© John Wiley & Sons, 2011 Chapter 16: Strategic Performance Measurement Eldenburg & Wolcott’s...

© John Wiley & Sons, 2011Chapter 16: Strategic Performance Measurement

Eldenburg & Wolcott’s Cost Management, 2e Slide # 1

Cost ManagementMeasuring, Monitoring, and Motivating Performance

Chapter 16

Strategic Performance Measurement



Chapter 16: Strategic Performance Measurement

Learning objectives• Q1: What is strategic decision making?

• Q2: How are financial and nonfinancial measures used to evaluate organizational performance?

• Q3: What is a balanced scorecard?

• Q4: How is a balanced scorecard implemented?

• Q5: How does the balanced scorecard affect strategic management and incentives?

• Q6: What is the future direction of cost accounting?



Q1: Overview of Management Decision Making

Organizational

Vision

Core

Competencies

Operating

Plans

Actual

Operations

Organizational

Strategies

Measure, Monitor, and Motivate



Q1: Strategic Decision Making

• Managers determine performance objectives to monitor the results of actual operations.

• Performance objectives are specific goals.

• Measurements of the performance objectives are compared to management’s expectations.

• Adjustments are made to either change operations or adjust the long-term strategies.



Q2: Financial Performance Measures

• Financial measures provide information in dollars or ratios of dollars.• These measures come from the accounting

information system.• Traditionally these often were the only

measures used.

• Examples include:• division revenue,• division profit margin or return on sales, and• variances of actual operating results from the

budget.



Q2: Nonfinancial Performance Measures

• Nonfinancial measures cannot be measured in dollars.

• Examples include:• Defect rates,• Customer satisfaction levels,• Number of days from a candidate’s interview to

his or her start date,• Average service time, and• Employee satisfaction levels.



Q3: Balanced Scorecard• The balanced scorecard is a method of

organizing the financial and nonfinancial performance measures used to monitor operations.

• The chosen measures are carefully related to the organization’s vision and long-term strategies.

• The balanced scorecard serves as a means of communicating the organization’s strategies throughout the organization.



Q3: Balanced Scorecard



Q3: Balanced Scorecard (BSC) Perspectives• A balanced scorecard usually consists of four categories of

measures, with 4 ~ 5 specific measures per category.• The four common categories are called the balanced

scorecard perspectives.1. The financial perspective measures progress towards the

organization’s financial goals.2. The customer perspective evaluates the organization’s

performance from the viewpoint of customers.3. The internal business process perspective assesses the

organization’s ability to produce and deliver goods and services.

4. The learning and growth perspective measures the organization’s ability to change and develop improved strategies.



Q3: The BSC Translates Strategy to a Series of Cause and Effect Relationships

Long-Term Strategy

Internal Perspective

Customer Perspective

Learning & Growth

Financial Perspective

How do shareholders view organization?

How do customers view organization?

How do employees view organization?

How can organization grow and improve?

Performance measurements for each perspective can be

used to determine appropriate operational and

strategic changes.

Measurements:• Income from operations• ROI, residual income,

EVA©

• Working capital• Operational cash flow• Inventory turns

Objectives:• Maximize Profit• Maximize Cash• Control Costs• Effective Investment

Utilization• Minimize Inventory

Q3: The Financial Perspective



Measurements:• Customer survey ratings• Market share• Airline passenger loads• Customer retention

rates• New customer

acquisitions

Objectives:• Improve customer

satisfaction• Increase market share• Increase repeat

customers



Q3: The Customer Perspective



Q3: The Internal Business Process Perspective• The internal business process perspective contains

three stages:

• In the innovation cycle, customer preferences are determined and the products are designed.

• In the operations cycle, goods and services are produced and delivered to the customer.

• The post-sales service cycle supports the customer after the sale.

Measurements:• # of engineering

changes• Order response time• Cycle time• Defects per million• Warranty costs• # of returns

Objectives:• Reduce cycle time• Reduce engineering

changes• Improve order response

time• Efficient capacity

utilization• Minimize waste



Q3: The Internal Business Process Perspective

Q3: Learning & Growth Perspective

Measurements:• Training hours per

employee• Retention rate• Specific skill

development metrics• Number of information

systems

Objectives:• High quality employee

training• Minimize turnover• Develop efficient

information systems





Q3: BSC ExampleThe School for Future Artists is a private, for-profit, high school for students that are gifted in painting, drawing, and sculpture. Its mission is to train students in techniques and give them the confidence to be innovative, while at the same time preparing them to earn a living. Students are admitted to the school after a review of their portfolios. Half of the students are given full scholarships and the parents of the other half pay the expensive tuition. Parents who are paying tuition are given the opportunity to pay reduce tuition if they become shareholders. The School also receives donations from successful alumni. Identify some performance measures the School might use for the financial perspective on its balanced scorecard.

• Operating income• Return on equity• Donations as a percent of total

revenues

• Variances between actual and budgeted expenditures

• Dollar amount of state and federal grant money received this year



Q3: BSC ExampleIdentify some performance measures the School for Future Artists might use for the customer perspective on its balanced scorecard.

• Percent of graduates who eventually complete masters degrees in fine arts or related fields

• Percent of graduates who eventually become art professors

• Number of graduates who were involved in art expositions this year

• Number of graduates who received federal or state grants this year

• Number of families with 2 or more children at the school

• Responses to satisfaction surveys given to students and parents



Q3: BSC ExampleIdentify some performance measures the School for Future Artists might use for the 3 categories of the internal business processes perspective on its balanced scorecard.

Innovation cycle• Number of new courses developed• Course development time

Operations cycle• Percent of students who graduate• Art supply costs per student

Post-sales service cycle• Accounts receivable turnover ratio• Results of alumni satisfaction

surveys



Q3: BSC ExampleIdentify some performance measures the School for Future Artists might use for the learning and growth perspective on its balanced scorecard.

• Teacher turnover• Number of training workshops attended by teachers this year• Results of teacher satisfaction surveys• Teacher and student use of newly purchased kiln equipment• Number of management efficiency and leadership conferences

attended by administrators this year



Q4: Balanced Scorecard Implementation• A BSC implementation includes the following

stages:• Clarify vision, competencies, and strategies.• Analyze the four BSC perspectives to develop

objectives and measures.• Communicate the components of the BSC throughout

the organization.• Establish performance targets and action plans.• Collect and analyze scorecard data.• Investigate variances and reward employees.• Provide feedback and refine the scorecard.

Vision Barrier •People in the organization do not understand the strategy

•BSC helps engage people throughout the organization

People Barrier •Employee incentives are not linked to strategy

•BSC can integrate operating plans and employee performance evaluation

Resource Barrier •Organization resources are not linked to strategy

•BSC can focus resource allocations to areas that align with strategy

Mgmt Barrier

•Top managers do not spend enough time discussing strategy•BSC engages managers in discussion on strategy and the interactions

between financial and non financial measurements



Q5: Barriers to Implementing Strategies



Q5: Balanced Scorecard Strengths• The greatest strength of the BSC is the

communication of strategies throughout the organization.

• The BSC forces top management to clarify the vision and strategies of the organization.

• The BSC links employee rewards to performance objectives that are linked to the organization’s vision and strategies, so short-term and long-term strategies are more likely to be in alignment.



Q5: Balanced Scorecard Potential Weaknesses• If based on inappropriately defined visions and

strategies, the BSC provides the wrong incentives for managers.

• Sometimes performance measures are chosen because the data is easy to obtain and familiar, rather than because they are linked to the vision and strategies.

• If performance measure targets are unattainable, employees may not buy in to the BSC initiative.

• Managers may focus on measurements that are already successful rather than areas that need improvement.



Q6: Future Direction of Cost Accounting• Information technology advances free accountants

from preparing detailed reports.

• More time is available to concentrate on providing the best information possible to support management decision making.

• Accountants increasingly need to become aware of and understand emerging management tools (such as the balanced scorecard).

© John Wiley & Sons, 2011 Chapter 16: Strategic Performance Measurement Eldenburg & Wolcott’s...

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