MCS

Performance Measurement & Control

Management Control Systems

B E S’s Institute of Management Studies & Research

Presented to: Prof T M C Varadarajan

Management Control

• The process of assuring that resources are obtained and used effectively and efficiently in the accomplishment of the organization’s objectives.

• Can be defined as a systematic effort by business management to compare performance to predetermined standards, plans, or objectives in order to – determine whether performance is in line with these standards,

and– Presumably, to take any remedial action required to utilize all the

available resources to the fullest.• Carried on within the framework established by strategic

planning

Distinction between Strategy Formulation and Management Control

Strategy Formula

tion

It is the process of deciding on new strategies

Man

agem

ent

Cont

rolIt is the process of implementing those strategies

Implementation Mechanisms

Framework for Strategy Implementation

Management Controls

Human Resource

Management

Culture

Organization Structure PerformanceStrategy

What is Performance Measurement?

• It is a tool to help managers control the outcomes of their organizations.

• It enables them to be the driver rather than a passenger on their organizational journey.

“You measure what you value.You get what you measure.”

Value of Performance Measurement

STRATEGY

What counts, gets measured

What gets measured, gets done

What gets done, gets rewarded

What gets rewarded, really counts

Why measure performance?

• Basic purpose: to provide feedback, relative to the organization’s goals

• Measurement is not an essence, but improvement.– The purpose of measuring is not to know how the

business is performing but to enable it to perform better.

continued

• Business performance measurement has a variety of uses. Bititci, Carrie and Turner (2002) list the following reasons companies measure business performance:– To monitor and control– To drive improvement– To maximize the effectiveness of the improvement effort– To achieve alignment with organizational goals and

objectives– To reward and to discipline

continued

• Simmons (2000) looks at business performance measurement as a tool to balance five major tensions within a firm:1. Balancing profit, growth and control2. Balancing short term results against long-term

capabilities and growth opportunities3. Balancing performance expectations of different

constituencies4. Balancing opportunities and attention5. Balancing the motives of human behavior

To measure anything, we require a tool/system

Performance Measurement Systems

• Performance Measurement Systems (PMS) serve as a key contributor to the perpetual and coordination/control capabilities of the firm.

• Firms use PMS to:– Help monitor and control specific activities– Predict future internal and external states– Monitor state and behavior relative to its goals– Make decisions within needed time frames– Alter the firm’s overall orientation and/or behavior

Performance Measurement Systems

• It attempts to address the needs of the different stakeholders of the organization by creating a blend of strategic measures:– Outcome and drive measures– Financial and non-financial measures• Non-financial measures are referred as “key success

factors” or “key performance indicators”.

– Internal and external measures

The Balanced Scorecard

Balanced Scorecard’s key theme is not about Measurement as the term would outwardly

convey Its about

Value creation -Execution of Strategy

Balanced Scorecard : Synonym for Managing Performance

Introduced in 1992, by Robert Kaplan and David Norton, the Balanced Scorecard is the most commonly used framework for ensuring that companies execute their strategies

Today, about 70% of the Fortune 1,000 companies utilize the Balanced Scorecard to help manage performance.

Balanced Scorecard is measured from the four perspectives

• Profitability, cash flow, return on assets and risk from the shareholder’s perspective

The Financial Perspective

• Market share, customer satisfaction index

The Customer Perspective

• Employee retention, cycle time reduction,

The Internal Business Perspective

• Organizational change – climate creation, % of sales from new products

The Innovation & Learning Perspective

Difficulties in implementing Performance Measurement Systems

One

• Poor correlation between non-financial measures and results• Difficult to identify the cause-effect relationship among the

different measures

Two

• Fixation on financial results• Poorly designed incentive programs

Three

• Measures are not updated• No mechanism for making improvements

Four

• Measurement overload• Too many measures – manager may risk losing focus in

doing too many things at once

Five

• Difficulty in establishing trade-offs• Not assigning explicit weights across financial and

nonfinancial measures

Interactive Control

Case Study: CUP Corporation