Lecture 8- Strategic performance measurement

Strategy- [blank_start]Direction[blank_end] that organisation intends to take over [blank_start]long term[blank_end] to meet its [blank_start]mission[blank_end] & achieve its [blank_start]objectives[blank_end]. It focuses on ways to manage organisation’s [blank_start]resources[blank_end] to create [blank_start]value[blank_end] for owners &/shareholders & to [blank_start]satisfy[blank_end] all stakeholders

Strategic [blank_start]planning[blank_end] & strategic [blank_start]implementation[blank_end] is needed to put [blank_start]strategy[blank_end] into practice

Strategic planning involves [blank_start]corporate[blank_end] & [blank_start]business (or competitive)[blank_end] strategy. [blank_start]Corporate[blank_end] strategy is making choices about types of [blank_start]businesses[blank_end] & [blank_start]markets[blank_end] in which organisation will operate. [blank_start]Business (or competitive)[blank_end] strategy is concerned with way that business [blank_start]competes[blank_end] within its chosen [blank_start]market[blank_end]

Strategic planning draws on wide range of [blank_start]management accounting[blank_end] information, as well as information from [blank_start]special studies[blank_end] internal & external to organisation. Information is both [blank_start]financial[blank_end] & [blank_start]non-financial[blank_end]

One problem with divisional performance measures is that it emphasises only [blank_start]one perspective[blank_end] of [blank_start]performance[blank_end]

Another problem with divisional performance measures is that they do not focus on [blank_start]determinants[blank_end] of [blank_start]outcomes[blank_end]

Third problem with divisional performance measures is that there is [blank_start]limited[blank_end] guidance for [blank_start]future actions[blank_end]

Fourth problem with divisional performance measures is that they may encourage [blank_start]short-term[blank_end] actions which decrease [blank_start]shareholder[blank_end] & [blank_start]customer value[blank_end]

To improve & understand performance, [blank_start]managers[blank_end] need to manage [blank_start]determinants[blank_end] of [blank_start]performance[blank_end]. They also need to use [blank_start]non-financial performance[blank_end] measures

Strategic performance measurement have [blank_start]strategic orientation[blank_end] (sustain [blank_start]strategic planning[blank_end] & [blank_start]strategic implementation[blank_end]), include [blank_start]non-financial measures[blank_end], subject to [blank_start]managerial discretion[blank_end], use [blank_start]external benchmarks[blank_end] & emphasise [blank_start]continuous improvement[blank_end]

Non-financial measures reflect [blank_start]drivers[blank_end] of future [blank_start]financial performance[blank_end] ([blank_start]improvements[blank_end] should flow through to [blank_start]financial performance[blank_end]). They are more [blank_start]actionable[blank_end] & more [blank_start]understandable[blank_end] & easier to relate to, particularly at [blank_start]operational[blank_end] level

Examples of non-financial measures are: [blank_start]customer satisfaction[blank_end], [blank_start]defect measures[blank_end], [blank_start]quality[blank_end] & [blank_start]employee capability[blank_end]

Balance scorecard- Performance [blank_start]measurement[blank_end] system that identifies & reports on performance [blank_start]measures[blank_end] for each key [blank_start]strategic[blank_end] area of business. It translates [blank_start]strategy[blank_end] into plan of action through specific [blank_start]objectives[blank_end] & [blank_start]performance[blank_end] drivers. Also, it identifies (assumed) cause & effect [blank_start]relationships[blank_end] between these measures

Balance scorecard- [blank_start]Strategic[blank_end] management tool that integrates [blank_start]financial[blank_end] & [blank_start]non-financial[blank_end] measures of performance in [blank_start]single[blank_end] concise report, with aim of incorporating [blank_start]performance[blank_end] management within [blank_start]strategic[blank_end] management process

One perspective of balance scorecard is [blank_start]customer perspective[blank_end]. This focuses on how [blank_start]organisation[blank_end] appears to its [blank_start]customers[blank_end]

Another perspective of balance scorecard is [blank_start]financial perspective[blank_end]. This focuses on how [blank_start]organisation[blank_end] looks to [blank_start]shareholders[blank_end]

Third perspective of balance scorecard is [blank_start]internal business perspective[blank_end]. This focuses on what [blank_start]organisation[blank_end] needs to [blank_start]excel[blank_end] at

Fourth perspective of balance scorecard is [blank_start]learning & growth perspective[blank_end]. This focuses on how [blank_start]organisation[blank_end] can continue to [blank_start]improve[blank_end] & [blank_start]create[blank_end] value

Lag indicators- Represent [blank_start]past[blank_end] performance. It comes at end of [blank_start]value creation[blank_end] process. Many [blank_start]financial[blank_end] indicators are examples of lag indicators. They are sustained by [blank_start]leading[blank_end] indicators

Lead indicators- Performance [blank_start]drivers[blank_end] that lead to achievement of [blank_start]lag[blank_end] indicators. It comes before [blank_start]value creation[blank_end] process. Also, it is [blank_start]actionable[blank_end] & [blank_start]manageable[blank_end]

Steps for constructing balance scorecard include: firstly, deciding on overall [blank_start]objectives[blank_end] for each [blank_start]perspective[blank_end], then deciding how to monitor this [blank_start]objective[blank_end] ([blank_start]lag[blank_end] indicators) & finally, deciding [blank_start]lead[blank_end] indicators in relation to [blank_start]lag[blank_end] indicators

Strategy map- [blank_start]Visual[blank_end] representation that explains (assumed) cause & effect relationships linking [blank_start]objectives[blank_end] of [blank_start]four perspectives[blank_end] of balance scorecard & organisation’s [blank_start]objectives[blank_end]. May also identify [blank_start]linkages[blank_end] between [blank_start]lag[blank_end] & [blank_start]lead[blank_end] measures. Also, it is tool to communicate to managers components of [blank_start]strategy[blank_end] & [blank_start]processes[blank_end] that will help achieve it

Errors in using non-financial measures include: there is [blank_start]lag[blank_end] between [blank_start]financial[blank_end] & [blank_start]non-financial[blank_end] performance, there are [blank_start]incentives[blank_end] to engage in [blank_start]dysfunctional[blank_end] behaviour & wrong [blank_start]strategic[blank_end] priorities may be selected

Disadvantages of non-financial measures include: [blank_start]wide[blank_end] choice of non-financial measures available, inclusion of non-financial measures can be [blank_start]undirected[blank_end], managers must necessarily make [blank_start]trade-offs[blank_end], some non-financial measures lack [blank_start]integrity[blank_end] & some measures may not easily [blank_start]translate[blank_end] into [blank_start]financial[blank_end] outcomes