The Analytic Hierarchy Process and Multi-Criteria Performance Management Systems
THE ANALYTIC HIERARCHY PROCESS AND MULTI-CRITERIA
PERFORMANCE MANAGEMENT SYSTEMS
Stephen L. Liedtka
Assistant Professor of Accounting
Lehigh University
Forthcoming in the November/December 2005 issue of Cost Management
EXECUTIVE SUMMARY
This paper describes how the Analytic Hierarchy Process (AHP), a popular decision-support methodology, is particularly well-suited to the challenges of implementing a multi-criteria performance management system (MCS) such as the Balanced Scorecard. In doing so, the paper describes AHP methodology in detail, and demonstrates AHP by using the method to create a basic MCS for a major airline. Additionally, the paper reports overall airline performance scores generated by the MCS and compares the derived scores to the results from two competing approaches. Of the three sets of results, the AHP-based performance scores correlate highest with annual stock market returns, providing some evidence that AHP yields a superior model for linking strategy to shareholder wealth.
Acknowledgments: The author gratefully acknowledges assistance from Frank Alt, Larry Bodin, Dick Durand, Larry Gordon, Jim Largay, Marty Loeb, Ella Mae Matsumura, and Expert Choice, Inc.
Address for correspondence: Rauch Business Center, Lehigh University, 621 Taylor Street, Bethlehem, PA 18015, USA. E-mail: SLL7@Lehigh.edu.
THE ANALYTIC HIERARCHY PROCESS AND MULTI-CRITERIA
PERFORMANCE MANAGEMENT SYSTEMS
INTRODUCTION
Academics and practitioners long have argued that the traditional use of a single financial measure of firm performance, such as return on investment or residual income, can result in excessive focus on the short-term at the expense of long-term firm health. To promote a comprehensive view of the firm, therefore, researchers advocate the replacement of traditional single-measure systems with sets of financial and nonfinancial performance measures that reflect all vital firm activities. Peter Drucker, for instance,
PERFORMANCE MANAGEMENT SYSTEMS
Stephen L. Liedtka
Assistant Professor of Accounting
Lehigh University
Forthcoming in the November/December 2005 issue of Cost Management
EXECUTIVE SUMMARY
This paper describes how the Analytic Hierarchy Process (AHP), a popular decision-support methodology, is particularly well-suited to the challenges of implementing a multi-criteria performance management system (MCS) such as the Balanced Scorecard. In doing so, the paper describes AHP methodology in detail, and demonstrates AHP by using the method to create a basic MCS for a major airline. Additionally, the paper reports overall airline performance scores generated by the MCS and compares the derived scores to the results from two competing approaches. Of the three sets of results, the AHP-based performance scores correlate highest with annual stock market returns, providing some evidence that AHP yields a superior model for linking strategy to shareholder wealth.
Acknowledgments: The author gratefully acknowledges assistance from Frank Alt, Larry Bodin, Dick Durand, Larry Gordon, Jim Largay, Marty Loeb, Ella Mae Matsumura, and Expert Choice, Inc.
Address for correspondence: Rauch Business Center, Lehigh University, 621 Taylor Street, Bethlehem, PA 18015, USA. E-mail: SLL7@Lehigh.edu.
THE ANALYTIC HIERARCHY PROCESS AND MULTI-CRITERIA
PERFORMANCE MANAGEMENT SYSTEMS
INTRODUCTION
Academics and practitioners long have argued that the traditional use of a single financial measure of firm performance, such as return on investment or residual income, can result in excessive focus on the short-term at the expense of long-term firm health. To promote a comprehensive view of the firm, therefore, researchers advocate the replacement of traditional single-measure systems with sets of financial and nonfinancial performance measures that reflect all vital firm activities. Peter Drucker, for instance,