1. © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

2. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Performance Measurement to Support Business Strategy Chapter 18

3. 18-3 Learning Objectives LO 18-1 Explain why management accountants should know the business strategy of their organization. LO 18-2 Explain why companies use nonfinancial performance measures. LO 18-3 Understand the reasons why performance measures differ across levels of the organization. LO 18-4 Understand how the balanced scorecard helps organizations recognize and deal with their conflicting responsibilities. LO 18-5 Understand how to apply the methods involved in an effective performance measurement system. LO 18-6 Identify examples of nonfinancial performance measures and discuss the potential for improved performance resulting from improved activity management. LO 18-7 Explain why employee involvement is important in an effective performance measurement system.

4. 18-4 Strategy and Performance LO 18-1 Explain why management accountants should know the business strategy of their organization. LO 18-1 Business Strategy A company’s specific approach for deploying the organizational assets and capabilities required to meet its customers’ needs competitively, while delivering the desired returns to stakeholders.

5. 18-5 Strategy and Performance LO 18-1 Value Proposition How the organization will create value for all stakeholders. Mission Why an organization exists; its purpose and goals. Mission Statement Description of an organization’s values, definition of its responsibilities to stakeholders, and identification of its major strategies.

6. 18-6 The Foundation of a Successful Business Strategy LO 18-1 Identify Core Resources and Capabilities Methods of Achieving Success Cost Leaders Product Differentiators Focused Competitors

7. 18-7 Financial performance measures are useful for motivating employees to improve the company’s profits, but they do have several flaws. Beyond the Accounting Numbers LO 18-2 Explain why companies use nonfinancial performance measures. Often not useful in identifying the cause of operational problems Commonly reported only on a monthly, quarterly, or annual basis Many people in the organization do not see how their work translates into financial results LO 18-2

8. 18-8 Nonfinancial Measures Nonfinancial measures direct employees’ attention to those things they control. In the case of a desk clerk at a hotel, measuring the clerk's performance in terms of customer satisfaction would be meaningful LO 18-2

9. 18-9 Responsibilities According to Level of Organization LO 18-3 Understand the reasons why performance measures differ across levels of the organization. Business Model Description of how different levels and employees in the organization must perform for the organization to achieve its goals. LO 18-3

10. 18-10 Business Model Branch Leadership Satisfy Employees Excellent Advisers Efficient Operations Build Knowledge Act Ethically Satisfy Customers Build Revenues Control Costs Return Profits JYC Investments Business Model LO 18-3

11. 18-11 Balanced Scorecard LO 18-4 Understand how the balanced scorecard helps organizations recognize and deal with their opposing responsibilities. Balanced Scorecard Set of performance targets and results that show how well an organization has performed in meeting its objectives relating to its stakeholders LO 18-4

12. 18-12 Multiple Measures or a Single Measure of Performance? Single Measure Profit LO 18-3 Customer satisfaction Regulatory violations Branch profitability Employee satisfaction Employee learning Branch costs Multiple Measures

13. 18-13 Four Balanced Scorecard Views or Perspectives Financial perspective Financial perspective Customer perspective Customer perspective Internal business processes perspective Internal business processes perspective Learning and growth perspective Learning and growth perspective Strategy LO 18-4

14. 18-14 Four Balanced Scorecard Views or Perspectives Many, if not most, organizations include the four perspectives listed here. Objectives Measures Targets Initiatives LO 18-4

15. 18-15 Four Balanced Scorecard Views or Perspectives Financial To succeed financially, how should we appear to our shareholders? To succeed financially, how should we appear to our shareholders? Increased revenues Reduced costs Increased revenues Reduced costs CustomerTo achieve our mission how should we should appear to our customers? Relationships Timeliness Crown Castle's scorecard includes the following: LO 18-4

16. 18-16 Four Balanced Scorecard Views or Perspectives Internal To satisfy our shareholders and customers, in what business process we must excel? To satisfy our shareholders and customers, in what business process we must excel? Reduce cycle time Manage projects Reduce cycle time Manage projects Learning and Growth To achieve our mission how will we sustain our ability to change and improve? Employee satisfaction Improved global knowledge Promote career development Crown Castle's scorecard includes the following: LO 18-4

17. 18-17 Strategy Map Financial Perspective Financial Perspective Add customers Improve return Grow revenue Satisfy customers Reduce errors Control costs Improve efficiency Build knowledge Develop leaders Satisfy employees Customer Perspective Customer Perspective Internal Business Perspective Internal Business Perspective Learning and Growth Perspective Learning and Growth Perspective LO 18-4

18. 18-18 Continuous Improvement and Benchmarking LO 18-5 Understand how to apply the methods involved in an effective performance measurement system. Continuous Improvement Continuous reevaluation and improvement of the efficiency of the organization’s activities Benchmarking Continuous process of measuring a company’s own products, services, and activities against competitors’ performance LO 18-5

19. 18-19 Nonfinancial Measures LO 18-6 Identify examples of nonfinancial performance measures and discuss the potential for improved performance resulting from improved activity management. Customer Satisfaction Measures Quality Control Delivery Performance Bookings and Purchase Orders Market Share LO 18-6

20. 18-20 Nonfinancial Measures Quality Control Increase customer satisfaction Delivery Performance Deliver goods and services when promised Bookings and Purchase Orders A decrease in booking and purchase orders sends a signal to management to devote more marketing effort to sales Market Share If the market is growing faster than the company's sales, the company is, in effect, experiencing a decline in sales LO 18-6

21. 18-21 Nonfinancial Measures Functional performance measures keep processes efficient and effective. Manufacturing Cycle Time Time involved in processing, moving, storing, and inspecting products and materials Manufacturing Cycle Efficiency Measure of the efficiency of the total manufacturing cycle; equals processing time divided by the manufacturing cycle time LO 18-6

22. 18-22 Nonfinancial Measures Productivity focuses on the efficient conversion of inputs into outputs. Partial productivity measures express the relation between output and only one input. LO 18-6

23. 18-23 Nonfinancial Measures Total factor productivity: the ratio of the value of output to the value of key inputs LO 18-6

24. 18-24 Employee Involvement LO 18-7 Explain why employee involvement is important in an effective performance measurement system. Many managers believe that when workers take on real decision-making authority, their commitment to the organization and its objectives increases. LO 18-7

25. 18-25 Employee Involvement When decision-making responsibility lies with workers closer to the customer, workers are more responsive to customer concerns and can make informed decisions. When decision-making responsibility lies with workers closer to the customer, workers are more responsive to customer concerns and can make informed decisions. Giving decision-making responsibility to workers uses their skills and knowledge and motivates them to further develop those skills and knowledge in an effort to improve the organization’s performance. Giving decision-making responsibility to workers uses their skills and knowledge and motivates them to further develop those skills and knowledge in an effort to improve the organization’s performance. LO 18-7

26. 18-26 Employee Involvement For effective employee involvement the evaluation system must: Convey the organization’s objectives and critical success factors Promote goal congruence Be applied consistently and accurately LO 18-7

27. 18-27 Difficulties in Implementing Nonfinancial Performance Measurement Systems Fixation on financial measures Reliability of nonfinancial measures Lack of correlation between nonfinancial measures and financial results LO 18-7

28. 18-28 End of Chapter 18