P5: Advanced Performance Management

2 Strategic performance measurement D1. Performance hierarchy D2. Strategic performance measures in private sector D3. Divisional performance and transfer pricing issues D4. Strategic performance measures in not-for-profit organisations D5. Non-financial performance indicators D6. The role quality in management information & performance management system. D7.Performance measurement & strategic human resources management issues D8. Performance measurement & the reward systems D9. Other behavioural aspects of performance measurement Designed to give you knowledge and application of:

3 Performance hierarchy  Discuss how the purpose, structure and content of a mission statement and their potential impact on business performance. [2]  Discuss the ways in which high level corporate objectives are developed. [2]  Identify strategic objectives and discuss how they may be incorporated into the business plan. [2]  Discuss how strategic objectives are cascaded down the organisation via the formulation of subsidiary performance objectives. [2]  Discuss social and ethical obligations that should be considered in the pursuit of corporate performance objectives. [2]  Explain the performance 'planning gap' and evaluate alternative strategies to fill that gap. [3]  Apply critical success factor analysis in developing performance metrics from business objectives. [3]  Identify and discuss the characteristics of operational performance. [2]  Discuss the relative significance of planning as against controlling activities at different levels in the performance hierarchy. [3] Learning Outcomes

4 Discuss the purpose, structure and content of a mission statement and their potential impact on business performance Content of a mission statement Purpose Why the business exists Strategy & scope What kind of business & how to run Values What management believes in Standards & behaviour The operational rules Mission statement Published statement that contains the fundamental objectives of an entity

5 Purposes of a mission statement To assist in translating purposes and direction into objectives for assessment & control To provide a basis for consistent planning decisions To provide a consistent purpose between different interest groups To establish organisational goals and objectives To improve understanding and support from key groups outside the organisation Purpose of a Mission Statement

6 Discuss the ways in which high level corporate objectives are developed. Principles directing corporate objectives Based on time frame Quantified According to previously established goals Each goal may have several objectives Realistic – using SWOT analysis Goals of short & long-term community development included Involvement of employees in objective setting SMART  Specific  Measurable  Attainable  Relevant  Time-bound High level corporate objectives Developed considering  Profit  Growth potential  Global power  Brand recognition  Reputation & image  Value to shareholders  Ethical issues  Personal satisfaction

7 Corporate objectives AttributesPerformance indicators Growth  Sales volume  Share of market  Asset base of firm  ‘ 000 of units  % of total volume  net assets Quality  Customer satisfaction  Elimination of defects  Consistency  Repeat purchases  No. per ‘ 000  Adoption of standard procedure Innovation  Peer group respect  Speed to market  Successful new products  Industry awards received  Development time  % of sales from new products Social responsibility  Non-discrimination  Environmental protection  Safety  Workforce composition  Cubic meters of waste  Notified incidents Examples of high level corporate objectives, attributes and related performance indicators:

8 Identify strategic objectives and discuss how they may be incorporated into the business plan Example Strategic objectives Critical success factorsPerformance indicators Be a full service provider  Sales expertise  Integration with other  Business units  Win-loss ratio  % cross-business unit sales  Milestone completion Build brand image  aggressive marketing  project management expertise  new customers  on-time project completion  new distributors  Market share Increase value perception  increase service  turnaround  service response time  customer satisfaction Fix infrastructure  train people  develop systems  training effectiveness  milestone completion Strategic objectives define critical success factors Set on the basis of mission statement Critical success factor analysis can be used as a basis for preparing resource plans

9 Discuss how strategic objectives cascade down the organisation via the formulation of subsidiary performance objectives  set in accordance with the primary objectives  should be congruent with main objective Financial objectives:  Growth in earnings per share  Ensuring a given % of return on investment Technological objectives:  Addition of new features to products to make them more attractive to customers Subsidiary objectives Other objectives:  Developing an efficient workforce & manufacturing system  Expansion of activity Marketing objectives:  Market share to be achieved  Growth in terms of sales volume

10 Discuss social and ethical obligations that should be considered in the pursuit of corporate performance objectives  Environmental pollution from production / consumption of products  Standards of factory & product safety  Non-discrimination in employment & marketing practices  Avoidance of the use of non-renewable resources  Non-production of socially undesirable goods  Production of non-degradable packaging or products Social obligations Taking more than just immediate interest of shareholders into account when making business decision  Honesty in advertising of jobs or products  Fairness in setting pay & working conditions  Non-exploitation of countries or people  Effects on customers of consuming product  Dealing with oppressive governments  Management of closures & redundancies Ethical obligations Concerned with morality of decisions & actions

11 Theories Social contract theory Social justice theory Rights theory Deontological theory Evolved so that exchanges could be made between parties in an environmental trust & harmony Focuses on appropriate distribution of wealth, power & intangibles in society Concerned with meaning of rights, including basic human rights & property rights Deals with belief that everyone has a moral duty to treat everyone else with respect Corporate social responsibility (CSR) Views Importance to earning profit only; ignoring social responsibilities Equal importance to social responsibilities along with profit Business & society have mutual obligations Milton Friedman: there is one & only one social responsibility of business: to use its resources and engage in activities designed to increase its profit

12 Refer to Test Yourself 6 on page 206 Strategic management concept put forward by R. Edward Freeman Stakeholder theory The stronger the organisation’s relationship with external parties Help organisation to strengthen the relationship with stakeholders The easier it is to meet corporate business objectives To develop competitive advantage Corporate accountability Companies’ moral or legal obligation to be accountable to  Shareholders  Stakeholders  Society as a whole The concept underlying corporate sustainability is corporate accountability

13 Explain the performance ‘planning gap’ & evaluate alternative strategies to fill that gap Executives are not devoting sufficient time & resources to developing corporate strategies & creating clear action plan for implementing them Reasons for planning gap (difference between the strategic plans of organisations and the tactical and operational implementation of those plans) Executives often define strategies without allocating appropriate resources or budgets Operational managers are not made accountable for plan execution & therefore have no incentive to make plans work Executives do not communicate strategic plans in ways that relate to employee’s role & objectives Executives are often not aware of plan execution problems & make little use of business intelligence

14 Gap analysis Ultimate objective Comparison between Expected performance Where are we now? Where do we want to be? Time Performance parameter The gap 0

15 Gap can be closed by improvement in  process  communication  leadership development  cultural change Example A planning gap can be closed by taking strategic steps or by taking tactical steps. A gap in marketing planning (measured by market share) can be closed by employing marketing strategies such as market development, market penetration, diversification and adding new product features. Marketing penetration Market development Time Profit Profit forecast Diversification Product development Profit target 0 Continued…

16 One can close the planning gap by taking tactical steps. The marketing mix is ideal for this. One can modify the mix so that the organisation gets to where it wants to be. Accordingly, the price, product mix, market promotion, marketing team, process of marketing etc. may undergo a change. Price Product mix Market promotion Marketing team Process of marketing Time Profit Profit forecast Profit target 0 Continued…

17 Identify and discuss the characteristics of operational performance Characteristics of operational performance Usually routine but there are exceptions Scope is limited as mostly concerned with daily transactions Easier to automate Specialised in nature e.g. functional performance Performance measures at this level are easier to quantify Keys to ensure operational performance Improvement of operations Performance incentive programmes Productivity tracking Engineered standards Operational performance management Growing pressure to increase revenue with managing costs Meeting ever-evolving & expanding customer demands addresses It makes strategies successful or fail

18 Discuss the relative significance of planning as against controlling activities at different levels in the performance hierarchy PlanningControlling Strategic level  Includes both immediate & long-term planning  Controls threats & opportunities in environment Management level  Helps translating strategic plans to operational plans  Related to effective use of organisation ’ s resources Operational level  Concerned with day-to- day activities essential for operations of business  Concerned with daily implementation of plans

19 RECAP  Discuss how the purpose, structure and content of a mission statement and their potential impact on business performance. [2]  Discuss the ways in which high level corporate objectives are developed. [2]  Identify strategic objectives and discuss how they may be incorporated into the business plan. [2]  Discuss how strategic objectives are cascaded down the organisation via the formulation of subsidiary performance objectives. [2]  Discuss social and ethical obligations that should be considered in the pursuit of corporate performance objectives. [2]  Explain the performance 'planning gap' and evaluate alternative strategies to fill that gap. [3]  Apply critical success factor analysis in developing performance metrics from business objectives. [3]  Identify and discuss the characteristics of operational performance. [2]  Discuss the relative significance of planning as against controlling activities at different levels in the performance hierarchy. [3]