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Passenger: I’m surprised to see you operating the plane with only a single instrument. What does it measure?Pilot: Airspeed. I’m really working on airspeed this flight.Passenger: That’s good. Airspeed certainly seems important. But what about altitude? Wouldn’t an altimeter be helpful?Pilot: I worked on altitude for the last few flights and I’ve gotten pretty good on it. Now I have to concentrate on proper airspeed.Passenger: But I notice you don’t even have a fuel gauge. Wouldn’t that be useful?Pilot: You’re right; fuel is significant, but I can’t concentrate on doing too many things well at the same time. So on this flight I’m focusing on airspeed. Once I get to be excellent at airspeed, as well as altitude, I intend to concentrate on fuel consumption on the next set of flights.
imagine entering the cockpit of a modern jet airplane and
seeing only a single instrument there. How would you feel
about boarding the plane after the following conversation with
Measurement is the act of quantifying the performance criteria (metrics) of organizational units, goods and services, processes, people, and other business activities.
Good measures provide a “scorecard” of performance, help identify performance gaps, and make accomplishments visible to the workforce, the stock market, and other stakeholders.
• Often take top priority in for-profit organizations.
• Traditional financial measures include revenue, return on investment, operating profit, pretax profit margin, asset utilization, growth, revenue from new goods and services, earnings per share, and other liquidity measures.
• Customer measures: Customer satisfaction, customer retention, gains and losses of customers and customer accounts, customer complaints, warranty claims, measures of perceived value, loyalty, positive referral, and customer relationship building. − A customer-satisfaction measurement system
provides a company with customer ratings of specific goods and service features, and indicates the relationship between those ratings and the customer’s likely future buying behavior.
• Market measures: Market share, business growth, new product and geographic markets entered, percentage of new product sales.
• Quality measures the degree to which the output of a process meets customer requirements.
• Goods quality relates to the physical performance and characteristics of a good.
• Service quality is consistently meeting or exceeding customer expectations (external focus) and service delivery system performance (internal focus) for all service encounters.
• Flexibility is the ability to adapt quickly and effectively to changing requirements.
• Goods and service design flexibility is the ability to develop a wide range of customized goods and services to meet different or changing customer needs.− Measures include the rate of new product development or
percent of product mix developed over the past three years.
• Volume flexibility is the ability to respond quickly to changes in the volume and type of demand.− Measures include the time to change machine setups or
time required to “ramp up” to an increased production volume.
• Innovation refers to the ability to create new and unique goods and services that delight customers and create competitive advantage.
• Learning refers to creating, acquiring, and transferring knowledge, and modifying the behavior of employees in response to internal and external change.
• Measures of innovation and learning include intellectual asset growth, patent applications, best practices implemented, new product development, employee training and skills development, satisfaction, work system performance and effectiveness.
• The Triple bottom line (TBL or 3BL) refers to the measurement of environmental, social, and economic sustainability.
− Environmental sustainability measures include energy consumption, recycling, air emissions, solid and hazardous waste rates.
− Social sustainability measures include consumer and workplace safety, community relations, corporate ethics and governance, and ethical violations.
− Economic sustainability measures include financial audit results, regulatory compliance, sanctions and fines, and accomplishment of strategic initiatives.
Linking Internal and External Performance Measures
• Managers must understand the cause and effect linkages between key measures of performance. These relationships often explain the impact of operational performance on external results.
• The quantitative modeling of cause and effect relationships between external and internal performance criteria is called interlinking.
What is the value of a loyal customer (VLC) in the small contractor target market segment who buys an electric drill on average every 4 years or 0.25 years for $100, when the gross margin on the drill averages 50 percent, and the customer retention rate is 60 percent? What if the customer retention rate increases to 80 percent?
What is a 1 percent change in market share worth to the manufacturer if it represents 100,000 customers? What do you conclude?
If customer retention rate is 60 percent, the average customer defection rate = (1 – customer retention rate). Thus, the customer defection rate is 40 percent, or 0.4. The average buyer’s life cycle is 1/0.4 = 2.5 years. The repurchase frequency is every four years, or 0.25 (1.4).
Therefore:VLC (P)(RF)(CM)(BLC) = ($100)(0.25)(0.50)(1/0.4) = $31.25 over the buyer’s life cycle
The value of a 1 percent change in market share = (100,000 customers)($31.25/customer) = $3,125,000
Thus, the value of a 1 percent change in market share(100,000 customers)($62.50/customer/year) = $6,250,000
The economics are clear. If customer retention can be increased from 60 to 80 percent through better value chain performance, the economic payoff is doubled.
Key Questions:•Does the measurement support our mission?•Will the measurement be used to manage change?•Is it important to our customers?•Is it effective in measuring performance?•Is it effective in forecasting results?•Is it easy to understand/simple?•Is the data easy/cost-efficient to collect?•Does the measurement have validity, integrity, and timeliness?•Does the measurement have an owner?
Good performance measures are actionable. Actionable measures provide the basis for decisions at the level at which they are applied—the value chain, organization, process, department, workstation, job, and service encounter.
• Primary purpose of the program is to provide a framework for performance excellence through self-assessment to understand an organization’s strengths and weaknesses, thereby setting priorities for improvement. www.nist.gov/baldrige
• Organizations in manufacturing, small business, service, education, health care and non-profit sectors may receive the Malcolm Baldrige Award.
Source: Kaplan R. S., and Norton, D. P., “The Balanced Scorecard—Measures That Drive Performance,” Harvard Business Review, January–February 1992, p. 72.
Exhibit 3.4 The Balanced Scorecard Performance Categories and Linkages
• Evaluates performance throughout the value chain by identifying measures associated with suppliers, inputs, value creation processes, goods and service outputs and outcomes, customers and market segments, and supporting management processes.
• Based on a set of cause and effect linkages between internal and external performance, and defines the key performance measurements on which service-based firms should focus.
Source: Adapted from J. L. Heskett, T. O. Jones, G. W. Loveman, W. E. Sasser, Jr., Jr., and L. A. Schlesinger, “Putting the Service-Profit Chain to Work,” Harvard Business Review, March–April 1994, pp. 164-174.
IBM’s AS/400 Division in Rochester, Minnesota, used the Service-Profit-Chain concept to help understand relationships that existed among measurements such as market share, overall customer satisfaction, employee morale, job satisfaction, warranty costs, inventory costs, product scrap, and productivity in order to determine which factors had the greatest impact on business performance and improve management decisions. The analysis helped managers to understand not only how to manage the workforce more effectively, but also how decisions at the operations level can affect long-term business success. Such decisions cannot be made without considering the ripple-effects throughout the company. For example, if an action is taken that impacts employee satisfaction, such as a layoff, managers must consider counteractions to prevent a decline in productivity, customer satisfaction, and market share.
IBM Rochester – Service Profit Chain Example
IBM’s AS/400 Division in Rochester, Minnesota, used the Service-Profit-Chain concept to help understand relationships that existed among measurements such as market share, overall customer satisfaction, employee morale, job satisfaction, warranty costs, inventory costs, product scrap, and productivity in order to determine which factors had the greatest impact on business performance and improve management decisions. The analysis helped managers to understand not only how to manage the workforce more effectively, but also how decisions at the operations level can affect long-term business success. Such decisions cannot be made without considering the ripple-effects throughout the company. For example, if an action is taken that impacts employee satisfaction, such as a layoff, managers must consider counteractions to prevent a decline in productivity, customer satisfaction, and market share.
1.What are the major problems facing the credit card division?2.What steps are required to develop a good internal and external performance and information system?3.How should internal and external performance data be related? Are these data related? What do graphs and/or statistical data analysis tell you, if anything? 4.Is the real service level what is measured internally or externally? Explain your reasoning.5.What are your final recommendations?