Performance Management

Topics: Motivation, Strategy map, Regulatory Focus Theory Pages: 9 (2142 words) Published: March 10, 2006
Question 1

Performance measures are particular values or characteristics used to measure/examine a result or performance criteria. It may be expressed in a qualitative or quantitative way which helps institution to understand, manage and improve what they do. Performance measures inform the institution: •how well it is doing

•if it is meeting its goals
•if its customers are satisfied
•if its processes are in statistical control
In the early 1990's, Dr. Robert Kaplan (Harvard Business School) and Dr. David Norton, developed a new system for performance measurement, called the balanced scorecard. The balanced scorecard is a management system (not only a measurement system) that enables institutions to clarify their vision and strategy and translate them into action. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. The balanced scorecard suggests that institution or organization should be viewed from four perspectives including both financial and non-financial measure:

1)Financial perspective.

This perspective evaluates the profitability of the institution's strategy. It focuses on profit targets, cost avoidance, and cost-efficiency (i.e. the ability to deliver maximum value to the customer). It involves:

Operating Income :
Operating income can be used to gauge the general health of the core institution.

Return on Investment :
ROI is a backward-looking metric that yields no insights into how to improve the institution's results in the future. ROI has been used primarily for self-justification.
Net Earnings :
Net Earning shows what the company has earned (or lost) in a given period of time.

Earnings per share (EPS) :
EPS is a measure which fundamentally shows how well the shareholder is doing.

Cash flow :
Cash flow is a measure of a company's worth and its ability to pay dividends.

Economic Value-Added (EVA) :
EVA is a method to calculate the true economic profit of an institution. EVA gives managers a clearer idea of whether they are creating or destroying shareholder wealth.

Residual Income :
Residual income is the true profit or the amount by which earnings exceed or fall short of the minimum rate of return that shareholders could get by investing in comparable securities.

2)Customer perspective
This perspective identifies the targeted market segments and measures the company's success in the segments. The customer perspective typically includes several core or generic objectives and measures relating to:

Market share :
It is a measure of market share which indicates whether the strategy adopted is achieving the expected results in the targeted market segment

Customer retention and loyalty :
It is a method of maintaining or increasing market share in targeted customer segment by ensuring that existing customers are retained in those segments.

New customer acquisition :
It can be measured by either the number of new customers or the total sales to new customers in the desired market segment.

Customer satisfaction :
A measurement or indicator of the degree to which customers or users of the institution's products or services are pleased with those products or services, typically measured by an attitude questionnaire.

Customer profitability :
Customer profitability measures provide a valuable signal that satisfaction, retention, and growth in customer relationships are desirable only if these relationships contribute to higher, not lower, profits.

These are leading indicators of whether customers are not satisfied, or if they will eventually find institutions that will meet their needs. Poor performance from this perspective is thus a leading indicator of future decline, even though the current financial picture may look good....

Bibliography: Books:
 Horngren CT, Bhimani A, Datar SM, Foster G, (2nd ed, 2002), Management and cost accounting, Financial Times/Prentice Hall, Harlow
 Drury C, (2005), Management accounting for business, Thomson, Australia.
 Hoque Z, (2001), Strategic management accounting : concepts, processes and issues, Chandos, Oxford.
 (2001) ACCA study text 3.3: Performance management, London BPP
 Wilson R.M.S, Chua W.F, (1993), Managerial accounting : method and meaning,: Chapman & Hall, London, New York.
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