UMACRQ-15-M

Strategic Management
Accounting
Session 2 – Measuring Strategic Performance
 Session Objectives

• To examine measures of evaluating chosen strategies

• To evaluate different approaches to measuring performance
• To apply performance measurement frameworks to a case scenario
Activity
• Why do we need to measure organisational performance?
The Need for Measuring Performance
• Effective performance measurement is key in ensuring that an organisation’s strategy is successfully
implemented. It is about monitoring an organisation’s effectiveness in fulfilling its own predetermined goals
or stakeholder requirements. A company must perform well in terms of cost, quality, flexibility, value and
other dimensions.

• A performance measurement system that enables a company to meet these demands successfully is
essential. It helps ensure better informed and more effective decision making at both strategic and
operational levels.

• Performance measurement has evolved from purely financial performance measures such as profit, cash
flow or the return on capital employed (ROCE). Today there is greater emphasis on non-financial and multi-
dimensional performance measures to understand and manage the performance of the organisation to
achieve its goals.

• Deficiencies in traditional (financial) performance measurement have led to frameworks and techniques
being developed in recent years.
(CIMA, 2008)
Slide 11.5

Evaluating strategies

Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Slide 11.6

Performance measures

Economic performance refers to direct

measures of success in terms of economic
outcomes.
• There are three main dimensions:
– Performance in product markets (e.g. sales
growth or market share)
– Accounting measures of profitability (e.g.
profit margin or return on capital employed)
– Financial market measures (e.g. share price).
• These measures may seem objective but
need to be carefully interpreted.
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Slide 11.7

Performance measures

Organisational Effectiveness refers to a

broader set of performance criteria reflecting
internal operational efficiency or measures
relevant to a wider range of stakeholders.
• A broad measure of effectiveness is provided
by the balanced scorecard which considers
four perspectives (i.e. the customer, internal
business, innovation and learning and
financial perspectives).
• The triple bottom line – has economic,
social and environmental measures.
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Slide 11.8

Performance comparisons

Performance is measured in relation to:

• Organisational targets. Management will
typically set targets for sales growth or
profitability.
• Trends over time. Is performance
improving or declining over a significant
period of time (but be aware of cycles)?
• Comparator organisations. Typically
firms can benchmark themselves against
key competitors.

Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
20.9

Different standards give different messages

100 Absolute performance = 100%
90 Strategic goal = 95%
80
X
Actual performance = 83%
70
X Competitor performance = 75%
60 X
X X X Last years average
50 performance = 60%

40
Time

• Performance by historical standards is GOOD.

• Performance against improvement goal is POOR.
• Performance against competitors is GOOD.
• Absolute performance is POOR.

Slack, Chambers and Johnston, Operations Management, 6th Edition,

20.9
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
Slide 11.10

Gap analysis

Gap analysis compares achieved or

projected performance with desired
performance.
• Helps to identify shortfalls in performance
• The size of the ‘gap’ provides a guide to
the extent to which strategy needs to be
changed – a very large gap may suggest
transformational change is needed.

Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Slide 11.11

Gap analysis

Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Slide 11.12

Complexities of performance
analysis
• Performance measures can be
contradictory, e.g. sales growth can be
achieved by cutting profit margins.
• Organisations can manipulate outcomes in
order to meet key performance criteria.
• Organisations can legitimately manage
performance perceptions and expectations.
• The importance of particular measures can
change over time.

Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Slide 11.13

Performance targeting systems

Performance targets focus on the outputs

of an organisation (or part of an
organisation) such as product quality,
revenues or profits.
• These targets are often referred to as key
performance indicators (KPIs).
• The performance of the organisation is
judged on its ability to meet these targets.
• Within boundaries the organisation is free
to decide on how to reach these targets.
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Slide 11.14

Performance targeting systems

This approach is appropriate:

• In large businesses – as with the financial
control style, the centre may set targets for
business units but not get involved in how the
targets are achieved.
• In regulated markets – government appointed
regulators may exercise control through agreed
KPIs (e.g. service quality in utilities).
• In the public services – governments are trying
to shift control from input control to performance
outcomes (e.g. in healthcare or education).
Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Slide 11.15

Performance targeting systems

There are several problems in setting targets:

• Inappropriate measures – choosing things that
are easily measured but don’t reflect real needs.
• Inappropriate target levels – they may set
unrealistically high or at a level that is too easy to
achieve (and leads to complacency).
• Excessive internal competition – if individual
business units are rewarded on their own
performance there will be little incentive to
collaborate, share resources or best practices.

Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
20.16

Performance measures at different levels of aggregation

Broad strategic Overall strategic

measures objectives

Functional strategic Market Operations Financial

measures strategic strategic strategic
objectives objectives objectives

Composite
Customer
performance Agility Resilience
satisfaction
measures
Generic operations
performance Quality Dependability Speed Flexibility Cost
measures
Defects per Mean time Customer Time to Transaction
Some detailed unit between query time market costs
performance Level of failures Order lead time Product Labour
customer Lateness Throughput range productivity
measures complaints complaints Machine
time
Scrap level efficiency

Slack, Chambers and Johnston, Operations Management, 6th Edition,

20.16
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
20.17 Performance measures at different levels of aggregation

High strategic
Broad strategic relevance and
measures aggregation

Functional strategic
measures

Composite performance
measures
Generic operations
performance measures
High diagnostic
Detailed performance power and
measures frequency of
measurement

Slack, Chambers and Johnston, Operations Management, 6th Edition,

20.17
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
The Performance Pyramid
(Lynch and Cross, 1991)
The Performance Pyramid
The Performance Pyramid is a four level performance pyramid that links the corporate strategy with
the operations through the hierarchy, by translating objectives from the top and measures from the
bottom.
At the top of the pyramid is the company’s strategy which is translated into business unit objectives.
At the second level, the business level objectives can be defined in terms of short term financial
performance goals and long term market position and growth goals.
At the third level, the business unit goals are linked to day-to-day operations of the business in
terms of customer satisfaction, flexibility and productivity.
At the lowest level, department and work centre operational criteria (quality, delivery, process time
and cost) are used; which help the company to successfully implement its strategy

(Khan and Shah, 2011)

For further details see:

http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/The%20Performance%20Pyramid.aspx?mode=none
Stakeholders of a large organisation

Source: Adapted from R.E. Freeman, Strategic Management: A Stakeholder Approach, Pitman, 1984. Copyright 1984 by R. Edward Freeman.
The Performance Prism
(Neely et al, 2001 )
Slide 3.22

Components of strategic capabilities

Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
The Performance Prism
The performance prism uses as its starting point all of an organisation’s stakeholders, including investors, customers and
intermediaries, employees, suppliers, regulators and communities, rather than strategy, based on the premise that strategy should
follow from stakeholder analysis.
The PP framework also focuses on the reciprocal relationship between the organisation and its stakeholders, as opposed to just
stakeholder needs. There are five ‘facets’ to the Performance Prism which lead to key questions for strategy formulation and
measurement design:

1. Stakeholder satisfaction: Who are our stakeholders and what do they want and need?
2. Strategies: What strategies do we need to satisfy these wants and needs?
3. Processes: What processes do we need to execute these strategies?
4. Capabilities: What capabilities do we need to operate our processes more effectively and efficiently?
5. Stakeholder contribution: What do we want and need from our stakeholders if we are to develop and maintain these capabilities?

The Performance Prism reflects the complexities of organisations and the multiplicity and reciprocity of stakeholder relationships.
For further information, see: http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/The%20Performance%20Prism.aspx
Building Block Model
(Fitzgerald and Moon, 1996)
Building Block Model
(Fitzgerald and Moon, 1996)

Fitzgerald and Moon’s Model identifies three main areas to focus for performance measurement in service industries. These are:

Challenging targets / Dimensions / Objectives

• Target setting is a difficult task. The targets must be challenging enough to push employees, in order to motivate them to maximum effort, without being perceived to be so improbable to achieve
that they demotivate the employees.
Standard (Rules / Principles / How)
• Should be assessed for the areas manager is responsible for
• Market condition should be factored
• Performance of similar business type should be compared.
• Those being measured take ownership of standards, possibly by participating in the process of setting the standard.
Reward
• Rewards should be motivating
• Rewards should be achievable
• Matching to the industry standard
• Clear, that is, understood by the managers;
• Controllable, that is, related to their area of responsibility.

For further details, see:

• http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Fitzgerald%20and%20Moon's%20Building%20Block%20Model.aspx
The Performance Measurement Matrix
(Keegan et al, 1989)
The Performance Measurement Matrix

• The Performance measurement matrix (Keegan et al., 1989)

categorizes performance measures into four different dimensions:
cost, non-cost, internal and external, emphasising the need for a
balanced system.
Slide 11.28

Balanced scorecards

Balanced scorecards set performance targets

according to a range of perspectives, not only
financial.
Typically there is a combination of four specific
perspectives:
• financial
• customer
• internal
• innovation and learning.

Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
 The Balanced Scorecard

Kaplan and Norton (1992:22) established a four-part framework, containing questions which
should be addressed by senior management:

1. How do we look to shareholders? (The financial perspective)

2. How do our customers see us? (The customer perspective)
3. What must we excel at? (The internal perspective, which focuses on internal business
processes)
4. How can we improve and create value? (The innovation and learning perspective)

The questions should then lead onto a set of performance measures (e.g. customer satisfaction
index measure for the customer perspective)
20.30

The measures used in the balanced scorecard

Financial performance
measures
To achieve strategic
impact, how should we be
viewed by shareholders?

Internal process Customer performance

performance measures measures
Overall
To achieve strategic impact, strategic To achieve strategic
what aspects of objectives impact, how should we
performance should be viewed by
business process excel at? customers?
Learning and growth
performance measures
To achieve strategic
impact, how will we build
capabilities over time?

Slack, Chambers and Johnston, Operations Management, 6th Edition,

20.30
© Nigel Slack, Stuart Chambers, and Robert Johnston 2010
 Activity
• What are the advantages and disadvantages of using a
balanced scorecard?
 Further Resources
• https://2gc.eu/resources/balanced-scorecard
• http://www.balancedscorecard.org/
Slide 11.35

Strategy maps

Strategy maps link different performance

targets into a mutually supportive causal
chain supporting strategic objectives.

The Figure on the next slide provides an

example for a delivery company and stresses the
need for balance and re-enforcement.

Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Slide 11.36

A strategy map

Source: Adapted from M. Goold and A. Campbell, Strategies and Styles, Blackwell, 1989, Figure 3.1, p. 39.

Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Slide 11.37

EFQM ‘Business Excellence’ Model

People People
results

Key
Leadership Policy and Processes Customer performance
strategy results results

Partnerships Society
and resources results

Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Slide 11.38

Further Resources

• http://www.efqm.org/the-efqm-excellence-model

Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014
Steps in the development of an effective
performance measurement system
• The performance measurement system must be integrated with the overall strategy of the business.
• There must be a system of regular feedback and review of actual results against the original plan and the
performance measures themselves.
• The performance measurement system must be comprehensive. It needs to include the range of factors that
contribute to the organisation's success such as competitive performance, quality of service and innovation.
This requires a range of financial and non-financial indicators.
• The system must be owned and supported throughout the organisation. The implementation must be top-
down so that individuals setting strategy can determine the objectives and develop appropriate top-level
measures. These should filter down to the rest of the organisation. Other levels throughout the organisation
should set their own measures in consultation with the level above and these must be consistent with the
top-level measures.
• Measures need to be fair and achievable. Where performance measures are used to reward managers’
performance, the evaluation should include only the elements they have direct control over.
• The system and results reporting need to be simple, clear and understandable, particularly to non-finance
professionals. There is a need to prioritise and focus so that only the key performance indicators for the
business in strategic terms are measured.
(CIMA, 2008)
Activity
• Working in small groups, read the given case and create a balanced
scorecard for the given case organisation (Shaldon Zoo). You must
clearly state your chosen perspectives, objectives and key
performance measures.