On Performance Measurement
Business units with a performance measurement focus that complements their market strategy are generally perceived to be superior performers by senior management. This is not to say that only one of those perspectives should be recognized in a given strategic context. Instead, one perspective should dominate, with lesser attention being given to the other two.
Control systems are the significant connection between strategy execution and strategy adjustment. It is naive to believe a strategy can be successfully executed consistently without adjustments or corrections, both minor and major. Business managers must monitor customer needs and preferences, competitors’ actions, technology development, and the performance of internal processes, as well as the overall financial condition of the business. The fundamental reason we measure anything in a business is to determine when and how we should shift behavior.
A multidimensional performance measurement and analysis system is the heart of an effective strategic control system. It provides the basis for organizational learning from an analysis of the results of the firm’s actions. But a control system that only measures a single performance (example: financial performance) is not enough, even if it measures several dimensions of it. Financial performance is an outcome. By the time that information is available, the game, or at least the inning, is probably over. The multidimensional approach should include leading indicators so that there is an opportunity to influence the final results.
One of the most popular multidimensional approaches to performance measurement is the recent work by Robert Kaplan and David Norton on the “Balanced Scorecard”. It is also the most popular one among managers. The balanced scorecard presents managers with four different perspectives on performance from which to choose the strategy-specific measures that become the centerpiece of the strategic control system. They are the perspectives on financial, customer focused, internally analytical and innovative.
Concerns on the identification of the key financial drivers in creating shareholder wealth are what the financial perspective is all about. Shareholder wealth is created when the business earns a rate of return on invested capital that exceeds its cost of capital. Growth amplifies this effect. A common analytical approach is to decompose return on equity, a common representation of return on capital, into its component ratios. The major component ratios are profit margin, asset turnover, and leverage; these should be the core of the financial perspective. Other important measures may be concerned with cash flow or working capital management.
The customer perspective covers measures regarding corporate or brand awareness and image, customer satisfaction, customer retention, and customer profitability. They may be leading indicators of what the financial measures will subsequently reveal. This is despite of the fact that these measures lack mathematically precise relationship with creating shareholder value, unlike the financial measures. For example, increases in brand awareness typically precede increases in preference, which leads to sales growth.
The internal perspective, on the other hand, is primarily concerned with the efficiency of the entire business system. It will be most effective when it views the firm as a system of business processes, all of which must be coordinated for the purpose of creating customer value. Compared to focusing narrowly on a metric such as inventory level, it may be more informative to analyze manufacturing cycle time with its implications for cost and reliability. Even if inventory level is critical, other internal processes or external demands may likely have influence on it. Order-to-delivery cycle time, response time for dealing with customer complaints, and total labor content are among the probable business processes considered to be important. Time is a key influence on many of these internal processes.
And lastly, concerns on the adaptation effectiveness of the business to changing conditions are the primary interest of the innovation perspective. In other words, it tells you how well the firm can learn to create customer value more effectively with new products and services, and more efficiently based on new internal processes. Whereas the internal perspective focuses on continuous improvement exemplified by the learning curve or experience effects, and the customer perspective on learning about the business’ competitive position directly from the market, the innovation perspective requires a willingness to learn through experimentation and exploration. The key here is to learn from those experiences and improve on the central innovation processes. Important metrics include time from concept to market introduction, design for manufacturability, and value as a platform for future offerings.
Performance measures define the limits placed on vehicle configurations and loadings. These limits provide the set of constraints under which vehicle designers/ manufacturers and transport operators will seek to maximize the fleet productivity involved in any particular task. Generally, this can be done by increasing the mass of goods carried per trip and/or the volume of goods carried per trip. It can also be done by decreasing the average travel time per trip, the average travel distance per trip, the number of trips required to complete the task, the average rate of fuel consumption of the vehicles and/or the vehicle loading and unloading times.