target set. In addition, liquidity is another aspect of the measurement of financial performance. The points total in part (a) showed that Leonardotown and Michaelangelotown depots appear to have the best current record in aspects of credit control.

 

Competitiveness may be measured in terms of sales growth but also in terms of market share, number of new customers, etc. In the TSC statistics available we only have data for the current quarter. This shows that three of the four depots listed have achieved increased revenue compared to target.

 

The determinants are the factors which may be seen to contribute to the achievement of the results. Quality, resource utilisation, flexibility and innovation are cited by Fitzgerald and Moon as examples of factors that should contribute to the achievement of the results in terms of financial performance and competitiveness. In TSC a main quality issue appears to be customer care and service delivery. The statistics in the points table in part (a) of the answer show that the Raphaeltown depot appears to have a major problem in this area. It has only achieved one point out of the six available in this particular segment of the statistics.

 

Resource utilisation for TSC may be measured by the level of effective use of drivers and vehicles. To some extent, this is highlighted by the statistics relating to customer care and service delivery. For example, late collection of consignments from customers may be caused by a shortage of vehicles and/or drivers. Such shortages could be due to staff turnover, sickness, etc or problems with vehicle maintenance.

 

Flexibility may be an issue. There may, for example, be a problem with vehicle availability. Possibly an increased focus on sources for short-term sub-contracting of vehicles/collections/deliveries might help overcome delay problems.

 

The ‘target v actual points system’ may be seen as an example of innovation by the company. This gives a detailed set of measures that should provide an incentive for improvement at all depots. The points system may illustrate the extent of achievement/non-achievement of company strategies for success. For example TSC may have a customer care commitment policy which identifies factors that should be achieved on a continuing basis. For example, timely collection of consignments, misdirected consignments re-delivered at no extra charge, prompt responses to customer claims and compensation for customers.

 

 

  • The performance measurement system used by TSC appears simplistic. However, it may be considered to be measuring the right things since the specific measures used cover a range of dimensions designed to focus the organisation on factors thought to be central to corporate success, and not confined to traditional financial measures.

 

Internal benchmarking is used at TSC in order to provide sets of absolute standards that all depots are expected to attain. This should help to ensure that there is a continual focus upon the adoption of ‘best practice’ at all depots. Benchmarks on delivery performance place an emphasis upon quality of service whereas benchmarks on profitability are focused solely upon profitability! Incentive schemes are used throughout the business, linking the achievement of company targets with financial rewards. It might well be the case that the profit incentive would act as a powerful motivator to each depot management team. However, what is required for the prosperity of TSC is a focus of management on the determinants of success as opposed to the results of success.

 

(Alternative relevant discussion would be acceptable)

 

Test your understanding 8

 

 

 

Possible measures (KPIs)

 

Customer satisfaction

 

  • Repeat purchases.

 

  • Numbers of complaints.

 

  • Value of refunds.

 

  • Sales growth by market segment. Flexibility

 

  • Product/service introduction time.

 

  • Product/service mix flexibility.

 

  • Internal setup times – the time taken to switch production from one product to another.

 

  • Delivery response time – the time taken to meet customer delivery requests.

 

  • Revenue per employee.

 

  • Sales and administration costs as a percentage of sales revenue.

 

  • Units of output per unit of resource.

 

  • Capital asset utilisation.

 

Note: only two measures were required for each category.

 

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