Performance Measurement

Topics: Measurement, Investment, Profit, Corporate finance, Rate of return, Management accounting / Pages: 14 (4264 words) / Published: Jul 14th, 2014
1.0 Introduction

Performance measurement is essential to improve the performance of the organizations to compete in today’s business environment. In the era of industry way back in the 1960’s, the traditional performance measurement system has been designed to report labour productivity, machine and capacity utilization, and standard cost variances. These are cost-efficiency-based measures derived from a strategy to minimize production costs, described as a cost leadership strategy. (usefulness of traditional and new performance measures). At that time, multi-divisional forms became popular and each divisional performance is being measured as it will affect the organizational performance as a whole. (Multi-divisional form). In assessing the success of the division, company normally focus on the costs and revenues under the control of that divisional manager. (Performance measurement).

However, in recent years, traditional performance measurement system has been criticized for their inadequacy in providing performance indicators that can clearly help a company achieve its ultimate goal. (The Declining Need for Traditional Performance). Therefore, traditional organization performance measurement systems are no longer compatible with the new business environment as it measures the financial dimension alone.

Since the beginning of the 1990s, the financial measures alone were not sufficient to measure performance as said by Kaplan and Norton. Other factors in the new economy such as competence and knowledge, customer focus, and operational efficiency and innovation are missing from traditional financial reporting. Thus, managers should design a new performance measurement system that includes financial and non-financial measures to measure the divisional performance as well as organizational performance. However, traditional measures are still useful, though to a much lesser extent because every firm has its own business nature, which requires a different

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