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Performance Management

Date 1

Business Growth and Expansion

Business Challenges

Functional Structures

Finance

HRM

Marketing

Operations

Divisions

Divisional Structures

Geographical Perspective

Product Perspective

Decentralization

Delegation of decision-making responsibility

This improves:

Autonomy

Quality of decision-making

Speed of decision-making

Motivation of managers

Agency Costs - Moral Hazard

Goal Incongruence

Costs

Managers may pursue goals that are not in the best interest of the company

Performance Measures

Tools to monitor and control how well the managers are making decisions

Management Solutions

Scope

It includes financial and non-financial measures

The Controllability Principle

Managers should be held accountable only for the results that they can significantly influence

Key Criteria

Controllable

Non-Controllable

Managerial Performance

Economic Performance

Financial Measures

Financial Measures

Return on Investment

Assess how well divisional mangers utilize the resources available to them

Controllable Divisional Profit

x 100

Divisional Capital Employed

ROI

The division is profitable if:

ROI > Cost of Capital

Sandy is managing a division. She gets paid a bonus based on how much her divisional ROI exceeds the company target of 15%.

Her division currently generates profit of £37,500 and she has divisional capital of £187,500.

She can accept a new project returning £15,000 profit for a capital outlay of £90,000

Application

Company's Perspective

Sandy's Perspective

ROI = 17% > Cost of capital = 15%

ROI before project = 20% <

ROI after project = 19%

Residual Income

Dollar amount of income generated in excess of the cost of capital charge

RI

= Controllable Profit - (Capital employed x cost of capital %)

The division is profitable if:

RI > 0

Katie is managing a division. She gets paid a bonus if her RI increases.

Her division currently generates profit of £15,000 and she has divisional capital of £100,000. There is a required return of 10%.

She can accept a new project returning £1,100 profit for a capital outlay of £10,000.

Application

Company's Perspective

Katie's Perspective

RI before project = £5,000

RI after project = £5,100

RI = £100 > 0

ROI

RI

Enables Comparison

Evaluations

Achieves Goal Congruence

Risk-Adjusted Capital Costs

Strategy

Performance Measures

Strategic Performance Management Frameworks

Financial and Non-Financial

Strategy Implementation

Non-Financial Measures

Balanced Scoreboard

By Kaplan & Norton

Performance measures in terms of:

Financial Perspective

The Framework

Customer Perspective

Internal Business Perspective

Learning and Growth Perspective

Airlines Example

Construct a balanced scorecard for a divisional manager at a company of your choice

Your

Turn!

How is it a performance management tool?

Objectives guide performance

Performance Evaluation

Sets a benchmark to evaluate performance

Mechanism for a reward system

Evaluation

Benefits & Costs

Long-term strategic performance measures

Causal linkages between multiple measures are difficult to explain

Multiple perspectives in terms of stakeholders & scope

Absence of a time dimension

Omission of other important perspectives

Limits threat of creative accounting

Good performance measures exhibit:

1. Comparability

Across units of analysis

2. Variability

Same unit of analysis

Performance Paradox

Running down process

The comparability and variability of performance measures erode over time

The Issue

The Performance Paradox

A weak correlation between performance indicators and performance itself

*Meyer & Gupta, 1994

4 Processes

Perverse Learning

Suppression

Positive Learning

Selection

Causes

*Meyer & Gupta, 1994

Solving the Paradox

Control is best achieved through multiple, uncorrelated and changing performance measures that render it difficult to know exactly what performance is

Solutions

Goal-Setting Theory

*Locke et al.

There is an important relationship between the way employee performance objectives are set and their performance

Performance Boost

Effective goal-setting principles:

Clarity, Challenge, Commitment, Feedback, Complexity

Compare the impact of functional and divisional structures on organisational control and decision making

Critically evaluate key financial methods for performance measurement used by organisations

Learning Outcomes

Explain the benefits to managers of using both financial and non-financial performance measures

Explain the impact of performance measurement systems on management behaviour and performance

Question 1

Choose two financial ratios and critically evaluate the insight they can provide on firm performance.

Exam Questions

Question 2

Critically evaluate three possible tools that a manager could use to analyse the performance of their department. Which do you think would be the most useful?

It's a trap

Answer 1

Firm Performance

Manager's Performance

Most Useful Measure

Answer 2

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